-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K3XDiID5U7jshDWkhbHm7u92ugxUkcZIsUTLCFT1MwigKMRyBRdS60lydVV+uJUe yWrbIA32p6cpdjZ2VmQhDA== 0000940180-99-000810.txt : 19990719 0000940180-99-000810.hdr.sgml : 19990719 ACCESSION NUMBER: 0000940180-99-000810 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19990716 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVERSTAR INC CENTRAL INDEX KEY: 0001086051 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SERVICES, NEC [8900] IRS NUMBER: 043411541 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-78517 FILM NUMBER: 99665534 BUSINESS ADDRESS: STREET 1: 23 FOURTH AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 7812216990 MAIL ADDRESS: STREET 1: 23 FOURTH AVENUE CITY: BURLINGTON STATE: MA ZIP: 01803 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 As filed with the Securities and Exchange Commission on July 16, 1999 Registration No. 333-78517 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT Under the Securities Act of 1933 ---------------- AVERSTAR, INC. (Exact name of registrant as specified in its charter) Delaware 8711 043411541 (State or other (Primary standard industrial (I.R.S. employer jurisdiction of classification code number) identification number) incorporation or organization) ---------------- 23 Fourth Avenue Burlington, MA 01803 (781) 221-6990 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- Michael B. Alexander Chief Executive Officer AverStar, Inc. 23 Fourth Avenue Burlington, MA 01803 (781) 221-6990 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Gerald Adler, Esq. Julie M. Allen, Esq. Swidler Berlin Shereff Friedman, LLP 919 Third Avenue Proskauer Rose LLP New York, New York 10022 (212) 758-9500 1585 Broadway New York, New York 10036 (212) 969-3000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. ---------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] . If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [_] . If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [_] . If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +This information in this prospectus is not complete and may be changed. We + +may not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and we are not soliciting offers to buy these + +securities in any jurisdiction where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 16, 1999 PROSPECTUS 4,000,000 Shares [Logo of AverStar] ________________________ Common Stock ----------- This is an initial public offering of shares of our common stock. We are offering 4,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $7.00 and $9.00 per share. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "ASTR". See "Risk Factors" beginning on page 8 to read about risks that you should consider before buying shares of our common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------
Per Share Total ----- ----- Public offering price............................................... $ $ Underwriting discounts and commissions.............................. $ $ Total proceeds, before expenses, to us from this offering........... $ $
----------- 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 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. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors," before investing in our common stock. Our Business AverStar is a pioneer in providing information technology, or IT, services and software products for the mission-critical systems of a significant number of civilian and defense agencies of the United States government. Our customers include 16 of the 20 government agencies with the largest IT budgets for the government's 1999 fiscal year. We also provide our services to large commercial companies. We have established long-term customer relationships, some of which have extended over 20 years. During our 30-year history, we have maintained a strong record of customer satisfaction based on the quality and reliability of our services and products. We provide an integrated offering of services and products in four areas of IT: . IT Assurance. We provide independent analysis, testing and verification of critical information systems under development or being upgraded. We also provide security for customers' information systems. . IT Development. We offer a full range of software and systems development services for customer-specific applications and Internet applications. . IT Operations. We manage and operate information system networks and data centers at our customers' facilities. . IT Consulting. We serve as consultants with respect to our customers' development of innovative applications or improvements to existing critical systems. We provide IT assurance services for many of the United States government's mission-critical systems. An IT system is mission-critical if the failure of the system would pose a risk to health and safety or cause disruption of a vital service or function. Our key IT assurance contracts include NASA's space shuttle, space station and ground systems, the Health Care Finance Administration's Medicare transactions system and the United States Postal Service's automation systems. Once a customer retains us to perform assurance services, we believe that we can gain expertise about the customer's business and therefore become well positioned to provide additional services and products to that customer. Since June 1994, more than one-half of our customers who originally awarded us IT assurance contracts of more than $1.0 million subsequently awarded us IT development or IT consulting contracts. For example, after first being engaged to provide IT assurance services, we have been awarded contracts to provide IT development and IT consulting services to the United States Postal Service and the Department of Health and Human Services. We serve as the prime contractor on a majority of our contracts. Prime contracts accounted for approximately 78% of our 1998 pro forma revenues. We believe that our position as prime contractor allows us to develop closer relationships with our customers, to control the quality of services and products delivered to the customer and to expand our customer relationships. Our Market The demand for third-party IT services has grown substantially in recent years. Organizations are increasingly using IT to improve the quality of their products and services, to reduce their costs and to improve operating efficiencies. International Data Corporation, or IDC, forecasts that the United States market for IT services will grow from an estimated $139 billion in 1998 to $207 billion in 2002. IDC forecasts that the IT system services segment of the worldwide IT services market will grow at a compound annual growth rate of approximately 12% over this period. 1 According to Federal Sources, Inc., the United States government is the world's largest single buyer of IT services and products. The Electronics Industry Association, or EIA, reports that the United States government's IT budget for fiscal 1999 is approximately $30 billion, nearly double the budget ten years ago. The EIA also estimates that the outsourced portion of the federal IT budget will be $26 billion in 1999, with approximately 64% allocated to civilian agencies of the government and 36% allocated to the Department of Defense. We believe that the increasing emphasis by the United States government on downsizing and reducing budgets will result in the growing use of IT to enhance productivity and in more testing and upgrading of existing IT systems. In addition, government agencies are increasingly using commercial procurement practices. With our position in IT assurance, reputation for quality and reliability and broad customer base, we believe that we are well positioned to take advantage of these trends. Our Corporate History Our current business and operations result from a series of strategic acquisitions of well established IT companies, executed by our current management team. In February 1998, we combined the businesses of Intermetrics, Inc. and Pacer Infotec, Inc. Previously, Pacer acquired Infotec Development, Inc. in July 1996. Founded in 1969, Intermetrics brought us expertise in IT assurance and IT consulting services for United States civilian and defense agencies and for commercial organizations and IT development services for customer-specific applications. Founded in 1968, Pacer broadened our base of contracts for IT assurance and IT development services for United States defense and civilian agencies. In March 1999, we acquired Computer Based Systems, Inc. Founded in 1978, CBSI strengthened our IT operations services and broadened our customer base among civilian agencies of the federal government. Our acquisitions have provided us with an experienced management team, a broad base of long term contracts, a diverse group of established customers, substantial backlog and strong sales and marketing resources. We believe that these strengths enable us to compete effectively in our industry. Our Strategy Our goal is to be the leading quality supplier of IT services and software products for mission-critical systems. To achieve our goal, our strategy is to: . Leverage our position in IT assurance. We intend to continue to capitalize on our position in IT assurance to attract new customers and to provide additional services and products to our existing customers. . Pursue targeted acquisition opportunities. We seek to acquire companies that operate in defined vertical market niches complementary to our current business or that have well established relationships with key customers. . Expand our commercial business. We intend to leverage our expertise and reputation in the federal IT market to compete for commercial projects. . Continue our investment in sales and marketing. We are continuing to strengthen our sales and marketing efforts to compete effectively for government contracts in a changing procurement environment and to expand our commercial customer base. . Maintain our high level of customer satisfaction. We believe that maintaining our high level of customer satisfaction and the resulting long-term relationships provide a stable customer base from which we can grow our business. We are incorporated in Delaware. Our principal executive offices are located at 23 Fourth Avenue, Burlington, Massachusetts 01803. Our telephone number at that location is (781) 221-6990. Our web site address is www.averstar.com. Information contained on our web site does not constitute part of this prospectus. 2 The Offering 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
Additional shares may be issued after this offering. You should be aware that we are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock to be outstanding after this offering. If and when we issue these shares, the percentage of common stock you own may be diluted. 1,513,433 shares are issuable upon the exercise of outstanding options at a weighted average exercise price of $3.26 per share, of which 757,055 shares are exercisable. Options to purchase an additional 504,180 shares of common stock will become exercisable upon the closing of this offering. In addition, 1,836,014 shares are available for future option grants. Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares after the closing of this offering to cover over-allotments. ---------------- All pro forma statement of operations information in this prospectus is presented as if our acquisitions of Pacer and of CBSI had occurred as of January 1, 1998, unless otherwise noted. ---------------- AverStar, Inc., Intermetrics, Inc., Pacer Infotec, Inc., JWatch, EWatch, Ada Magic and our logo are our trademarks. Each other trademark, trade name or service mark appearing in this prospectus belongs to its holder. 3 Summary Financial Data The following tables set forth our summary financial data. These tables do not present all of our financial information. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 of this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." On March 13, 1995, an investor group led by current management formed a holding company that acquired Intermetrics in August 1995. Substantially all data for the period March 13, 1995 through February 29, 1996 relate to the operations and financial position of Intermetrics. The summary financial data for the 12 months ended February 29, 1996, which are unaudited, combine the two preceding columns which reflect the operations of Intermetrics for the first six months of the period based on Intermetrics' basis of accounting prior to the acquisition, and our operations giving effect to the acquisition of Intermetrics in August 1995. In February 1998, we acquired Pacer, whose results of operations are included from the date of acquisition in our results for the 12 months ended December 31, 1998. In March 1999, we acquired CBSI. The pro forma column below presents our statement of operations data as if the acquisitions of Pacer and CBSI had occurred as of January 1, 1998. The pro forma as adjusted statement of operations data reflect our sale of shares of common stock in this offering, after deducting underwriting discounts and estimated offering expenses, and the application of the proceeds to repay debt as if both these events had occurred as of January 1, 1998. The selected financial data for the 12 months ended February 28, 1997, the 10 months ended December 31, 1997 and the 12 months ended December 31, 1998 are derived from our audited financial statements included elsewhere in this prospectus. The selected financial data for the 12 months ended February 28, 1995 are derived from audited financial statements not included in this prospectus. The consolidated financial data for the three months ended March 31, 1998 and 1999, have been prepared on the same basis as our consolidated financial statements. In our opinion, all necessary adjustments, consisting of normal recurring accruals, have been included. Results of operations for interim periods are not necessarily indicative of results we may achieve in a full year. Historical results are not necessarily indicative of the results we may achieve in the future. Adjusted EBITDA is net income (loss) from continuing operations before taxes, interest expense, interest income, depreciation expense, amortization expense, in process research and development expense and merger-related expense. Depreciation expense is included in cost of revenues in the following tables. In process research and development expenses and merger-related expenses are included in selling, general and administrative expense in the following tables. Adjusted EBITDA is provided because we believe that investors may find it to be a useful tool for analyzing our ability to service debt. Adjusted EBITDA should not be construed: . As an indicator of our operating performance instead of operating income; or . As a measure of liquidity instead of cash flows from operating activities. We may calculate adjusted EBITDA differently than other companies. 4
Intermetrics ----------------------- Pro Forma 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 ------------ (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 ======= ======= ======= ======= ======= ======= ======== ======== Statement of Operations Data: Revenues........ $169,039 Cost of revenues....... 128,520 Selling, general and administrative expense........ 31,007 Amortization expense........ 4,344 In process research and development expense........ -- ------------ Income (loss) from operations..... 5,168 Interest expense........ 2,431 Interest income......... 244 ------------ Income (loss) from continuing operations before taxes... 2,981 Provision for income taxes... 1,371 ------------ Net income (loss) from continuing operations..... $ 1,610 ============ Computation of Adjusted EBITDA: Net income (loss) from continuing operations..... $ 1,415 $ 35 $(8,590) $(8,555) $ 27 $ 198 $ 2,434 $ 73 Provision for income taxes... 945 40 32 72 18 154 2,168 366 Interest income......... (525) (363) (149) (512) (160) (96) (244) (244) Interest expense........ 26 13 734 747 1,441 1,302 2,513 4,973 Depreciation expense........ 1,918 709 561 1,270 1,066 785 2,178 2,465 Amortization expense........ -- -- 514 514 1,085 150 1,050 4,344 In process research and development expense........ -- -- 8,600 8,600 -- -- -- -- Merger-related expense........ -- 1,592 -- 1,592 -- 700 560 560 ------- ------- ------- ------- ------- ------- -------- -------- Adjusted EBITDA......... $ 3,779 $ 2,026 $ 1,702 $ 3,728 $ 3,477 $ 3,193 $ 10,659 __12,537$ ======= ======= ======= ======= ======= ======= ======== ======== Adjusted EBITDA as a percentage of revenues.... 7.0% 7.5% 6.1% 6.8% 6.5% 6.0% 8.8% 7.4% ======= ======= ======= ======= ======= ======= ======== ======== Computation of Adjusted EBITDA: Net income (loss) from continuing operations..... $ 1,610 Provision for income taxes... 1,371 Interest income......... (244) Interest expense........ 2,431 Depreciation expense........ 2,465 Amortization expense........ 4,344 In process research and development expense........ -- Merger-related expense........ 560 ------------ Adjusted EBITDA......... __12,537$__ ============ Adjusted EBITDA as a percentage of revenues.... 7.4% ============ Cash Flows: Continuing operating activities..... $ 2,652 $ 3,106 $ 1,147 $ 4,253 $ 433 $ 1,007 $ 1,299 Discontinued operating activities..... -- -- -- -- -- (1,367) (8,951) 2,652 3,106 1,147 4,253 433 (360) (7,652) Investing activities..... (1,537) 7,829 (405) 7,424 (1,297) (2,471) (7,999) Financing activities of continuing operations..... (366) 384 603 987 133 2,348 11,997 Financing activities of discontinued operations..... -- -- -- -- -- -- 3,855 (366) 384 603 987 133 2,348 15,852 ------- ------- ------- ------- ------- ------- -------- Net cash increase (decrease)..... $ 749 $11,319 $ 1,345 $12,664 $ (731) $ (483) $ 201 ======= ======= ======= ======= ======= ======= ======== Cash Flows: Continuing operating activities..... Discontinued operating activities..... Investing activities..... Financing activities of continuing operations..... Financing activities of discontinued operations..... Net cash increase (decrease).....
5
Three Months Ended March 31, ---------------------------------------------- Pro Forma As Actual Pro Forma Adjusted ----------------- ---------------- --------- 1998 1999 1998 1999 1999 ------- -------- ------- ------- --------- (In thousands) 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 ======= ========
6 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.
March 31, 1999 --------------------- --- As Actual Adjusted ------- --- -------- (In thousands) Balance Sheet Data: 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
7 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. In this case, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. Most of our revenues are derived from contracts with agencies of the United States government, and uncertainties in government contracts could adversely affect our business. Our largest customers are agencies of the United States government. In 1998, government contracts, and contracts with prime contractors of the United States government, accounted for approximately 90% of our pro forma revenues. We believe that United States government contracts are likely to continue to account for a significant portion of our revenues for the foreseeable future. Significant changes in the contracting policies or fiscal policies of the United States government could adversely affect our business, results of operations or financial condition. Changes in government contracting policies could directly affect our financial performance. Among the factors that could materially adversely affect our United States government contracting business are: . Budgetary constraints affecting government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or available funding; . Cancellation of government programs; . Curtailment of the government's use of technology services firms; . The adoption of new laws or regulations; . Technological developments; . Governmental shutdowns; . Competition and consolidation in the IT industry; and . General economic conditions. These or other factors could cause governmental agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or not to exercise options to renew contracts, any of which could have a material adverse effect on our business, financial condition or results of operations. Many of our United States government customers are subject to increasingly stringent budgetary constraints. We have substantial contracts in place with many departments and agencies, and our continued performance under these contracts, or award of additional contracts from these agencies, could be materially adversely affected by spending reductions or budget cutbacks at these agencies. Such reductions or cutbacks could have a material adverse effect on our business, financial condition or results of operations. Our government contracts may be terminated prior to their completion, and we may not retain these contracts in any competitive rebidding process. We derive substantially all of our revenues from government contracts that typically span one or more base years and one or more option years and are awarded through formal competitive bidding processes. Many of the option periods cover more than half of the contract's potential duration. United States government agencies generally have the right not to exercise these option periods. In addition, our contracts typically also contain provisions permitting a government customer to terminate the contract on short notice, with or without cause. A decision not to exercise option periods or to terminate contracts would reduce the profitability of these contracts to us. 8 Upon expiration, if the customer requires further services of the type provided in the contract, there is frequently a competitive rebidding process, and we may not win any particular bid, or be able to replace business lost upon expiration or completion of a contract. Further, all government contracts are subject to protest by competitors. The unexpected termination of one or more of our significant contracts could result in significant revenue shortfalls. The termination or non-renewal of any of our significant contracts, short-term revenue shortfalls, the imposition of fines or damages or our suspension or debarment from bidding on additional contracts could have a material adverse effect on our business, financial condition or results of operations. A negative audit could adversely affect our business, and we could be required to reimburse the government for costs that we have expended on our contracts. Government agencies routinely audit government contracts. These agencies review a contractor's performance on its contract, pricing practices, cost structure and compliance with applicable laws, regulations and standards. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while improper costs already reimbursed must be refunded. Therefore, an audit could result in a substantial adjustment to our revenues. No material adjustments have resulted from any audits of us completed as of December 31, 1994, and we believe that adjustments resulting from subsequent audits will not adversely affect our business. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with United States government agencies. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Any such government determination of impropriety or illegality, or allegation of impropriety, could have a material adverse effect on our business, financial condition or results of operations. Many of our United States government customers spend their procurement budgets through General Service Administration Schedule contracts and we are required to compete for post-award orders. Budgetary pressures and reforms in the procurement process have caused many United States government agencies to increasingly purchase goods and services through General Service Administration Schedule contracts and other multiple award and/or government-wide acquisition contract vehicles. We must continually persuade government agencies to purchase our IT services and products because government agencies have a larger number of IT service providers from which to choose under these contracts. We may not maintain or increase revenues or otherwise sell successfully under these contracts. Our failure to compete effectively in this procurement environment could have a material adverse effect on our business, financial condition or results of operations. We may be liable for penalties under a variety of procurement rules and regulations, and changes in government regulations could adversely affect our business. Our defense and commercial businesses must comply with and are affected by various government regulations. Among the most significant regulations are the Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance of government contracts; the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based government contracts; and laws, regulations and Executive Orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data. These regulations affect how our customers and we do business and, in some instances, impose added costs on our businesses. Any changes in applicable laws could adversely affect the financial performance of the business affected by the changed regulations. Any failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting with the United States government. 9 If we fail to recruit, train and retain skilled personnel, our costs could increase and our growth would be limited. Our success depends to a significant extent upon our ability to attract, retain and motivate highly skilled personnel. If we fail to attract, train and retain sufficient numbers of skilled people, our business, results of operations or financial condition would suffer. We must continue to hire skilled people to perform services under our existing contracts and new contracts that we will enter into. Competition for skilled personnel is intense in the IT services industry. Recruiting and training skilled personnel require substantial resources. We also experience significant turnover of skilled employees. We must pay an increasing amount to hire and retain a skilled workforce. These factors may create variations and uncertainties in our compensation expense. In addition, our ability to implement our business strategy and to operate profitably depends largely on the skills, experience and performance of our management team. If several members of our management team become unable or unwilling to serve in their present positions, our business, results of operations or financial condition could suffer. If we fail to maintain our security clearances, we may not be able to perform classified work for the government. Government contracts require us, and some of our employees, to maintain security clearances. The loss of these security clearances could curtail the term and renewal of these government contracts. We maintain facility security clearances complying with the requirements of the Department of Defense and other agencies. In addition, approximately 30% of our employees have security clearances. We may not successfully execute our acquisition strategy. Through acquisitions of companies, we intend to expand our geographic presence and to expand the products and services we offer to new and existing customers. If our acquisition strategy fails, we may not continue to grow at historical rates or at all. We cannot assure you that we will consummate any acquisitions, or that any acquisitions, if consummated, will be advantageous to us. Various risks may prevent us from completing acquisitions. These risks include: . Increased competition for acquisitions; . Fewer suitable acquisition candidates available at acceptable prices; . Insufficient capital resources for acquisitions; and . Inability to enter into definitive agreements for desired acquisitions on acceptable terms. In addition, there are risks that we may not benefit from our acquisitions. These risks include: . Inability to integrate or operate acquired companies successfully or at expected levels of profitability; . Accounting charges that adversely affect our financial results; . Issuance of additional shares of common stock, which could dilute your investment; and . Incurrence of additional debt. If we fail to properly manage our growth, our business could be adversely affected. If we do not manage our growth effectively, our business, results of operations or financial condition could be materially adversely affected. We intend to continue the expansion of our operations in the foreseeable future to pursue existing and potential market opportunities. Our growth places significant demands on our management and operational resources. In order to manage our growth effectively, we must continue to invest in our systems of internal controls and procedures, and continue to expand, train and manage our workforce. 10 We are highly leveraged. We have a substantial amount of indebtedness. If we default on our debt agreements, our business, financial condition or results of operations would be materially adversely affected. As of March 31, 1999 we had debt with a face amount of approximately $59.0 million outstanding. We will repay approximately $28.7 million of this debt from the proceeds of this offering. We will have approximately $30.0 million of debt outstanding after this offering. We pay interest on this debt at variable rates averaging approximately 8.5% per annum. In addition, we may incur additional debt to finance acquisitions or future growth. Our leverage could have the following important consequences: . Repayment of debt reduces funds available for other purposes; . Our ability to obtain additional debt financing in the future for working capital, general corporate purposes or acquisitions may be constrained; and . We may be more vulnerable to downturns in general economic conditions or our business than our competitors. We may require additional financing that we may not be able to secure on favorable terms or at all. We may need more financing than currently anticipated to support our growth, to develop new or enhanced services, to respond to competitive pressures or unanticipated requirements or to make acquisitions. Any required additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, to develop or enhance services, to respond to competitive pressures or to take advantage of acquisition opportunities, any of which could have a material adverse effect on our business, results of operations or financial condition. If additional funds are raised by our issuing equity securities, stockholders may experience dilution of their ownership interest and the newly issued equity securities may have rights superior to those of the common stock. If additional funds are raised by our issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends. Amortization of our intangible assets may have an adverse impact on our operating results. Approximately $35 million, or 37%, of our assets as of March 31, 1999, consisted of intangible assets, including goodwill, arising from our acquisitions. This amount will be amortized over 18 months to 20 years. This non-cash expense, some of which is not tax deductible, will reduce net income or increase net loss in each amortization period. This reduction in our net income or increase in our net loss may have an adverse effect on the market price of our common stock. In addition, we may never realize the value of our intangible assets. We evaluate current events and circumstances to determine whether the remaining balance of our intangible assets will be recoverable. If we deem all or part of our intangible assets to be not recoverable, we would reduce the carrying value of our intangible assets, which could have a material adverse effect on our operating results for the period in which the reduction is recognized. We may not be able to compete successfully. Our business could suffer if we are not able to compete successfully. We experience significant competition in all areas of our business. In general, the markets in which we compete are not dominated by a single company or a small number of companies. Thousands of companies offer services and products that are competitive with our IT service and product offerings. However, we compete regularly with approximately seven different competitors in our IT assurance service offerings, 18 in our IT development service offerings, six in our IT operations service offerings and four in our IT consulting service offerings. 11 Many of our competitors are significantly larger and have greater financial resources than we do. In addition, many of our competitors have significantly more experience in the commercial IT market than we have. These factors may place us at a disadvantage in responding to competition, technological changes and changes in customer requirements. In addition, some of the contracts on which we have the technical capability to bid are set aside for companies which the United States government classifies as "small businesses" or "minority businesses." After 1999, we will not qualify for any of these classifications. The pricing provisions of our contracts may adversely affect our profits. Some of our contracts are fixed-price contracts which contain pricing provisions that require the payment of a set price by the customer for our services regardless of the costs we incur in performing these services, or provide for penalties in the event we fail to achieve contract requirements. Failure to anticipate technical problems, estimate costs accurately or control costs during our performance of a fixed-price contract may reduce our profit or cause us to suffer a loss. The number of our fixed-price contracts may increase as our commercial business increases. Recently, a growing percentage of our contracts are time-and-materials contracts. Typically, time-and-materials contracts provide for the customer to pay a specified rate per hour of labor dedicated to the project. If market or other conditions require us to increase our employees' salaries or other costs and we cannot convince our customers to pay proportionately higher prices, we would suffer reduced profits or losses under these contracts. Fluctuations in our operating results may negatively impact our stock price. The price of our common stock may fall because of fluctuations in our quarterly operating results and our inability to meet market expectations. Our operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. Factors that may affect our quarterly results include, but are not limited to: . The number, size and scope of projects; . Our expenditures; . The accuracy of our estimates of resources required to complete ongoing projects; . The demand for our services and products; and . The adequacy of our reserves for losses. Accordingly, we believe that quarter-to-quarter comparisons of operating results are not necessarily meaningful. You should not rely on the results of any one quarter as an indication of our results for a full year or any other quarter. We may not realize all of the revenues included in our backlog. Although our contract backlog was approximately $450 million as of March 31, 1999, we may not realize all of this backlog as revenue. Backlog represents management's estimate of our realizable revenues on our contracts. Please see "Business--Backlog." Government contracts comprise substantially all of our backlog. The following factors may affect our ability to realize revenues included in our backlog: . The government's failure to fund all of the years of a multi-year contract; . The government's failure to exercise its option to extend the length of a contract; . The government's failure to request any services under contracts that we provide only upon request of the government; and . The government's decision to decrease the size or scope of a contract. 12 We may not be able to replace our Year 2000 testing and assessment contracts with equally profitable business. As demand for Year 2000 services declines, unless we are able to replace our Year 2000 business with equally profitable work, our rate of revenue growth and our profits could suffer. In 1998, approximately 6% of our pro forma revenues related to Year 2000 testing and assessment services. We may not be successful in expanding our commercial business. Only a small portion of our business is currently derived from the commercial IT market. If we are not able to increase the amount of services and products we sell to the commercial market, we may not grow at expected rates and our reliance on federal government agencies may continue. Changes in technology could adversely affect our business. Our business could suffer if we are not successful in adopting and integrating new technologies into our service and product offerings in a timely and cost-effective manner. The markets for our IT services and products change rapidly because of technological innovations, new product introductions, changes in customer requirements, declining prices and evolving industry standards, among other factors. New products and new technology often render existing information services or technology infrastructure obsolete. As a result, our success depends on our ability to integrate new technologies into our service offerings. Further, we cannot be sure that we will be able to continue to commit the resources necessary to refresh our technology infrastructure at the rate demanded by our markets. Advances in technology require us to commit substantial resources to acquire and deploy new technologies for use in our operations. We must continue to commit resources to train our personnel in the use of these new technologies. We must also continue to maintain the compatibility of existing hardware and software systems with these new technologies. We may be unable to protect our intellectual property rights, and we may be liable for infringing the intellectual property rights of others. Third parties may infringe or misappropriate our patents, trademarks or other proprietary rights, which could have a material adverse effect on our business, results of operations or financial condition. The steps we have taken to protect our proprietary rights may not prevent misappropriation. Our suppliers, customers and competitors may have patents and other proprietary rights that cover technology utilized by us. These persons may also seek patents in the future. United States patent applications are confidential until a patent is issued, and most technologies are developed in secret. Accordingly, we are not aware of all patents or other intellectual property rights that our services and products may infringe. We could incur substantial costs to prosecute or defend any litigation against others who allege infringement of intellectual property rights. Intellectual property litigation could force us to do one or more of the following: . Cease selling or using services or products that incorporate infringed intellectual property; . Obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology; and . Redesign those services or products that incorporate infringed intellectual property. Our shares may experience extreme price and volume fluctuations. Just as the shares of other IT companies have experienced price and volume fluctuations, the market price of our common stock may be volatile. You may not be able to resell your shares at or above the initial public offering price and may suffer a loss of your investment. 13 The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: . Quarterly variations in operating results; . Changes in financial estimates by securities analysts; . Changes in market valuations of IT service companies; . Announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . Losses of major contracts; . Additions or departures of key personnel; and . Sales of common stock by our stockholders. In the past, securities class action litigation has often been initiated against a company following periods of volatility in the market price of their securities. If a suit is initiated against us, regardless of the outcome, it could result in substantial costs, diversion of our management's attention and resources, and a material adverse effect on our business, results of operations or financial condition. Future sales of large amounts of our stock, or the perception that such sales could occur, may adversely affect our stock price. The market price of our common stock could drop as a result of sales of a large number of shares of common stock in the market after this offering, or the perception that such sales could occur. Assuming no exercise of the underwriters' over-allotment option, there will be 10,880,655 shares of common stock outstanding immediately after this offering. The 4,000,000 shares of common stock sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, unless such shares are held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. As of March 1, 2000, holders of approximately 5,254,977 shares of our common stock will be able to sell their shares without limitation under Rule 144(k). After this offering, we will have 3,349,447 shares of common stock reserved for issuance upon the exercise of stock options, of which 1,513,433 shares are subject to currently outstanding options. Following this offering, we intend to file registration statements on Form S-8 to register these shares. Please see "Shares Eligible for Future Sale." Provisions of our certificate of incorporation and bylaws and Delaware law could deter takeover attempts. Some provisions in our certificate of incorporation and bylaws could delay, defer, prevent or make more difficult a merger, tender offer or proxy contest involving our company. However, our stockholders might view such a transaction as being in their best interests because, for example, a change of control might result in a price higher than the market price for shares of our common stock. Among other things, these provisions: . Require an 80% vote of the stockholders to amend certain provisions of our certificate of incorporation and by-laws; . Permit only our chairman, president or a majority of the board of directors to call stockholder meetings; . Authorize our board of directors to issue shares of preferred stock in series with the terms of each series to be fixed by our board of directors without any further action by our stockholders; . Divide our board of directors into three classes so that only approximately one-third of the total number of directors will be elected each year; and . Specify advance notice requirements for stockholder proposals and director nominations to be considered at a meeting of stockholders. 14 In addition, with certain exceptions, Section 203 of the Delaware General Corporation Law restricts certain mergers and other business combinations between us and any holder of 15% or more of our voting stock. Potential Year 2000 problems could adversely affect our business. We believe that it is not possible to determine with complete certainty that all Year 2000 problems affecting us or our customers have been identified or corrected. As a result, we believe that the following consequences are possible: . Operational inconveniences and inefficiencies for us and our customers may divert management's time and attention and financial and human resources from ordinary business activities; . Routine business disputes and claims for pricing adjustments or penalties due to Year 2000 problems may occur, which will be resolved in the ordinary course of business; . Serious system failures may require significant efforts by us or our customers to prevent or alleviate material business disruptions; and . Serious business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance may result in litigation or contract termination. In addition, any system failures could interfere with our ability to properly manage contracted projects and could adversely affect our business. You will suffer immediate and substantial dilution. Investors purchasing shares in this offering will suffer immediate and substantial dilution of their investment, because the initial public offering price per share will significantly exceed the net tangible book value per share. 15 FORWARD-LOOKING STATEMENTS Many statements made in this prospectus under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere are forward- looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements are speculative and uncertain and not based on historical facts. Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under "Risk Factors." Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward- looking statements after the date of this prospectus to conform such statements to actual results. 16 USE OF PROCEEDS Our net proceeds from the sale of the shares offered by us in this offering are estimated to be approximately $28.7 million, or approximately $33.1 million if the underwriters' over-allotment option is exercised in full, assuming an initial public offering price of $8.00 per share and after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use these net proceeds as follows: . To repay $23.7 million of the amount outstanding as of March 31, 1999 under our credit agreement with First Union Commercial Corporation, as agent, and the other lenders that are parties to our credit agreement; and . To repay subordinated debt outstanding with a face value of $5.0 million as of March 31, 1999 under our subordinated debt agreement with MassMutual. As of March 31, 1999, approximately $53.4 million was outstanding under our credit agreement with First Union. We used approximately $25.0 million to acquire CBSI, $24.0 million to repay existing debt and $5.0 million to pay transaction fees and expenses and to fund general working capital requirements. Our credit agreement with First Union expires in 2004 and March 2005. Loans outstanding at March 31, 1999 under our credit agreement with First Union bear interest at variable rates averaging approximately 8% per year. In connection with the acquisition of Intermetrics by an investor group led by our current management, we obtained a credit facility with Massachusetts Mutual Life Insurance Company, or MassMutual, and affiliates of MassMutual in August 1995. As of March 31, 1999, subordinated debt with a face value of $5.0 million was outstanding under our credit agreement with MassMutual. The loan outstanding under our credit agreement with MassMutual bears interest at a rate of 13% per year. This credit agreement expires in June 2005. DIVIDEND POLICY We intend to retain all future earnings, if any, to finance the expansion of our business. We have not declared or paid any cash dividends on our common stock since our inception and do not expect to declare or pay any cash dividends in the foreseeable future. In addition, our credit agreement with First Union contains restrictions on our ability to pay dividends. 17 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.
At March 31, 1999 ------------------------------ As Actual Adjusted ---------- ----- ------------ (In thousands, except share and per share data) 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 ========== ===== ==========
18 DILUTION Our net tangible book value as of March 31, 1999 was $(31,008,000), or $(4.48) per share. Our net tangible book value per share is equal to the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of March 31, 1999. Assuming that we sell the 4,000,000 shares offered by us in this offering at an initial public offering price of $8.00 per share, after deducting the underwriting discounts and the estimated offering expenses payable by us, and apply the proceeds to repay debt, our pro forma net tangible book value as of March 31, 1999 would have been $(2,591,000), or $(0.24) per share. This amount represents an immediate increase in pro forma net tangible book value of $4.24 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $8.24 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution: 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 =====
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:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- 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% ========== ==== =========== ====
None of the foregoing tables or calculations assumes that any options outstanding as of March 31, 1999 will be exercised. If all outstanding options were exercised on the date of the closing of this offering, new investors purchasing shares in this offering would suffer total dilution of $8.16 per share. The above tables do not reflect the following changes to our capitalization since March 31, 1999: . We issued 37,500 shares to the Averstar Profit Sharing & Savings Plan; . We redeemed 84,870 shares from stockholders under the terms of existing agreements for an aggregate of approximately $410,000; and . At the closing of this offering, we will issue approximately 911 shares from treasury to stockholders pursuant to obligations incurred in connection with the acquisition of Intermetrics. 19 SELECTED FINANCIAL DATA The following tables set forth our selected financial data. These tables do not present all of our financial information. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." On March 13, 1995, an investor group formed a holding company which acquired Intermetrics in August 1995. Substantially all data for the period March 13, 1995 through February 29, 1996 relate to the operations and financial position of Intermetrics. The selected financial data for the 12 months ended February 29, 1996, which are unaudited, combine the two preceding columns which reflect the operations of Intermetrics for the first six months of the period based on Intermetrics' basis of accounting prior to the acquisition, and our operations giving effect to the acquisition of Intermetrics in August 1995. In February 1998, we acquired Pacer, whose results of operations are included from the date of acquisition in our results for the 12 months ended December 31, 1998. In March 1999, we acquired CBSI. The pro forma column presents our statement of operations data as if the acquisitions of Pacer and CBSI had occurred as of January 1, 1998. The pro forma as adjusted statement of operations data reflect our sale of shares of common stock in this offering, after deducting underwriting discounts and estimated offering expenses, and the application of the proceeds to repay debt as if both these events had occurred as of January 1, 1998. The selected financial data for the 12 months ended February 28, 1997, the 10 months ended December 31, 1997 and the 12 months ended December 31, 1998 are derived from our audited financial statements included elsewhere in this prospectus. The selected financial data for the 12 months ended February 28, 1995 are derived from audited financial statements not included in this prospectus. The consolidated financial data for the three months ended March 31, 1998 and 1999 have been prepared on the same basis as our consolidated financial statements. In our opinion, all necessary adjustments, consisting of normal recurring accruals, have been included. Results of operations for interim periods are not necessarily indicative of results we may achieve in a full year. 20
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) 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 Pro Forma As Adjusted Twelve Months Ended December 31, 1998 ------------ 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
21
Three Months Ended March 31, -------------------------------------------- Pro Forma Actual Pro Forma As Adjusted --------------- ---------------- ----------- 1998 1999 1998 1999 1999 ------- ------- ------- ------- ----------- (In thousands, except per share data) 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
The following table is a summary of our balance sheet data.
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) 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)
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Please see "Risk Factors" and "Forward-Looking Statements." Overview We provide IT services and products to the United States government and to commercial companies. Through both internal growth and a series of acquisitions, we have increased our revenues from $53.3 million for the fiscal period ended February 28, 1997 to $169 million in pro forma revenues for the fiscal period ended December 31, 1998. Our growth has resulted in a broader base of long-term contracts and a more diverse group of established customers. AverStar is the result of a series of strategic acquisitions executed by our current management. In February 1998, we combined the businesses of Intermetrics and Pacer. In March 1999, we acquired CBSI for $26 million in cash, $25 million of which was paid to the former CBSI stockholders at the closing and $1 million of which will be paid ratably over the next five years. All three transactions were accounted for as purchases. During 1997, we changed our fiscal year to a December 31 year end in anticipation of the merger with Pacer. As a result, the fiscal period ended December 31, 1997 is a ten-month period. A substantial portion of our revenues are derived from contracts with the United States government. Approximately 90% of our pro forma revenues in the fiscal period ended December 31, 1998 were derived from government contracts, either directly with government customers or indirectly through government prime contractors. We enter into three types of contracts: cost-reimbursable, time-and- materials, and fixed-price contracts. Of our total pro forma revenues for 1998, cost-reimbursable contracts represented approximately 46%, time-and-materials contracts approximately 45% and fixed-price contracts approximately 9%. Cost- reimbursable contracts provide for the reimbursement of costs plus the payment of a fixed fee. Under time-and-materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and reimbursed for travel and other direct expenses at actual cost plus applied indirect, general and administrative expenses. Under fixed-price contracts, we agree to perform certain work for a fixed price and, accordingly, realize a benefit or detriment to the extent that our actual cost of performing the work differs from the negotiated price. We assume greater financial risk on fixed-price contracts than on either time-and-materials or cost-reimbursable contracts. We believe that an increasing percentage of our contracts will be fixed-price as our commercial business increases. Failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract may reduce our profits or cause us to suffer a loss. If we are successful in providing our services at a reduced cost, however, we expect that fixed-price contracts will result in greater profitability. In addition, greater risks are involved under time-and-materials contracts than under cost-reimbursement contracts because we assume the responsibility for the delivery of specified skills at a fixed hourly rate. Our management believes that adequate reserves for our fixed-price and time-and-materials contracts are reflected in our financial statements. We recognize revenues on government and commercial contracts under the percentage-of-completion method. This method involves a periodic assessment of the estimated total cost to complete each contract. The percentage-of- completion method is determined by relating the actual costs incurred to date to the estimated total costs at completion. The cumulative effects resulting from revisions of estimated total costs and revenues are recorded in the period in which the facts requiring revisions become known. When a loss is anticipated on a contract, the full amount of the anticipated loss is provided for at that time. 23 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:
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 ------------ ------------ ------------ --------- --------- ------------ ------------ ----------- 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
Three-Month Periods Ended March 31, 1998 and 1999 The results of operations for the three months ended March 31, 1998 reflect the activity of Intermetrics for the entire three months of the quarter and the activity of Pacer for one month of the quarter. The results of operations for the three months ended March 31, 1999 reflect the activity of Intermetrics and Pacer for the entire three months of the quarter and ten days of activity of CBSI. Revenues. For the three months ended March 31, 1999, our revenues were $36.3 million compared to $22.7 million for the three months ended March 31, 1998. Of the $13.6 million or 60% increase, approximately $8.6 million or 63% related to the acquisition of Pacer and approximately $950,000 or 7% related to the acquisition of CBSI. The remaining 30% of the increase was associated with new task orders and additional work performed under existing contracts, mainly with the United States Postal Service, Government Services Agency Schedule or GSA, National Institutes of Health and NASA. Cost of revenues. For the three months ended March 31, 1999, our cost of revenues was $28.8 million compared to $17.3 million for the three months ended March 31, 1998, an increase of $11.5 million or 67%. As a percentage of revenues, cost of revenues was 79.3% for the period ended March 31, 1999 and 76.1% for 24 the period ended March 31, 1998. The increase in cost of revenues as a percentage of revenues resulted from higher costs in relation to revenues from acquired contracts and less than full utilization of office facilities acquired to support the increase in the number of contracts and task orders performed. Selling, general and administrative expense. For the three months ended March 31, 1999, our selling, general and administrative, or SG&A, expense, including amortization expense, was $5.3 million compared to $4.2 million for the first quarter of 1998, an increase of $1.1 million or 27%. Amortization expense was $300,000 of the $5.3 million in 1999 and $100,000 of the $4.2 million in 1998. The $200,000 increase in amortization expense reflects three months amortization related to Pacer in 1999 and ten days related to CBSI compared with one month and none, respectively, in the 1998 first quarter results. Of the remaining $900,000 increase in total SG&A expense, approximately 50% was associated with the increased staff from Pacer, approximately 22% related to the growth in the sales and marketing function and the remainder related to acquisition and financing activities. As a percentage of revenues, SG&A expense decreased to 14.6% in the first quarter 1999 from 18.3% in the first quarter 1998, primarily because SG&A expense was spread over a larger revenue base in 1999. Income from continuing operations. For the three months ended March 31, 1999, our income from continuing operations before interest and taxes was $2.2 million compared with $1.3 million for the three months ended March 31, 1998, representing a $900,000 or 75% increase. Approximately $500,000 or 53% of this increase was attributable to the acquisition of Pacer and about 5% was attributable to the acquisition of CBSI. The remainder of the increase resulted from increased profit recorded on new and additional work performed. Net income from continuing operations. For the three months ended March 31, 1999, net income from continuing operations was $800,000 compared to $400,000 in 1998, an increase of 100%. The increase resulted from higher operating income of $900,000 reduced by an increase in interest expense of $300,000 and an increase in income taxes of $200,000. The increase in interest expense resulted from additional borrowings to fund the acquisition of CBSI and to support working capital requirements. The increase in taxes was caused by the increase in taxable income. Net income. For the three months ended March 31, 1999, our net income was $800,000 compared to a net loss of $200,000 for the first quarter of 1998. The net loss for 1998 was the result of income from continuing operations of $400,000 offset by a net loss from discontinued operations of $600,000. Fiscal Periods Ended February 28, 1997, December 31, 1997 and December 31, 1998 Revenues. For the 12 months ended December 31, 1998, our revenues were $121.1 million compared to $53.6 million for the ten months ended December 31, 1997 and $53.3 million for the 12 months ended February 28, 1997, representing a 127% increase over this period. Of the approximately $68 million increase in revenues over this period, approximately $39 million, or 57% of the increase, was the result of the acquisition of Pacer which became effective February 27, 1998. Approximately $12 million, or 18% of the increase, resulted from our winning two contracts with the United States Postal Service in mid-1997. We benefitted from the first full-year effect of these contracts in 1998. The increased work under a contract awarded by NASA in 1996 accounted for approximately $9 million, or 13% of the increase. Revenues were also positively affected by increased business with commercial customers, by new contracts with the National Institute of Health and the United States Navy and by increased royalty income. Cost of revenues. For the 12 months ended December 31, 1998, our cost of revenues was $93.6 million compared to $41.7 million for the ten months ended December 31, 1997 and $40.7 million for the 12 months ended February 28, 1997, representing a 130% increase over this period. The increase primarily resulted from higher labor costs to support a larger number of contracts. As a percentage of revenues, cost of revenues has not changed significantly: 77.3% for the period ended December 31, 1998, 77.7% for the period ended December 31, 1997 and 76.4% for the period ended February 28, 1997. 25 Selling, general and administrative expense. For the 12 months ended December 31, 1998, our selling, general and administrative expense, including amortization expense, was $20.6 million compared to $10.4 million for the ten months ended December 31, 1997, and $11.2 million for the 12 months ended February 28, 1997, representing an increase of $9.4 million, or 84%, over this period. This increase is attributed to increased staff related to the acquisition of Pacer, increased sales and marketing staff and $1.5 million of expenditures related to the consolidation of Pacer. The decrease of $800,000 from the 12-month period ended February 28, 1997 to the ten-month period ended December 31, 1997 was primarily due to the ten-month reporting period. As a percentage of revenues, SG&A expense decreased to 17% in the 12 months ended December 31, 1998, from 19% in the ten months ended December 31, 1997 and from 21% in the 12 months ended February 28, 1997, primarily because SG&A expense was spread over a larger revenue base in 1998. Income from operations. For the 12 months ended December 31, 1998, our income from operations was $6.9 million compared to $1.6 million for the ten months ended December 31, 1997 and $1.3 million for the 12 months ended February 28, 1997, representing a 431% increase over this period. Of the $5.6 million increase in income from operations over this period, approximately $1.9 million, or 34% of the increase, is attributable to the acquisition of Pacer. Approximately $1.8 million of the increase, or 32%, was the result of higher royalty revenues. Net income from continuing operations. For the 12 months ended December 31, 1998, net income from continuing operations was $2.4 million compared to $198,000 for the ten months ended December 31, 1997 and $27,000 for the 12 months ended February 28, 1997. The increase in net income from continuing operations of $2.4 million over this period resulted from the increase in income from operations of $5.5 million offset by a $1.0 million net increase in interest expense and an increase in taxes of $2.2 million. The increase in interest resulted from additional borrowing to partially fund the acquisition of Pacer and to support working capital needs. The increase in taxes resulted from the increased operating income. Net income. For the 12 months ended December 31, 1998, our net loss was $2.7 million, compared to a net loss of $1.5 million for the ten months ended December 31, 1997 and net income of $27,000 for the 12 months ended February 28, 1997. The net loss for 1998 resulted from income from continuing operations of $2.4 million offset by a net loss from the discontinued operations of $2.5 million and by a net loss on the disposal of discontinued operations of $2.6 million. Similarly, the net loss for the ten months ended December 31, 1997 was the result of income from continuing operations of $198,000 and a net loss from discontinued operations of $1.7 million. There was no loss from discontinued operations for the 12 months ended February 28, 1997. Liquidity and Capital Resources In March 1999, we refinanced our outstanding debt in conjunction with the purchase of CBSI. We obtained a $75.0 million credit facility from a group of lenders led by First Union Commercial Corporation. This facility comprised $45.0 million in senior debt and $30.0 million in revolving credit. In addition, we maintain a $5.0 million subordinated debt agreement, which we obtained in August 1995, with MassMutual. Our total debt capacity has a face value of $80 million. At March 31, 1999, our outstanding debt under these agreements was approximately $58.4 million. The availability of approximately $21.3 million under the revolving credit agreement is subject to certain covenants and collateral limitations. At March 31, 1999, about $10.0 million of additional borrowing under the revolving credit facility was available to us based on the covenants and limitations. Our First Union Credit Facility is secured by the stock of our subsidiaries, our accounts receivable and substantially all our other assets. The agreements expire in March 2004 and March 2005. Loans outstanding under these agreements bear interest at variable rates generally based on LIBOR approximating 8.5% per year. Our current credit agreements require that at least 50% of the proceeds of a sale of equity be used to reduce debt under the agreements. We expect to apply $28.7 million to reduce the senior and subordinated debt under our current agreements thereby increasing the amount of our borrowing capacity. Please see "Use of 26 Proceeds." As of March 31, 1999, after giving effect to this offering and the application of the proceeds to repay debt, approximately $21.0 million would be outstanding in senior debt, $0 in subordinated debt, and approximately $8.7 million in revolving credit. We intend to seek to increase the borrowing capacity under our revolving credit facility from a group of lenders led by First Union after this offering, primarily to fund acquisitions. We believe the capital resources available to us under our credit agreements and cash from our operations are adequate to fund our ongoing operations and to support the internal growth we expect to achieve for at least the next 12 months. In the longer term, we anticipate financing our internal and external growth from acquisitions through one or a combination of the following: cash from operations; additional borrowing; issuance of equity; use of the existing revolver facility; or a refinancing of our credit facilities. Please see "Risk Factors--We may require additional financing that we may not be able to secure on favorable terms or at all." Backlog Backlog represents management's estimate of our aggregate realizable revenues over the term of all of our contracts, including any option periods. However, backlog is not necessarily indicative of future revenues. Our contract backlog was approximately $450 million as of March 31, 1999. Our backlog is composed of: . Customer authorized contract values for which the customer has set aside, appropriated or committed funds for specifically identified services, products, tasks or delivery orders; and . Management's estimate of the realizable contract values for all expected future services, products, tasks or delivery orders, for which funds have not yet been set aside, appropriated or committed. The actual timing of our receipt of revenues, if any, on projects included in our backlog could change because many factors affect the scheduling of projects. In addition, cancellations or adjustments to contracts may occur. Our backlog is subject to large variations from quarter to quarter as existing contracts are renewed or new contracts are awarded. Additionally, virtually all of our backlog represents contracts with the United States government which may be terminated at any time for any reason. Discontinued Operations In August 1997, we combined our computer and video game business with the operations of Looking Glass Technologies, Inc. to form Intermetrics Entertainment Software, LLC, or IES. After the combination, we owned 66% of IES and consolidated the results of IES' operations with our operations for our financial reporting purposes. In December 1998, we approved a plan of divestiture of IES by means of a distribution of our interest in IES to our stockholders. We effected the distribution in March 1999. Please see note 3 to our consolidated financial statements. As part of our plan of divestiture, we structured financial arrangements with IES that included the conversion of $1.3 million of capital contributed to IES into a term loan, and the establishment of a $2.0 million revolving credit facility for use by IES through December 31, 1999. The term loan is equal to our capital contributed to IES, reduced by the operating losses of IES during our ownership period. We converted the contributed capital to a term loan because the term loan provides us with the possibility to recover some of the advances we made to IES without creating adverse tax consequences. The revolving credit facility obligates us to advance up to $2.0 million to IES through December 31, 1999. These advances must be made available at any time, for any amount up to $2.0 million, as long as IES has not filed for bankruptcy and is not in the process of liquidation or the equivalent. Amounts advanced under the term loan and revolving credit facility and an additional $400,000 in term loans mature on December 31, 2001. If not prepaid, we will pursue collection of all amounts due. However, we presently do not believe that we will be successful in our collection efforts. As a result of the plan of divestiture approved by us in December 1998 and completed in March 1999, we have accounted for our investment in IES as a discontinued operation in 1997 and 1998. For the five months 27 ended December 31, 1997, IES recorded revenues of $1.9 million and a net loss from operations of $1.7 million. For the twelve months ended December 31, 1998, IES recorded revenues of $7.2 million and a net loss from operations of $2.5 million. The increase in revenues in 1998 over 1997 was the result of a full year of operations and a higher level of development activities supported by advances of royalties from publishers of the games under development. The increased loss in 1998 over 1997 is primarily attributable to the full year of operations in 1998. The operating losses in both years were the result of the increasing number of game development projects, for some of which the estimated costs to complete the development exceeded the expected advances from publishers, resulting in the recording of losses in current periods. The net losses in both 1997 and 1998 are accounted for in our statement of operations as losses from discontinued operations. In addition, we incurred a net loss from the disposal of IES of $2.6 million, $3.9 million on a pre-tax basis, representing the write-off of $1.7 million of term loans, $200,000 of professional fees, $500,000 of estimated operating losses through the disposal date and the accrual of our remaining estimated funding commitment of $1.5 million described in the preceding paragraph. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk relates to changes in interest rates for borrowings under our senior term loans and our revolving credit facility. These borrowings bear interest at variable rates. The unsecured notes bear interest at a fixed rate. Based on our borrowings during 1998, a hypothetical 10% increase in interest rates would have increased our annual interest expense by approximately $250,000 and would have decreased our annual cash flow from operations by approximately $150,000. Impact of the Year 2000 Issue General. Many currently installed computer systems and software products are coded to accept or recognize only two-digit entries in the date code field. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. We are exposed to the risk that the systems we, our customers and vendors depend on to conduct operations are not Year 2000 compliant. State of Readiness. We have developed a Year 2000 program that was structured to address our Year 2000 exposure. Our Year 2000 program focuses on certain tasks that address critical Year 2000 issues. These tasks include assessing each of the following: . Our computer hardware and software, including data, networks, servers and workstations, human resources systems and financial systems; . Our telephone systems, computer room systems and office equipment; and . Our financial interfaces and leased facilities. We also monitor critical suppliers and vendors for Year 2000 readiness as follows: . We require Year 2000 compliance in all new purchases of hardware and software, both for internal use and for the use by our customers; . We regularly monitor vendor information for additional Year 2000 readiness information and obtain and apply software changes appropriately; . We monitor the readiness of our financial services vendors to provide timely services; . We are conducting a letter survey of landlords requesting information as to the readiness and reliability of building systems including security access, elevators and environmental control systems. 28 We have substantially completed the process of determining the Year 2000 readiness of our IT systems. We believe that our internal systems, as a whole, are Year 2000 compliant. Our remaining Year 2000 tasks include: . Migrating employee records and data from legacy computer systems; . Reviewing how our systems interface with those of our financial services companies, including payroll functions, direct deposits, health and retirement benefits, and customer electronic interfaces; . Completing our review of Year 2000 compliance by critical suppliers and vendors; . Implementing a strategy for deploying uniform desktop applications across our operations and maintaining desktop systems in a Year 2000 compliant configuration; . Completing upgrades for data and voice communications equipment; and . Working with landlords to assess Year 2000 issues in building systems. We are not currently aware of any Year 2000 problems that would have a material adverse effect on our business, financial condition or results of operations. We intend to complete our assessment, and the replacement or remediation of any non-Year 2000 compliant technologies, by September 1999. Costs. As of March 31, 1999, we have expended approximately $100,000 in connection with Year 2000 compliance efforts. We estimate that the total remaining cost of our Year 2000 compliance efforts will be approximately $500,000. Most of these expenses relate to costs for licensing standardized Year 2000 compliant software, costs for personal computer hardware upgrades and operating costs associated with time spent by employees in Year 2000 compliance matters. If we encounter unexpected difficulties, or if we are unable to obtain compliance information from material third parties, we may need to spend additional amounts to ensure that our systems are Year 2000 complaint. Risks. We provide our IT assurance services for information systems affected by Year 2000 problems. Although we attempt to contractually limit our liability for damages arising from errors, mistakes, omissions or negligent acts in rendering services, our attempts to limit liability may not be successful. Our failure or inability to meet a customer's expectations could cause our customer's operations to suffer and, therefore, could give rise to claims against us or damage our reputation, adversely affecting our business, operating results and financial condition. Although our assessment may be finalized without identifying any material non-compliant systems operated by us or by third parties, a systemic failure beyond our control, such as a prolonged telecommunications or electrical failure, is possible. This type of failure could prevent us from operating our business. We believe that the primary business risks, in the event of such failure, would include, but not be limited to, lost business revenues, increased operating costs or other business interruptions of a material nature, as well as claims of mismanagement, misrepresentation or breach of contract. Presently, we believe we are unable to reasonably estimate the duration and extent of any such interruption, or quantify the effect it may have on our future revenues. Contingency Plan. We have not yet developed a contingency plan to address the worst-case scenario that might occur if our technologies are not Year 2000 compliant. The results of our Year 2000 simulation testing and the responses received from the Year 2000 readiness disclosures obtained from critical providers will be taken into account in determining the need for and nature and extent of any contingency plans. We intend to complete the development of any required contingency plan by September 1999. Effects of Recent Accounting Pronouncements In 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," which must be adopted for fiscal years beginning after December 15, 1998, and the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Investments and Hedging Activities," which must be adopted for fiscal years beginning after June 15, 1999. The adoption of these statements is not expected to have a material impact on us. 29 BUSINESS Overview AverStar is a pioneer in providing IT services and software products for the mission-critical systems of a significant number of civilian and defense agencies of the United States government. We provide an integrated offering of services and products in four areas of IT: . IT Assurance. We provide independent analysis, testing and verification of critical information systems under development or being upgraded. We also provide security for customers' information systems. . IT Development. We offer a full range of software and systems development services for customer-specific applications and Internet applications. . IT Operations. We manage and operate information system networks and data centers at our customers' facilities. . IT Consulting. We serve as consultants with respect to our customers' development of innovative applications or improvements to existing critical systems. Industry Background Growth of IT Industry The demand for third-party IT services has grown substantially in recent years. Organizations are increasingly using IT to improve the quality of their products and services, to reduce their costs and to improve operating efficiencies. IDC forecasts that the United States market for IT services will grow from an estimated $139 billion in 1998 to $207 billion in 2002. IDC forecasts that the IT system services segment of the worldwide IT services market will grow at a compound annual growth rate of approximately 12% over this period. According to Federal Sources, Inc., the United States government is the world's largest single buyer of IT services and products. The EIA reports that the United States government's IT budget for fiscal 1999 is approximately $30 billion, nearly double the budget ten years ago. The EIA also estimates that the outsourced portion of the federal IT budget will be $26 billion in 1999, with approximately 64% allocated to civilian agencies of the government and 36% allocated to the Department of Defense. We believe that the increasing emphasis by the United States government on downsizing and reducing budgets will result in the growing use of IT to enhance productivity and in more testing and upgrading of existing IT systems. Trends in Federal IT Industry Historically, the United States government purchased IT services and products primarily through a protracted, competitive bidding process involving numerous service providers. Recent government procurement reform has streamlined the government's buying practices, resulting in a more commercial approach. These changes have led to the following trends in the federal IT procurement process: . The government now places greater emphasis on an IT service provider's past performance. In evaluating contract bids, the government examines an IT service provider's technical merit, reputation and references, leading to an increasing emphasis on the quality and reliability of IT services and products. . The government increasingly awards government-wide acquisition contracts, or GWACs. GWACs are contracts awarded by a government agency to many IT service contractors to provide IT services and products at pre-negotiated prices, terms and conditions. GWACs streamline the government's 30 procurement process by allowing any government agency to choose IT services and products from any agency's existing GWAC rather than going through its own protracted contract procurement process. . Government contracts procured by a single agency are increasing in size. Government agencies are consolidating more work under single contracts to reduce the time and effort required to procure IT services and products. These larger contracts favor IT service providers with greater management, financial and technical resources and broader service offerings. In addition, these contracts may lead to preferred contractor relationships for successful IT service providers. . Government agencies have moved toward multiple-award contracts. Multiple-award contracts are awarded by one government agency to several IT service contractors, each with similar service offerings and products. These contracts provide the government agency that awarded the contract a choice among IT service providers. In addition, multiple- award contracts favor IT service contractors with broad technical resources. These trends in the federal procurement process have led to the following responses by IT service providers: . Federal IT service providers are increasing their investments in sales and marketing. As the government adopts a more commercial approach to contract procurement, IT service contractors must increase their sales and marketing efforts. Government-wide acquisition contracts and multiple-award contracts require continued sales and marketing efforts over the life of the contract because a government agency has the freedom to choose among several pre-approved IT service providers. . There is increasing consolidation among federal IT service providers. The trends toward government-wide acquisition contracts, multiple-award contracts and larger single agency contracts requires IT service providers to have greater management, financial, technical and sales resources. As a result, IT service providers increasingly seek to consolidate complementary businesses. The AverStar Solution We provide high-quality and cost-effective IT services and products designed to meet all the needs of mission-critical information systems. Our solution to the challenges presented by the federal IT industry consists of the following components which we believe differentiate us from our competitors. . Emphasis on Quality and Reliability. Over our 30-year history, we believe that we have established a reputation for providing IT services and products of the highest quality and reliability. We have developed a company culture that emphasizes and rewards the delivery of services and products of the highest quality and reliability. As a result, over the last 10 years, we have won over 95% of our government contracts for which we have recompeted. . In-Depth Knowledge of Mission-Critical Systems. Mission-critical systems are complex and perform vital functions in which even a minor failure exposes customers to substantial losses, including potential loss of life. We have developed significant expertise in addressing the needs of these large, complex systems. For 30 years, we have worked on some of the country's most sensitive and critical systems, including NASA's manned flight systems and the Health Care Finance Administration's Medicare transactions system. We also provide services for commercial customers' critical systems. . Highly Developed Project Management Skills. Each of our projects is headed by an experienced project manager. The project manager works closely with our customers' management and IT personnel to ensure that the project is completed on-time and within budget. We currently have approximately 100 project managers with an average of over 20 years experience in the IT industry. . Comprehensive Offering of Services and Products. We offer a comprehensive range of IT services and products. We can support a customer throughout the entire life cycle of an information system from design and development through deployment and operation. 31 . Expertise in Multiple Technologies. Our IT professionals have experience and expertise in diverse technical environments, legacy platforms, programming languages and software, as well as newer technologies including client/server applications and the Internet. This expertise enables us to assist customers in determining the best solutions for their specific IT needs. We also have extensive knowledge of customers' mission-critical systems and operations, which allows us to design and integrate new systems or applications. Our Business Strategy Our goal is to be the leading quality supplier of IT services and software products for mission-critical systems. To achieve our goal, our strategy is to: . Leverage Our Position in IT Assurance. We intend to continue to leverage our position in IT assurance to attract new customers and to provide additional services and products to our existing customers. We believe that the knowledge we gain concerning our customers' business, processes and technologies while performing IT assurance services allows us to expand our customer relationships over time. . Pursue Targeted Acquisition Opportunities. Strategic acquisitions of IT service providers are an integral part of our growth strategy. We seek to acquire companies that operate in defined vertical market niches complementary to our current business or that have well established relationships with key customers. These acquisitions may allow us to: -- Offer products and services which we do not currently provide; -- Add new markets and customers which we do not currently serve; and -- Compete more effectively for larger contracts with increased technical, financial and sales and marketing resources. Our recent acquisition of CBSI is an example of our targeted acquisition strategy. Through CBSI, we acquired several new customer relationships as well as significantly increased our IT operations capabilities. . Expand Our Commercial Business. We intend to capitalize on our expertise and reputation in the federal IT market to compete for commercial projects. As the size of IT systems of commercial companies has grown in response to the demand for improved product quality, reduced costs and improved operating efficiencies, information systems have become critical to their businesses. As a result, the need for high-quality IT services is likely to grow. We believe that our reputation for high quality and reliability together with our position in IT assurance will enable us to take advantage of this opportunity in the commercial market. . Continue Our Investment in Sales and Marketing. Over the last three years, we have significantly strengthened our sales and marketing efforts and have increased the number of our employees dedicated to sales and marketing from eight to twenty-six as of May 31, 1999. Our investment in sales and marketing enables us to compete effectively for larger government contracts, to provide the continuous sales presence necessary to obtain additional work under government-wide acquisition contracts and multiple-award contracts and to expand our commercial customer base. . Maintain Our High Level of Customer Satisfaction. We remain focused on customer satisfaction which has been a major factor in our past success. Our highly qualified, responsive project teams ensure quick and effective responses to customers' IT concerns. We believe that maintaining our high level of customer satisfaction and the resulting long-term relationships provide a stable customer base from which we can grow our business. Our Services and Products We provide our customers with an integrated offering of services and products in four areas: IT assurance, IT development, IT operations and IT consulting. Through these offerings, we are able to support customers during all or any particular phase of the life cycle of an information system. 32 IT Assurance Our IT assurance services include the independent analysis, review, testing, verification and validation of information systems under development or being upgraded. Customers increasingly view more of their information systems as being critical to their operations. This growth in the number of critical systems, which must operate correctly and be delivered within schedule and cost constraints, has increased the market demand for our IT assurance services. We provide the following types of IT assurance services: Systems Assurance. Our systems assurance services involve independent assessment of the specification, design, implementation and testing of information systems being developed for our customers. We focus on early detection of problems so that cost-effective corrections can be made early in the development cycle. We also evaluate the processes and tools being used by the systems developer and provide oversight in tracking the customer's schedule and budget. Our systems assurance methodologies, tools and services verify our customers' information systems and provide them with comprehensive technical reports detailing any and all tracking and reporting problems. Information Assurance. Our information assurance services include providing customers with security risk assessments, security policy and architecture design, and certification and accreditation of IT systems. Our solutions help customers automate highly secure transmissions of data across communications networks. With more information systems migrating to Internet and Intranet applications, the potential threat from computer viruses and computer hackers increases the demand for these services. We also offer products that provide customers with the ability to control a user's access to network systems in a multi-level, secure environment. Compliance Assessments. Customers retain us to determine whether a specific component of an information system complies with their specifications. The scope of our compliance assessment services may vary from assessing the readiness of software for operational implementation, to assessing the process, cost and schedule for an information system upgrade. As part of our business strategy, we have begun to apply our expertise in assessing critical information systems to the commercial IT services market. As a result of current market demand, the majority of our recent commercial projects have focused on the Year 2000 problem. We believe that the high demand for these services presents a significant opportunity for us to expand our customer base in the commercial IT market. Already, some of the commercial companies that originally hired us to do Year 2000 work have retained us to provide broader-based IT assurance as well as IT development services such as building web-based applications for legacy systems. IT Development Our IT development services include specification and design, coding and implementation, system integration, testing and verification, training and operational deployment of IT systems. We use both our proprietary and commercially available tools, together with well established procedures, to develop and implement IT systems. Our many years of experience in performing IT assurance services on major systems provide us with a competitive advantage as an IT developer through the use of processes that avoid common development problems and through the utilization of project management disciplines to control the cost, schedule and performance of our projects. Our IT development services specialize in the following: Mission Applications. Mission applications involve developing and maintaining software and systems to support customer-specific programs or operations. Electronic Business. Applications for electronic business involve enabling legacy systems for web-based access and building new Internet and intranet applications for government and commercial customers. 33 IT Operations Our IT operations include network and desktop operations and complete data center operations at our customers' facilities. We install, maintain and support our customers' network and desktop operations. Our data center operations include software development, data collection and input, database archives, report generation and hardware maintenance. We also support customers in incorporating new technologies and requirements into their operations. As a provider of end-to-end services for these operations, we frequently call upon our expertise in IT assurance, IT development and IT consulting to fulfill particular requirements of an IT operations contract. We recently expanded our IT operations services through the acquisition of CBSI, a company that has significant expertise in providing IT operations services to several civilian agencies of the federal government. IT Consulting Our IT consulting services include supporting customers' innovative applications of new technologies or enhancements to existing critical information systems. Through our IT consulting services, we gain knowledge of customers' systems, providing us with opportunities to capture other IT projects. Our IT consulting services include: Technology Studies. When customers want to investigate the application of a new or developing technology for a particular use, they can engage us to provide our IT consulting services in order to study feasibility of the concept, define the scope of the project, plan the detailed steps involved in phasing in new technology to replace an existing system, or develop a detailed plan, including schedules and budget, for a development project. Prototyping. We develop rapid prototype demonstrations for a variety of systems or applications. Language and Software Tool Development and Services. We deliver custom language and software tool development products and services to support web- based or private network systems and to support electronic design and manufacturing. . Monitoring and Debugging Tools. JWatch, our proprietary software debugging tool, provides users with the ability to analyze Java code execution and to display data and information to isolate problems and repair them within a Java software development environment. We license JWatch to software product companies that incorporate it into their products. Building on our JWatch technology, we have developed a new product, EWatch, which is currently being beta tested. EWatch supports monitoring and debugging in a distributed computing environment. We expect EWatch to enter the marketplace in late 1999 or early 2000. . Computer-Aided Design Automation Tools. We are a leader in developing languages to support the design and simulation of integrated circuits. We lead a group of design automation companies in an effort to develop an industry solution for the exchange of design information for integrated circuits directly between the designer and manufacturer. . Software Languages and Tool Development Services. We have been one of the leaders in creating higher order programming languages for building software-intensive systems for the United States government. We created NASA's HAL/S language, the standard for manned space avionics software, and the latest version of Ada, the standard language of the Department of Defense. These tools and related high-technology capabilities distinguish us and enable us to capture IT services contracts. In addition, our tools have intrinsic value of their own. By licensing some of our tools to third-party distributors, we are able to generate higher margin royalty revenues. 34 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. 35
SERVICES - --------------------------------------------------------------------------------------------------------------------------------- MARKET IT Assurance IT Development IT Operations IT Consulting - --------------------------------------------------------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------------------------------------------------------------
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. 37 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. 38 Our management works to foster an environment in which every employee shares the responsibility for our sales and marketing and internal growth. In addition to our dedicated sales and marketing personnel, many other employees spend significant amounts of their time on sales and marketing activities. We seek to ensure that each employee understands how he or she can contribute to our growth, whether by communicating to management opportunities for new business, by building a new customer relationship or by supporting a proposal. As we grow, we will continue to invest our resources in sales and marketing. Our continually growing sales presence is necessary to compete for larger, long-term government contracts, and to develop the ongoing relationships with present and prospective customers demanded by the prevalence of multiple-award government contracts and by our expansion of commercial opportunities. A significant portion of our new business derives from existing customer relationships. We frequently leverage our strong incumbent positions to expand the scope of our customer relationships. In addition, we identify new contract opportunities through the use of industry contacts, attendance at conferences and review of publications that identify new contracting opportunities. While the services and products we provide to commercial customers are the same as or similar to those we offer to government customers, the process of selling to commercial customers is somewhat different. A portion of our sales and marketing staff is, therefore, dedicated to selling services to commercial customers. We expect to continue to expand our commercial sales and marketing staff. We also have a sales effort dedicated to licensing our technology and products to companies that sell our products and pay us royalties. We have an incentive compensation program for sales and marketing personnel. Incentive awards are based on achievement of our goals for profitability and bookings of new business. Contracts Government Contracts We have several multi-year contracts with United States government agencies, typically for three to five years. These contracts require us to provide a broad range of requested services. We receive specific assignments under a given contract through the issuance by the government of task orders. Task orders describe the specific assignment, the number of employees allocated to the assignment and the estimated cost, fee and travel allocated to the assignment. Under our Government Services Agency Schedule, which is a type of GWAC, any government agency may purchase IT services and products at pre-approved prices and without any additional competitive bidding. The term of our current Government Services Agency Schedule contract expires in September 2002. Commercial Contracts Typically, commercial contracts require us to complete a specific task or provide a defined range of services and support. Payments are usually made incrementally during the performance of each specific work assignment. Currently, we are working to expand our customer base and increase the sales of our products and services in the commercial IT market. Most of our existing commercial contracts are fixed-price contracts. Backlog Backlog represents management's estimate of our aggregate realizable revenues over the term of all of our contracts, including any option periods. However, backlog is not necessarily indicative of future revenues. Our contract backlog was approximately $450 million as of March 31, 1999. Our backlog is composed of: . Customer authorized contract values for which the customer has set aside, appropriated or committed funds for specifically identified services, products, tasks or delivery orders; and 39 . Management's estimate of the realizable contract values for all expected future services, products, tasks or delivery orders, for which funds have not yet been set aside, appropriated or committed. The actual timing of our receipt of revenues, if any, on projects included in our backlog could change because many factors affect the scheduling of projects. In addition, cancellations or adjustments to contracts may occur. Our backlog is subject to large variations from quarter to quarter as existing contracts are renewed or new contracts are awarded. Additionally, virtually all of our backlog represents contracts with the United States government which may be terminated at any time for any reason. Competition We experience significant competition in all areas of our business. In general, the markets in which we compete are not dominated by a single company or a small number of companies. Rather, a large number of companies offer services that overlap and are competitive with our services and products. However, we compete regularly with approximately seven different competitors in our IT assurance service offerings, 18 in our IT development service offerings, six in our IT operation service offerings and four in our IT consulting service offerings. We believe that the principal competitive factors in our business are technical understanding, management capability, past contract performance, personnel qualifications and price. While we have considerable experience, there are many other contractors that have comparable skills. Many of our competitors are significantly larger and have greater financial resources than we do. In addition, many of our competitors have significantly more experience in the commercial IT market than we do. Proprietary Information Although much of our work is performed for the United States government, wherever possible we attempt to retain proprietary rights in our products. We rely on copyright, patent and trade secret laws and internal non-disclosure safeguards, as well as restrictions incorporated into software product license agreements and other contractual provisions to protect our proprietary rights. However, these measures may not prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures, or prevent others from independently developing similar knowledge, practices or procedures. Further, the government may acquire certain proprietary rights to software programs and other products that we develop while performing services under government contracts. The government may disclose this information to others, including our competitors. Disclosure or loss of control over our proprietary information could have a material adverse effect on our business, financial condition and results of operations. Employees As of May 31, 1999, we had a total of 1,765 employees, consisting of 1,643 full-time and 122 part-time or temporary employees. Of our total full-time employees, approximately 1,499 are in engineering, technical and technical support positions, 118 are in general and administrative positions and 26 are in sales and marketing positions. None of our employees are covered by a collective bargaining agreement. We have several full-time employees dedicated to recruiting technical and administrative professionals and managing our human resources. As part of our retention efforts, we seek to minimize turnover by emphasizing our reputation, the nature of our work, our work environment, our encouragement of technical publications, our participation in professional societies and our competitive compensation packages. Certain Regulatory Matters United States government contracts are subject to the Federal Acquisition Regulations, or FAR, and other agency FAR supplements. Major contracts are also subject to the Truth in Negotiations Act, or TIN Act, and Cost Accounting Standards, or CAS. Among other procurement regulations, the FAR contains the cost 40 principles for setting contract prices while the TIN Act requires us to provide current, accurate and complete cost or pricing data in connection with the negotiation of a contract. CAS requires consistency of accounting practices over time and compliance with specific cost accounting criteria. To the extent that a company fails to comply with procurement requirements, the United States government may adjust contract prices. Additionally, changes in cost accounting practices are subject to a required procedure for negotiation of the cost of the change. The United States government is protected from paying increased costs resulting from accounting changes. Finally, the United States government has the right to audit contractors for three years after final payment. Accordingly, our revenues are subject to adjustment. United States law and regulations restrict and regulate the export of technology as well as goods and commodities provided by United States businesses to controlled foreign subsidiaries and affiliates. We are subject to certain of these regulations with respect to our technology that is sold to non-United States customers. Facilities We currently lease approximately 310,000 square feet of space comprised of 24 facilities. We consider these properties to be modern, well maintained and suitable for their intended purposes. We lease our principal executive and administrative offices and software facility located in 38,800 square feet of space in Burlington, Massachusetts. This lease expires in 2003. We also have offices located in: . Fountain Valley, Huntington Beach, Pasadena, Point Mugu, Sacramento, San Diego and Santa Clara, California; . Colorado Springs, Colorado; . Panama City, Florida; . Baltimore, Greenbelt and Lexington Park, Maryland; . Billerica, Massachusetts; . Kansas City, Missouri; . Eatontown, New Jersey; . Lawton, Oklahoma; . Portland, Oregon; . Warminster, Pennsylvania; . Charleston, South Carolina; . Houston, Texas; and . Arlington, Fairfax and Vienna, Virginia. Legal Proceedings We are not involved in any material litigation. 41 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.
Name Age Position ---- --- -------- 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
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 42 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. 43 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
Annual Compensation ------------------------------ Other Annual All Other Name and Principal Position Salary Bonus Compensation Compensation --------------------------- -------- -------- ------------ ------------ 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
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. 44 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.
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 - ---- -------- ---------------- ----------- ------------- ----------- ------------- 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......... -- -- -- -- -- --
- -------- (1) Solely for purposes of this calculation, the fair market value of the common stock at the time of the exercise was deemed to be the initial public offering price of $8.00 per share. The exercise price of the options was $1.08 per share. (2) All of Mr. Alexander's options to purchase 387,831 shares of common stock will become exercisable when this offering closes and will have a value of $2,571,320 based on an assumed initial public offering price of $8.00 per share and an exercise price of $1.37 per share. (3) All of Mr. Saponaro's options to purchase 116,349 shares of common stock will become exercisable when this offering closes and will have a value of $771,394 based on an assumed initial public offering price of $8.00 per share and an exercise price of $1.37 per share. Classified Board of Directors The board of directors presently consists of seven persons. Our board of directors is divided into three classes. Directors of each class serve for three years and are elected at the annual meeting of stockholders held in the year in which the term for such class expires. Michael B. Alexander, Mary Ann Gilleece and Peter M. Schulte serve as Class 1 directors with their terms expiring at the 2000 annual meeting of stockholders. Joseph A. Saponaro and John C. Rennie serve as Class 2 directors with their terms expiring at the 2001 annual meeting of stockholders. Sigmund H. Goldblum and Joel N. Levy serve as Class 3 directors with their terms expiring at the 2002 annual meeting of stockholders. For further information on the effect of the classification of the Board of Directors, please see "Description of Securities--Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws." Directors Compensation In September 1998, we began compensating our non-employee directors $20,000 per year, paid in arrears in semi-annual increments. In addition, we reimburse each non-employee director for customary and reasonable out-of-pocket expenses for attending each board of directors or committee meeting. At the discretion of the board of directors, non-employee directors may be granted options to purchase common stock at the then prevailing fair market value. We also have a consulting agreement with Messrs. Levy and Schulte. Please see "Certain Relationships and Related-Party Transactions." Prior to September 1998, directors received no cash compensation for their service on our board of directors or any of our committees. 45 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 46 . 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 47 employment agreement, or long-term disability, then he is entitled to any earned but unpaid salary and bonus and the following severance for the lesser of 36 months following the date of his termination or the remaining term of his employment agreement: . His then current salary; . His tax anticipation payments; and . Continued medical benefits on the same basis as immediately prior to his termination. If Mr. Alexander's employment agreement is terminated for a long-term disability, then he is entitled to the following severance: . $25,000 per month and his tax anticipation payments for 12 months following his termination; . Any earned but unpaid salary and bonus amounts; and . Benefits under our long-term disability policy and medical benefits from the date of termination until his 65th birthday. If Mr. Alexander's employment agreement is terminated by his death, or if Mr. Alexander voluntarily terminates his employment agreement, then he, or his estate in the event of his death, is entitled to receive any earned but unpaid salary and bonus amounts. Under his employment agreement, Mr. Alexander also received options to purchase a maximum of 387,831 shares of common stock, at an exercise price of $1.37 per share. This stock option will vest and become exercisable upon the closing of this offering. Mr. Saponaro serves as President and director pursuant to the terms of an employment agreement, dated as of August 21, 1995, between us and Mr. Saponaro. Under the terms of his employment agreement, Mr. Saponaro receives an annual base salary of $230,000 or such greater amount as may be approved from time to time by our board of directors. Mr. Saponaro's employment agreement provides that he will be eligible to receive a bonus at the discretion of the board of directors. If Mr. Saponaro's employment agreement is terminated by us for any reason other than "cause", as defined in Mr. Saponaro's employment agreement, or long-term disability, or we fail to renew his employment agreement, then he is entitled to the following severance: . One-half of his then current salary, on a monthly basis, and one-half of his bonus, on an annual basis, for four years following the date of his termination; . Any earned but unpaid salary and bonus amounts; and . Continued medical benefits on the same basis as immediately prior to his termination for the greater of the remaining term of his employment agreement or 18 months. If Mr. Saponaro's employment agreement is terminated for a long-term disability, then he is entitled to the following severance: . His then current salary and bonus for 12 months following his termination, and $9,000 per month thereafter or such greater amount as our disability insurance policy permits, less our medical benefits described below; . Any earned but unpaid salary and bonus amounts; . Benefits under our long-term disability policy from the date of termination until his 65th birthday; and . Continued medical benefits to the extent permitted under our policies or plans, at no greater out-of-pocket cost to Mr. Saponaro than incurred prior to termination. 48 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 . 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 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.
Percentage before Percentage Number of this after this Beneficial Owner shares offering offering - ---------------- --------- ---------- ---------- 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%
- -------- * 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 (1) Includes options to purchase 387,831 shares of common stock for $1.37 per share. Includes 537,841 shares of common stock held by AFH Partners. Includes 58 shares of common stock held for the benefit of Mr. Alexander in the AverStar Profit Sharing & Savings Plan. (2) Includes options to purchase 24,453 shares of common stock at $3.78 per share. Includes 2,966 shares of common stock held in the Pacer Infotec Employee Stock Bonus Plan, or ESBP, for the benefit of Mr. Rennie. Excludes 155,351 shares held by the ESBP with respect to which Mr. Rennie, as trustee, has voting power but no pecuniary interest. After this offering, Mr. Rennie will not have the right to vote the shares held by the ESBP. (3) Includes options to purchase 116,349 shares of common stock for $1.37 per share. Includes 58 shares of common stock held for the benefit of Mr. Saponaro in the AverStar Profit Sharing & Savings Plan. Excludes 188,367 shares held by the AverStar Profit Sharing & Savings Plan with respect to which Mr. Saponaro has voting power but no pecuniary interest. (4) Includes options to purchase 48,906 shares of common stock at $3.78 per share. Includes 2,932 shares of common stock held for the benefit of Mr. Goldblum in the ESBP. (5) Includes 58 shares of common stock held for the benefit of Mr. Pettinella in the AverStar Profit Sharing & Savings Plan. (6) Excludes shares to be received by Messrs. Levy and Schulte from certain other AverStar stockholders pursuant to agreements between Messrs. Levy and Schulte and such stockholders. In connection with the acquisition of Intermetrics by Apollo Holding, Inc. in 1995, certain stockholders of Apollo who are now stockholders of AverStar agreed to share a percentage of their interest in Intermetrics' profits with Messrs. Levy and Schulte. Each of Mr. Levy and Mr. Schulte will receive (i) approximately 75,551 shares of common stock (assuming an initial public offering price of $8.00) immediately after this offering, approximately 911 of these shares will be issued out of our treasury shares and (ii) an additional number of shares of common stock six months after this offering to be determined based on the market price of the common stock at that time. The address of Messrs. Levy and Schulte is CM Equity Partners, 135 East 57th Street, 27th Floor, New York, New York 10022. (7) Includes 58 shares of common stock held for the benefit of Dr. Burton in the AverStar Profit Sharing & Savings Plan. Does not include options to purchase 15,000 shares of common stock issuable upon exercise of options that do not vest within 60 days of July 12, 1999. (8) Includes 54,882 shares of common stock owned by Levy Family 2/14/96 Limited Partnership, of which Mr. Levy is the general partner. (9) Does not include options to purchase 50,000 shares of common stock issuable upon exercise of options that do not vest within 60 days of July 12, 1999. (10) Includes options to purchase 577,539 shares of common stock. (11) The address of Mr. Niebla is 7524 Saddlehill Trail, Orange, California 92869. (12) The general partner of Richards Capital Fund L.P. is Richards Managers L.P. The general partner of Richards Managers L.P. is Richards LLC. The address of Richards Capital Fund L.P. is c/o James C. Richards, 303 Peachtree Street, N.E., Suite 4100, Atlanta, GA 30308. (13) Mr. Alexander is the President of Bronto, Inc., which is the general partner of AFH Partners. The address of AFH Partners is c/o Bronto, Inc., 127 Farm Road, Sherborn, Massachusetts 01770. (14) The address of these stockholders is c/o Michael P. Hermsen, CFA, MassMutual Life Insurance Co., 1295 State Street, Springfield, Massachusetts 01111. 52 CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS In connection with the acquisition of Intermetrics by an investor group led by current management, we obtained a $35.0 million credit facility with Massachusetts Mutual Life Insurance Company, or MassMutual, and certain affiliates of MassMutual. This facility comprised $25 million in senior debt, $5 million in subordinated debt and $5 million in revolving credit. In connection with this facility, MassMutual and its affiliates received warrants to purchase shares of common stock. In connection with our acquisition of Pacer in February 1998, these warrants were exchanged for 605,286 shares of our common stock. At December 31, 1998, we owed $23.6 million under the senior term agreement, $5 million under the subordinated debt agreement and $2.5 million under the revolving credit agreement. An additional $2.5 million was available under the revolving credit agreement. We repaid the $2.5 million borrowed under the revolving credit early in 1999 as we collected outstanding receivables. In March 1999, we refinanced our outstanding debt in conjunction with our acquisition of CBSI, and repaid our outstanding debt of $23.2 million under the senior term agreement. Currently, we maintain the $5 million subordinated debt agreement with MassMutual. MassMutual is also one of our lenders under our credit agreement with First Union. In connection with our divestiture of IES, we: . Provided a $2.0 million credit facility to IES; . Received a $1.3 million promissory note from IES; and . Extended the due date of two $200,000 secured notes from IES. Outstanding amounts under the credit facility and the promissory note bear interest at a rate of 8.5% per year. Outstanding amounts under the secured notes bear interest at a rate of 10.5% per year. AfterDecember 31, 1999, we are not required to fund any additional amounts under the credit facility, which matures on December 31, 2001. The promissory note and secured notes mature on December 31, 2001. Mr. Levy and Mr. Schulte, both members of our board, are the principal officers of Joel N. Levy/Peter M. Schulte, LLC, or L&S, which supported the buy out of Intermetrics in August 1995. We have retained L&S to provide financial, strategic and business planning and consulting services, including analysis and advice with respect to programs relating to value of our common stock. The consulting agreement with L&S terminates on the first anniversary of this offering. The total amounts of fees paid to L&S by us in 1996, 1997 and 1998 were $100,000, $200,000 and $263,000, respectively. J. Fernando Niebla was founder, chairman and chief executive officer of Infotec Development Inc. until it was merged into Pacer, and vice-chairman of Pacer until we acquired Pacer. In connection with our formation, Mr. Niebla entered into a repurchase agreement with us. This agreement provides that during 1998, 1999, 2000 and 2001, he can require us to repurchase some of his shares of common stock. Our total cost to repurchase all of the shares of his common stock under this agreement is $1,557,000. However, approximately $1,000,000 of such amount will be paid by cancellation of the outstanding indebtedness owed to us by Mr. Niebla. Mr. Niebla's right to require us to repurchase some of his shares of common stock terminates upon the closing of this offering. Each of our stockholders, including executive officers, who own 3% or more of our common stock calculated on a fully diluted basis have granted us a right of first refusal to purchase their shares at the prevailing market price. For three years following the date of this prospectus, each of these stockholders, other than MassMutual and its affiliates, must offer their shares to us before they may sell their shares on the public market. If we do not buy these shares, then these stockholders may sell their shares on the public market. 53 The following table sets forth loans made by us to our executive officers and 5% stockholders:
Principal Amount Amount of Currently Name and Principal Position Loan Outstanding Interest Rate Due Date - --------------------------- --------- ----------- ------------- -------- 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
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 DESCRIPTION OF SECURITIES The following descriptions of our common stock and preferred stock, and provisions of our certificate of incorporation and bylaws, reflect changes that will occur upon the filing of an amended and restated certificate of incorporation immediately prior to the closing of this offering. Our authorized capital stock consists of 25,000,000 shares of common stock, par value $.001 per share, and 1,000,000 shares of preferred stock, par value $.001 per share. Common Stock As of the date of this prospectus, there are 6,879,744 shares of common stock outstanding and held of record by 111 stockholders. Stockholders do not have cumulative voting with respect to the election of directors. There will be 10,880,655 shares of common stock outstanding upon the closing of this offering. Holders of common stock are entitled to one vote for each share on all matters submitted to a vote of stockholders. Holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Stockholders will not be liable for any further calls or assessments. Holders of common stock are entitled to receive dividends, if, as and when declared by the board of directors out of funds legally available for such purposes, subject to any dividend preferences of any outstanding preferred stock. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in our assets available for distribution, subject to the preferential rights of any outstanding preferred stock. Holders of the common stock have no preemptive, subscription, redemption or conversion rights. Upon the closing of this offering, there will be no shares of preferred stock outstanding. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. Preferred Stock As of the date of this prospectus, there are no shares of preferred stock outstanding. Upon the closing of this offering, the board of directors will be authorized, without further stockholder approval, to issue from time to time up to an aggregate of 1,000,000 shares of preferred stock in one or more series. The board of directors may fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each of these series, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of these series. We have no present plans to issue any shares of preferred stock. Stock Options Options to purchase a total of 3,349,447 shares of common stock may be granted under our stock option plan. As of the date of this prospectus, there are outstanding options to purchase a total of 1,513,433 shares of common stock under our stock option plan. Of these, stock options to purchase 757,055 shares are currently exercisable and options to purchase 504,180 shares will become exercisable upon the closing of this offering. As soon as practicable following the closing of this offering, we intend to file a registration statement on Form S-8 which will register the offer and sale of the shares to be issued upon exercise of these options. Upon the filing of the Form S-8, these shares will be immediately available for sale in the public market, subject to the terms of lock-up agreements entered into between certain of these option holders and the underwriters. Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws Delaware Law. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL. Section 203 of the DGCL generally prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder 55 attained that status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, fifteen percent (15%) or more of a corporation's voting stock. The provisions of Section 203 of the DGCL are intended to assure that the price that stockholders receive for the common stock in certain transactions is fair in relation to the market value of and the prices paid by the "interested stockholder" in its initial acquisitions of common stock and to allow the board of directors and the stockholders to prevent the consummation of such a transaction because it may not be in our best interest or in the best interest of our stockholders. Under those circumstances in which this statute would apply, minority stockholders may prevent a transaction favored by a majority of stockholders. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. Our Certificate of Incorporation and Bylaws. Certain provisions of our certificate of incorporation and bylaws, which will be in effect upon the closing of this offering and which are described in the following paragraphs, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. However, these provisions are designed to help to ensure that stockholders are treated fairly and equally in a multi-step acquisition, and are intended to encourage persons seeking to acquire control of us to pursue their acquisition in arms-length negotiations with our board of directors. Classified Board of Directors. Our board of directors is divided into three classes of directors serving staggered terms. The terms of our current directors expire at the 2000, 2001 or 2002 annual stockholders meeting. One class of directors will be elected at each annual stockholders meeting for a three-year term. This classification of directors may deter stockholders from changing the composition of our board of directors in a relatively short period of time. At least two annual stockholders meetings, instead of one, generally will be required to change the majority of directors. Because of the additional time required to change the directors, classification of directors also may delay the removal of our current management team. A classified board of directors helps to assure the continuity and stability of our board of directors and our business strategies and policies because generally a majority of directors at any given time will have had prior experience as directors. Board of Directors Vacancies. The certificate authorizes the board of directors to fill vacant directorships or increase the size of the board of directors. In addition, the certificate permits stockholders to remove directors only for cause. This may deter a stockholder from removing incumbent directors or simultaneously gaining control of the board of directors by filling the vacancies created by that removal with its own nominees. Stockholder Action; Special Meeting of Stockholders. The certificate provides that stockholders may only take action at duly called annual or special meetings of stockholders and not by written consent. The certificate further provides that special meetings of stockholders may be called only by the president, the chief executive officer, chairman of the board of directors or a majority of the board of directors. These provisions may delay a stockholders vote for a proposal over the objection of the board of directors. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must deliver a written notice to our principal executive offices within a prescribed time period. The bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders. Advance notice requirements may also delay a contest for the election of directors, and discourage or deter a tender offer or takeover attempt. Authorized But Unissued Shares. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to limitations imposed by the Nasdaq 56 National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could complicate or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. Restrictions on Certain Business Combinations. The certificate contains provisions which are substantially similar to Section 203 of the DGCL. Such provisions may dely or discourage mergers or other acquisition attempts with respect to us. Vote Required to Amend our Certificate of Incorporation and Bylaws. Subject to certain exceptions, our certificate and bylaws require the vote of 80% of the stockholders to amend, repeal or adopt any provision inconsistent with the anti-takeover and indemnification provisions discussed in this prospectus. This supermajority vote prevents a controlling stockholder from avoiding the requirements of these provisions by simply amending or repealing such provisions. Limitation of Liability and Indemnification Matters To the extent permitted under the DGCL, the certificate limits the personal liability of our directors to us or our stockholders for monetary damages for any breach of fiduciary duty as our directors. Under the DGCL, our directors have a fiduciary duty to us that is not eliminated by this provision of the certificate and, in appropriate circumstances, injunctions and other nonmonetary relief will remain available. This provision also does not affect the directors' responsibilities under any other laws, including the federal securities laws. Section 145 of the DGCL enables a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers. However, this provision does not eliminate or limit the liability of a director: . For any breach of the director's duty of loyalty to the corporation or its stockholders; . For acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . For payments of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL; or . For any transaction from which the director derived an improper personal benefit. Our certificate of incorporation provides that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that the person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees), judgments, fine and amount paid in settlement actually and reasonably incurred by that person in connection with any threatened, pending or completed action, suit or proceeding. We believe that the provisions of our certificate and bylaws are necessary to attract and retain qualified directors and executive officers. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether the DGCL would permit indemnification. We have obtained liability insurance for our officers and directors. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent for which indemnification will be required or permitted under the certificate. We are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. Transfer Agent and Registrar The transfer agent and registrar for the common stock will be Chase Mellon Shareholder Services, Ridgefield Park, New Jersey. 57 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:
Number of Shares Date ---------------- ----------------------------------------------------------- 21,929 After the date of this prospectus, subject to volume limitations in some cases 6,857,815 After 180 days from the date of this prospectus, subject to volume limitations in some cases 1,513,433 Upon the filing of a registration statement on Form S-8 to register the offer and sale of shares of common stock issuable upon the exercise of options granted under our stock option plan
In general, under Rule 144, as currently in effect, a person, or persons whose shares are required to be aggregated, including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . 1% of the then outstanding shares of common stock, approximately 108,881 shares, immediately after this offering; or . The average weekly trading volume in the common stock during the four calendar weeks preceding the date on which notice of that sale is filed, subject to restrictions. In addition, a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell those shares under Rule 144(k) without regard to the requirements described above. To the extent that shares are acquired from our affiliate, the acquiring person's holding period for the purpose of effecting a sale under Rule 144 generally commences on the date of transfer from the affiliate. As of the date of this prospectus, options to purchase a total of 1,513,433 shares of common stock are outstanding, of which options to purchase 757,055 shares are currently exercisable. Of the options to purchase 756,378 shares of common stock that are not currently exercisable, options to purchase 504,180 shares of common stock shall immediately vest and become exercisable upon the closing of this offering. Upon the commencement of this offering, we intend to file a registration statement to register the 1,836,014 shares of common stock reserved for issuance under the stock option plan. That registration statement will automatically become effective upon filing. Accordingly, shares issued upon the exercise of stock options granted under the stock option plan will be eligible for resale in the public market from time to time, subject to vesting restrictions and, in the case of some of the options, the lock-up agreements and the right of first refusal referred to below. Our directors and officers and stockholders who hold 6,871,537 shares in the aggregate, together with the holders of options to purchase 1,513,433 shares of common stock, have agreed that they will not sell, directly or indirectly, any shares of common stock without the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from the date of this prospectus. Please see "Underwriting." 58 Except in limited circumstances, we have agreed not to sell or otherwise dispose of any shares of common stock during the 180-day period following the date of the prospectus. Stockholders who own more than 3% of our common stock calculated on a fully diluted basis, have granted us a right of first refusal to purchase their shares at the prevailing market price. For three years following the date of this prospectus, these stockholders, other than MassMutual and its affiliates, must offer their shares to us before they may sell their shares on the public market. If we do not buy these shares, then these stockholders may sell their shares on the public market. 59 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:
Underwriter Number of Shares ----------- ---------------- Bear, Stearns & Co. Inc..................................... Legg Mason Wood Walker, Incorporated........................ --------- Total..................................................... 4,000,000 =========
The underwriting agreement provides that the obligations of the several underwriters are subject to approval of certain legal matters by counsel and to various other conditions. We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, and where such indemnification is unavailable, to contribute to payments that the underwriters may be required to make in respect of such liabilities. The nature of the underwriters' obligations is such that they are committed to purchase and pay for all of the above shares of common stock if any are purchased. If the underwriters sell more than the total number set forth in the table above, the underwriters have an option to buy up to an additional 600,000 shares to cover such sales from us. The underwriters may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in the same proportion as set forth in the table above. The underwriters, at our request, have reserved for sale at the initial public offering price up to 200,000 of the shares of common stock to be sold in this offering for sale to our employees and directors and other persons designated by us. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares offered hereby. The underwriters do not expect to confirm sales of common stock to any accounts over which they exercise discretionary authority. We, all of our directors and officers and stockholders holding an aggregate of 6,857,815 shares of our common stock have agreed that, subject to certain exceptions, for a period of 180 days from the date of this prospectus, without the prior written consent of Bear, Stearns & Co. Inc., which may be waived, we will not, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of our common stock or securities convertible into, exercisable for or exchangeable for our common stock. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
No Exercise Full Exercise ----------- ------------- Per Share.......................................... $ $ Total.............................................. $ $
60 Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the public offering price. If all the shares are not sold at the offering price, the representatives may change the offering price and the other selling terms. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock will be determined by negotiations among us and the representatives of the underwriters. Among the factors to be considered in those negotiations will be: . Our results of operations in recent periods; . Estimates of our prospects and the industry in which we compete; . An assessment of our management; . The general state of the securities markets at the time of this offering; and . The prices of similar securities of generally comparable companies. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol ASTR. However, there can be no assurance that an active or orderly trading market will develop for the common stock or that the common stock will trade in the public markets subsequent to this offering at or above the initial offering price. In connection with the offering, certain persons participating in this offering may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $1,100,000. In the ordinary course of business, certain of the underwriters and their affiliates have provided, and may in the future provide, financial advisory and investment banking services for us and our affiliates for customary fees. Legg Mason Wood Walker, Incorporated acted as financial advisor to CBSI in connection with the acquisition of CBSI by us and was paid a fee by CBSI of $625,000 for their services plus expenses and was also given the right to receive up to an additional $25,000 based on the achievement of certain financial thresholds by CBSI. LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Swidler Berlin Shereff Friedman, LLP, New York, New York, and for the underwriters by Proskauer Rose LLP, New York, New York. 61 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 AVERSTAR, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- 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
F-1 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 AVERSTAR, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (In thousands)
As of December 31, 1998 ------------------- Pro Forma Pro Forma AverStar CBSI Adjustments Balance Sheet ---------- -------- ----------- ------------- 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 ======== ======== ======= =======
F-3 AVERSTAR, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data)
For the year ended December 31, 1998 ----------------------------------------- 2 Months of Pro Forma Pro Forma AverStar Pacer CBSI Adjustments Total ------------- --------------------------- ----------- --------- 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 ============= ========
F-4 AVERSTAR, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended March 31, 1999 (In thousands, except per share data)
AverStar CBSI Three Months January 1, 1999 Ended March 31, to March 21, Pro Forma Pro Forma 1999 1999 Adjustments Total --------------- --------------- ----------- --------- 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
F-5 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: 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 ===========
Of the estimated amount of goodwill, the Company expects to allocate this amount and amortize it over estimated useful lives as follows: 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
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: 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 ===========
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: 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)
F-6 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: 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 ==========
2(b) Adjustment to record 2 months of amortization associated with the Pacer intangible assets acquired as follows: Contract backlog............................................... $189,000 Assembled workforce............................................ 25,000 Cost in excess of net assets acquired.......................... 50,000 -------- Total........................................................ $264,000 ========
2(c) Adjustment to record the amortization of the financing costs associated with the First Union refinancing. 2(d) Adjustment to record the incremental interest costs associated with the First Union Senior and Revolving Credit Notes used to finance the acquisition of CBSI. The interest rate on the Company's new borrowing is comparable to those in prior borrowing arrangements. 2(e) Adjustment to record the federal and state income taxes associated with CBSI operations assumed to be part of a C Corporation in 1998 and with the pro forma adjustments based upon the statutory rates in effect. 2(f) Adjustment to eliminate earnings for real estate and interest expense for real estate property not acquired. The pro forma adjustments to the unaudited pro forma condensed consolidated statement of operations, assuming the acquisition occurred on January 1, 1999, are as follows: 3(a) Adjustment to record amortization from January 1, 1999 to March 21, 1999 associated with the CBSI intangible assets acquired. 3(b) Adjustment to record the amortization of the financing costs from January 1, 1999 to March 18, 1999 associated with the First Union refinancing. 3(c) Adjustment to record the incremental interest costs associated with the First Union Senior and Revolving Credit Notes used to finance the acquisition of CBSI. The interest rate on the Company's new borrowing is comparable to those in prior borrowing arrangements. 3(d) Adjustment to record the federal and state income taxes associated with CBSI operations assumed to be part of a C corporation in 1999 and with the pro forma adjustments based upon the statutory rates in effect. 3(e) Adjustment to eliminate earnings for real estate and interest expense for real estate property not acquired. F-7 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 AVERSTAR, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
December 31 ------------------ March 31, 1997 1998 1999 -------- -------- ----------- (Unaudited) 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 ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-9 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)
(unaudited) Years Ended Three Months Ended -------------------------------------- ------------------- February 28, December 31, December 31, March 31, March 31, 1997 1997 1998 1998 1999 ------------ ------------ ------------ --------- --------- 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
The accompanying notes are an integral part of these consolidated financial statements. F-10 AVERSTAR, INC. CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT (In thousands)
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 ------ ------ ------ ------ ---------- ----------- ------------ ------ ----- ------------- 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) ===== ====== ===== ==== ======= ======== ===== === ===== =======
The accompanying notes are an integral part of these consolidated financial statements. F-11 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)
(Unaudited) ------------------- February 28, December 31, December 31, March 31, March 31, 1997 1997 1998 1998 1999 ------------ ------------ ------------ --------- --------- 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 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-12 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 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:
Asset Classification Estimated Useful Life -------------------- --------------------- Building & improvements........ 30 years, lesser of remaining life of lease or estimated life of improvement Computer, equipment and furniture..................... 2-7 years
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 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 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:
1997 1998 ------- -------- (In thousands, except per share data) ----------------- 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)
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:
March 31, ---------------- 1998 1999 ------- ------- (In thousands, except per share data) ---------------- 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
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 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:
December 31, Estimated Useful December 31, ------------ Life 1997 1998 ---------------- ------------ ------------ 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 ==== =======
Accumulated amortization relating to these intangible assets is $62,000 and $1,005,000 at December 31, 1997 and 1998. F-17 AVERSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5. Income Taxes The provision for (benefit from) income taxes from continuing operations for the year ended February 28, 1997 and the ten-month period ended December 31, 1997 and the year ended December 31, 1998 consists of the following:
February 28, 1997 December 31, 1997 December 31, 1998 ----------------- ----------------- ----------------- ($ in thousands) 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 $2,168 ==== ==== ======
The following table reconciles the provision (benefit) for income taxes to the amount computed by applying the statutory federal income tax rate to income from continuing operations before the provision for (benefit from) income taxes for the year ended February 28, 1997, the ten-month period ended December 31, 1997 and the year ended December 31, 1998:
February 28, 1997 % December 31, 1997 % December 31, 1998 % ----------------- ---- ----------------- ---- ----------------- ---- ($ in thousands) 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 $1,481 ===== ==== ======
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The significant temporary differences included in net deferred tax assets at December 31, 1997 and 1998 are as follows:
December 31, 1997 December 31, 1998 ----------------- ----------------- ($ in thousands) 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 ======= =======
F-18 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 AVERSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following represents aggregate maturities of long term debt pursuant to these borrowing arrangements: 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 ===========
Note 8. Capital Stock The following summarizes the classes of stock the Company has authorized and issued as of December 31, 1997 and 1998:
Shares Authorized Shares Issued ------------------------- ------------------------- Class of December 31, December 31, December 31, December 31, Common Stock 1997 1998 1997 1998 ------------ ------------ ------------ ------------ ------------ 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 ========= ========== ========= =========
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 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: 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 =======
Class F--Voting redeemable shares and related maximum amounts redeemable annually as of December 31, 1998 are as follows:
Year Shares Amount ---- ------- ---------- 1999.................................................... 122,249 $ 500,000 2000.................................................... 137,531 562,500 2001.................................................... 194,255 794,500 ------- ---------- Total................................................. 454,035 $1,857,000 ======= ==========
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 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:
February 28, 1997 December 31, 1997 December 31, 1998 ----------------- ----------------- ----------------- 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
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:
February 28, 1997 December 31, 1997 December 31, 1998 ----------------- ----------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- --------- ------- --------- --------- --------- 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
F-22 AVERSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options at December 31, 1998:
Options Options Outstanding Exercisable ------------------------------- ----------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Number Life Price Number Price - --------------- --------- ----------- --------- ------- --------- $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 ========= =======
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:
Fiscal Year Facilities Equipment Total - ----------- ---------- --------- ------- (In thousands) 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 ======= ==== =======
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 AVERSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11. Earnings Per Share The calculations of earnings per share are as follows:
February 28, December 31, December 31, March 31, March 31, 1997 1997 1998 1998 1999 ------------ ------------ ------------ --------- --------- (unaudited) (In thousands, except per share amounts) 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 ====== ====== ====== ====== ======
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 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 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 COMPUTER BASED SYSTEMS, INC. BALANCE SHEETS December 31, 1997 and 1998
1997 1998 ----------- ----------- 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 =========== ===========
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-27 COMPUTER BASED SYSTEMS, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ----------- ----------- ----------- 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 =========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-28 COMPUTER BASED SYSTEMS, INC. STATEMENTS OF OTHER COMPREHENSIVE INCOME For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 --------- ---------- ---------- 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 ========= ========== ==========
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-29 COMPUTER BASED SYSTEMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1997 and 1998
Voting Nonvoting Unrealized Common Common Retained Loss on Stock Stock Earnings Investment Total -------- ---------- ---------- ---------- ---------- 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 ======== ========== ========== ======= ==========
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-30 COMPUTER BASED SYSTEMS, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ---------- ----------- ------------ 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 ========== =========== ============
The accompanying Notes to Financial Statements are an integral part of these financial statements. F-31 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: 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
(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 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:
1997 1998 ----------- ----------- Billed............................................... $10,896,170 $12,196,691 Unbilled............................................. 288,614 114,148 ----------- ----------- Total.............................................. $11,184,784 $12,310,839 =========== ===========
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 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: Fair market value............................................... $ 1,142,495 Cost of securities.............................................. $(1,217,413) ----------- Net unrealized loss............................................. $ (74,918) ===========
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
1997 1998 --------- --------- 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 ========= =========
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 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.
1997 1998 ---------- ---------- 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 ========== ==========
The aggregate amount of principal payments due as of December 31, 1998 is as follows:
Year Ending December 31 Amount ----------- ---------- 1999............................................................. $ 514,588 2000............................................................. 26,320 2001............................................................. 28,868 2002............................................................. 1,357,529 ---------- Total.......................................................... $1,927,305 ==========
(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 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:
Year Ending Office Office December 31 Space Subleases Furniture Total ----------- ---------- ----------- --------- ---------- 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 ========== =========== ========= ==========
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 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 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 PACER INFOTEC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------ 1996 1997 ----------- ----------- 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 =========== ===========
See accompanying notes. F-39 PACER INFOTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Period from January 1, Year ended December 31, 1998 to ----------------------- February 28, 1996 1997 1998 ----------- ----------- ------------ 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 =========== =========== ==========
See accompanying notes. F-40 PACER INFOTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional ----------------- Paid-in Retained Shares Amount Capital Earnings Total --------- ------- ---------- ---------- ---------- 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 ========= ======= ========== ========== ==========
See accompanying notes. F-41 PACER INFOTEC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from January 1, Year ended December 31, 1998 to ------------------------ February 28, 1996 1997 1998 ----------- ----------- ------------ 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 =========== =========== ===========
See accompanying notes. F-42 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 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 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 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:
December 31 -------------------- 1996 1997 --------- --------- 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 ========= =========
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 PACER INFOTEC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Stock Options--(continued) Information regarding options under the Plan is summarized below:
Weighted- Average Number of Exercise Shares Price --------- --------- 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 =========
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 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: 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 ==========
7. Income Taxes Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1997 are as follows:
December 31 ----------------------- 1996 1997 ----------- ---------- 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 =========== ==========
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 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:
1996 1997 ---------- ---------- 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 ========== ==========
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 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 LOOKING GLASS TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS Year ended March 31, 1997 and the period from April 1, 1997 through August 8, 1997
March 31, August 8, 1997 1997 --------- --------- 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) =========== ===========
See accompanying notes. F-51 LOOKING GLASS TECHNOLOGIES, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICITS) Year ended March 31, 1997 and the period ended August 8, 1997
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 --------- ------- --------- ---------- ------- ---------- --------- ------ ---------- ------------ 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) ========= ======= ========= ========== ======= ========== ========= ====== ======= ============ Total stockholders' equity (deficit) ---------------- 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) ================
F-52 LOOKING GLASS TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS Year ended March 31, 1997 and period from April 1, 1997 through August 8, 1997
Period Year ended ended March 31, August 8, 1997 1997 ----------- ----------- 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 =========== ===========
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 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 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 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 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:
March 31, August 8, 1997 1997 --------- --------- Expected life (years)....................................... 5 5 Range of risk-free interest rates........................... 6.73% 6.76%
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:
Year ended April 1, 1997 March 31, through August 1997 8, 1997 ---------------- ---------------- Weighted Weighted Average Average Shares Exercise Shares Exercise (000) Price (000) Price ------ -------- ------ -------- 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
The following table summarizes information about the 1992 Plan at August 8, 1997:
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 - -------- ----------- ----------- -------- ----------- -------- $.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 --------- -------
F-57 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:
Period ending August 8 Capital Lease Operating Leases ---------------------- ------------- ---------------- 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 ========
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 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
SERVICES - --------------------------------------------------------------------------------------------------------------------------------- MARKET IT Assurance IT Development IT Operations IT Consulting - --------------------------------------------------------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 -------------------
Page ---- Prospectus Summary....................................................... 1 The Offering............................................................. 3 Summary Financial Data................................................... 4 Risk Factors............................................................. 8 Forward-Looking Statements............................................... 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 30 Management............................................................... 42 Principal Stockholders................................................... 51 Certain Relationships and Related-Party Transactions..................... 53 Description of Securities................................................ 55 Shares Eligible For Future Sale.......................................... 58 Underwriting............................................................. 60 Legal Matters............................................................ 61 Experts.................................................................. 62 Where You Can Find Additional Information................................ 62
------------------- Until , 1999 (25 days after the date of this prospectus), all dealers effecting transactions in the common stock, whether or not participating in this distribution, may be required to deliver a prospectus. This delivery re- quirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4,000,000 Shares [LOGO OF AVERSTAR] _________________________________________________________________________ Common Stock ----------------------------------- PROSPECTUS ----------------------------------- Bear, Stearns & Co. Inc. Legg Mason Wood Walker Incorporated , 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. 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 ==========
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 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
Exhibit Description ------- ----------- 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.
II-2
Exhibit Description ------- ----------- 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.
+ Previously filed as an Exhibit to Registration Statement on Form S-1 (Registration No. 333-78517) filed with the Securities and Exchange Commission on May 14, 1999. * To be filed by Amendment. II-3 (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
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) 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 ==== ==== ==== ==== ====
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 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 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burlington, Commonwealth of Massachusetts on July 16, 1999. Averstar, Inc. /s/ Michael B. Alexander By: _________________________________ Michael B. Alexander Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date /s/ Michael B. Alexander Chief Executive Officer July 16, 1999 ______________________________________ and Chairman of the Board Michael B. Alexander of Directors * Vice Chairman of the Board July 16, 1999 ______________________________________ of Directors John C. Rennie * President, Chief Operating July 16, 1999 ______________________________________ Officer and Director Joseph A. Saponaro * Executive Vice President July 16, 1999 ______________________________________ and Director Sigmund H. Goldblum * Executive Vice President July 16, 1999 ______________________________________ and Chief Financial Barbara L. Landes Officer * Director July 16, 1999 ______________________________________ Mary Anne Gilleece * Director July 16, 1999 ______________________________________ Joel N. Levy * Director July 16, 1999 ______________________________________ Peter M. Schulte /s/ Michael B. Alexander *By: _________________________________ Michael B. Alexander Attorney-in-fact
II-6 EXHIBIT INDEX (a) Exhibits
Exhibit Description ------- ----------- 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.
Exhibit Description ------- ----------- 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.
- -------- + Previously filed as an Exhibit to Registration Statement on Form S-1 (Registration No. 333-78517) filed with the Securities and Exchange Commission on May 14, 1999. *To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 4,000,000 Shares of Common Stock AVERSTAR, INC. UNDERWRITING AGREEMENT _________ __ , 1999 BEAR, STEARNS & CO. INC. Legg Mason Wood Walker, Incorporated as Representatives of the several Underwriters named in Schedule I attached hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Dear Sirs: AverStar, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 4,000,000 shares (the "Firm Shares") of its common stock, par value $.001 per share (the "Common Stock"), and, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, at the option of the Underwriters, up to an additional 600,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and any Additional Shares purchased by the Underwriters are referred to herein as the "Shares." The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to, and agrees with, the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-78517), and may have filed an amendment or amendments thereto, for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"). Such registration statement, including the prospectus, financial statements and schedules, exhibits and all other documents filed as a part thereof, as amended at the time of effectiveness of the registration statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the Commission under the Act (the "Regulations"), is herein called the "Registration Statement" and the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called the "Prospectus." The term "preliminary prospectus" as used herein means a preliminary prospectus as described in Rule 430 of the Regulations. (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Act and the Regulations and do not or will not contain an untrue statement of a material fact and do not or will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus, in light of the circumstances under which they were made, not misleading. When the preliminary prospectus relating to the Shares was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives as herein stated expressly for use in connection with the preparation thereof. If Rule 434 is used, the Company will comply with the requirements of Rule 434. (c) Each of Ernst & Young LLP, Aronson, Fetridge & Weigle and Grant Thornton LLP, who have certified certain financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the Act and the Regulations. (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business ("Material Adverse Effect"), and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred or undertaken any liabilities or obligations, direct or contingent, whether or not arising from transactions in the ordinary course of business, which are material to the Company and its subsidiaries taken as a whole, except for liabilities or obligations that are reflected in the Registration Statement and the Prospectus. 2 (e) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Company and this Agreement has been duly and validly executed and delivered by the Company. (f) Neither the Company nor any of its subsidiaries is (i) in violation of its respective certificate of incorporation or by-laws (or other organizational documents), (ii) in violation of any law, ordinance or regulation applicable to it, its business as now being conducted and as described in the Registration Statement or the ownership of its assets, except such violations that would not have a Material Adverse Effect, or (iii) in default in the performance of any obligation, agreement or condition contained in any agreement, instrument, franchise, license, permit, judgment, order or decree to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property or assets is bound, except such defaults that would not have a Material Adverse Effect. (g) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any agreement, instrument, franchise, license or permit to which the Company or any of its subsidiaries is a party or by which any of such corporations or their respective properties or assets may be bound or (ii) violate or conflict with any provision of applicable law or the certificate of incorporation or by-laws (or other organizational documents) of the Company or any of its subsidiaries or any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder, except the registration under the Act of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (h) All of the outstanding shares of Common Stock are duly and validly authorized and issued, fully paid and nonassessable and were not issued and are not now in violation of or subject to any preemptive or similar rights. The Shares, when issued, delivered and sold in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and nonassessable, and will not have been issued in violation of or be subject to any preemptive or similar rights. The Company had, at March 31, 1999, an authorized and outstanding capitalization as set forth in the Registration Statement and 3 the Prospectus. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (i) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not, individually or in the aggregate, have a Material Adverse Effect. Each of the Company and its subsidiaries has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies, to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. Each of the Company and its subsidiaries has complied with all Federal, state, local and foreign laws, ordinances, regulations and orders applicable to it, its business as now being conducted and as described in the Registration Statement or the ownership of its assets, except where the failure to be in compliance would not have a Material Adverse Effect. All of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights and are owned directly or indirectly by the Company, free and clear of any lien, encumbrance, claim, security interest, restriction on transfer, stockholder's agreement, voting trust or other defect of title whatsoever, except as described in the Registration Statement and the Prospectus. (j) Except as described in the Prospectus, there is no litigation or governmental proceeding to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject or which is pending or, to the knowledge of the Company, contemplated against the Company or any of its subsidiaries which might result in a Material Adverse Effect or which is required to be disclosed in the Registration Statement and the Prospectus, and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (k) The Company has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (l) The financial statements, including the notes thereto, and supporting schedules included in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company, Apollo Holding, Inc. ("Apollo"), Pacer 4 Infotec, Inc. ("Pacer," Apollo and Pacer being collectively referred to herein as the "Predecessor Companies") and Computer Based Systems, Inc., as of the dates indicated and the results of their operations and changes in cash flows for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein; and the pro forma financial information included in the Registration Statement and the Prospectus has been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and the assumptions used in the preparation thereof are, in the Company's opinion, reasonable; and the other financial and statistical information and data included in the Registration Statement and the Prospectus is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (m) Except as described in the Prospectus, no holder of securities of the Company has any rights to the registration of securities of the Company because of the filing of the Registration Statement or otherwise in connection with the sale of the Shares contemplated hereby. (n) The Company is not, and upon consummation of the transactions contemplated hereby will not be, subject to registration as an "investment company" under the Investment Company Act of 1940. (o) The Shares have been approved for quotation subject to notice of issuance on the Nasdaq National Market System. (p) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor dispute or disturbance by the employees of any of its principal customers, suppliers, contractors or providers of outsourced services that might have a Material Adverse Effect. (q) Except as described in the Registration Statement and the Prospectus, the Company and its subsidiaries own or possess valid and enforceable licenses or other rights to use all inventions, patents, patent applications, trademarks, service marks, trade names, copyrights, technology, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), proprietary techniques (including processes and substances) and other intellectual property rights necessary to conduct the business now conducted or presently contemplated to be conducted by the Company and its subsidiaries, taken as a whole, as described in the Registration Statement and the Prospectus ("Intellectual Property"), subject to such exceptions as would not have a Material Adverse Effect. Other than as described in the Registration Statement and the Prospectus: (i) there are no third parties who have any rights in the Intellectual Property that could preclude the Company or its subsidiaries from conducting its business as currently conducted or as presently contemplated to be conducted as described in the Registration Statement and the 5 Prospectus; (ii) there are no pending or, to the Company's knowledge, threatened actions, suits, proceedings, investigations or claims by others challenging the rights of the Company, its subsidiaries or (if the Intellectual Property is licensed) the licensor thereof in any Intellectual Property owned or licensed to the Company or its subsidiaries; (iii) the Company, its subsidiaries and (if the Intellectual Property is licensed) to the Company's knowledge the licensor thereof has not infringed, or received any notice of infringement of or conflict with, any rights of others with respect to the Intellectual Property; and (iv) there is no dispute between it or any licensor with respect to any Intellectual Property, subject, with respect to any of (i), (ii), (iii) or (iv), to such exceptions, individually or in the aggregate, as would not have a Material Adverse Effect. (r) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a Material Adverse Effect. (s) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a Material Adverse Effect. (t) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in or contemplated by the Prospectus. (u) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such 6 coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not result in a Material Adverse Effect. (v) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) Except as described in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (x) No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers, suppliers or providers of outsourced services of the Company or any of its subsidiaries on the other hand, which is required by the Act to be described in the Registration Statement and the Prospectus which is not so described. 2. Purchase, Sale and Delivery of the Shares. ----------------------------------------- (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $__________, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 9 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Shares shall be made at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, or at such other place as shall be agreed upon by the Representatives and the Company, at 9:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the provisions of Section 9 hereof), following the date of the effectiveness of the Registration Statement (or, if the Company has elected to rely upon Rule 430A of the Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) after the determination of the initial public offering price of the Shares), such time and date of payment and delivery being herein called the "Closing Date". Payment shall be made to 7 the Company by certified or official bank check or checks drawn in federal funds or similar same day funds payable to the order of the Company or by wire transfer in same day funds at the option of the Underwriters, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Shares to be purchased by them. Certificates for the Shares shall be registered in such name or names and in such authorized denominations as the Representatives may request in writing at least two full business days prior to the Closing Date. The Company will permit the Representatives to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (c) In addition, the Company hereby grants to the Underwriters options to purchase up to an aggregate of 600,000 Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth in this Section 2, for the sole purpose of covering over-allotments in the sale of Firm Shares by the Underwriters. Such options may be exercised at any time and from time to time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice by the Representatives to the Company. Each such notice shall set forth the aggregate number of Additional Shares as to which an option is being exercised and the date and time, as reasonably determined by the Representatives, when the Additional Shares are to be delivered (each such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that no Additional -------- ------- Closing Date shall be earlier than the Closing Date or earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Certificates for Additional Shares shall be registered in such name or names and in such authorized denominations as the Representatives may request in writing at least two full business days prior to the applicable Additional Closing Date. The Company will permit the Representatives to examine and package such certificates for delivery at least one full business day prior to the applicable Additional Closing Date. The number of Additional Shares to be sold to each Underwriter on an Additional Closing Date shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased on such Additional Closing Date as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to 4,000,000, subject, however, to such adjustments to eliminate any fractional shares as the Representatives in their sole discretion shall make. Payment for the Additional Shares shall be made by certified or official bank check or checks drawn in federal funds or similar same day funds, payable to the order of the Company, or by wire transfer in same day funds at the option of the Underwriters at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, or such other location as may be mutually acceptable, upon delivery of the certificates for the Additional Shares to the Representatives for the respective accounts of the Underwriters. 8 3. Offering. -------- (a) Upon the Representatives' authorization of the release of the Firm Shares, the Underwriters propose to offer the Shares for sale to the public upon the terms set forth in the Prospectus. (b) The Company and the Underwriters hereby agree that up to _______ of the Firm Shares to be purchased by the Underwriters (the "Directed Shares") shall be reserved for sale by the Underwriters to eligible employees of and certain persons designated by the Company (the "Directed Shares Purchasers"), as part of the distribution of the Offered Shares by the Underwriters subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations, provided, however, that under no circumstances will Bear, -------- ------- Stearns & Co. Inc. or any other Underwriter be liable to the Company or to any of the Directed Shares Purchasers for any action taken or omitted in good faith in connection with transactions effected with regard to the Directed Shares Purchasers. To the extent that such Directed Shares are not orally confirmed for purchase by such persons by the end of the first day after the date of this Agreement, such Directed Shares will be offered to the public as part of the underwritten offering contemplated hereby. 4. Covenants of the Company. The Company covenants and agrees with the ------------------------ Underwriters that: (a) If the Registration Statement has not yet been declared effective, the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will provide evidence satisfactory to you of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a term sheet that complies with the requirements of Rule 434. The Company will notify you immediately (and, if requested by you will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (v) of the receipt of any comments from the Commission, and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will use its best effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the 9 prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement before or after the effective date of the Registration Statement to which the Representatives shall reasonably object in writing after being timely furnished in advance a copy thereof. (b) If at any time when a prospectus relating to the Shares is required to be delivered under the Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Representatives or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary, in the judgment of the Representatives or the Company, at any time to amend or supplement the Prospectus or the Registration Statement to comply with the Act or the Regulations, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to the Representatives) which will correct the statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to you one signed copy of the Registration Statement, including exhibits and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement and all amendments of and supplements to such documents, if any, as the Representatives may reasonably request. (d) The Company will endeavor in good faith, in cooperation with you, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as the Representatives may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (e) The Company will make generally available (within the meaning of Section 11(a) of the Act) to its security holders and to you as soon as practicable, but not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement (in form complying with the provisions of Rule 158 of the Regulations) covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement. (f) During the period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of Bear, Stearns & Co. Inc. (i) issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended), or otherwise dispose of, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock) of the 10 Company or of any of its subsidiaries or (ii) enter into any swap, derivative transaction or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, provided that the foregoing shall not apply to (A) the Shares to be sold hereunder, and (B) the issuance by the Company of shares of Common Stock upon the exercise of any option or warrant outstanding on the date hereof and disclosed in the Prospectus; and the Company will obtain the undertaking of each of its officers and directors and such of its stockholders as have been heretofore designated by the Representatives and listed on Schedule II attached hereto not to engage in any of the aforementioned transactions on their own behalf. (g) During a period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of (i) all reports to its stockholders and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (h) The Company will apply the proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. (i) The Company will use its best efforts to cause the Shares to continue to qualify for inclusion in the Nasdaq National Market System. (j) The Company will use its best efforts to ensure that the Directed Shares are restricted as required by the National Association of Securities Dealers, Inc. or the National Association of Securities Dealers, Inc. rules from sale, transfer, assignment, pledge or hypothecation for a period of three (3) months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such a period of time. Should the Company release, or seek to release, from such restrictions any of the Directed Shares, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. 5. Payment of Expenses. Whether or not the transactions contemplated in ------------------- this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company hereunder, including those in connection with (i) preparing, printing, duplicating, filing and distributing the Registration Statement, as originally filed and all amendments thereof (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments or supplements thereto (including, without limitation, fees and expenses of the Company's accountants and counsel), the underwriting documents (including this Agreement and the Agreement Among Underwriters) and all other documents related to the public offering of the Shares (including those supplied to the Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the qualification of the Shares under state or foreign securities or Blue Sky laws, including the costs 11 of printing and mailing a preliminary and final "Blue Sky Survey", (iv) the fees of counsel for the Underwriters in connection with the qualification of the Shares under state or foreign securities or Blue Sky laws and in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers Inc., and such counsel's disbursements in relation thereto, (v) quotation of the Shares on the Nasdaq National Market System, (vi) filing fees of the Commission and the National Association of Securities Dealers, Inc., (vii) the cost of printing certificates representing the Shares and (viii) the cost and charges of any transfer agent or registrar. 6. Conditions of Underwriters' Obligations. The obligations of the --------------------------------------- Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 6, "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Proskauer Rose LLP ("Underwriters' Counsel"), pursuant to this Section 6 of any misstatement or omission, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than, if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the date of this Agreement or, if pricing pursuant to a pricing amendment, 12:00 P.M., New York time on the date an amendment to the Registration Statement containing the public offering price has been filed with the Commission, or at such later time and date as shall have been consented to in writing by the Representatives; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post- effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date you shall have received the opinion of Swidler Berlin Shereff Friedman, LLP, counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified and in good standing as a foreign corporation in [list those states to be specified in such opinion]. Each of the Company and its subsidiaries has all requisite power and authority, and all consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies that are material to the Company's business, to own, lease and operate its respective properties and conduct its business as now being conducted and as described in the Registration 12 Statement and the Prospectus. All of the issued and outstanding capital stock of each subsidiary of the Company has been duly and validly authorized and issued and is fully paid and nonassessable and was not issued in violation of any statutory or, to such counsel's knowledge, other preemptive rights and, is owned directly or indirectly by the Company, free and clear of any encumbrance, claim, security interest, restriction on transfer, stockholders' agreement, voting trust or, to such counsel's knowledge, any lien, except as described in the Registration Statement and the Prospectus. (ii) The Company has authorized and outstanding capital stock as set forth in the Registration Statement and the Prospectus. All of the outstanding shares of Common Stock are duly and validly authorized and issued, are fully paid and nonassessable and were not issued in violation of or subject to any statutory or, to such counsel's knowledge, other preemptive rights. The Shares to be delivered on the Closing Date have been duly and validly authorized and, when delivered by the Company in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or subject to any statutory or, to such counsel's knowledge, other preemptive rights. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (iii) The Common Stock is duly authorized for quotation on the Nasdaq National Market System, subject to official notice of issuance. (iv) This Agreement has been duly and validly authorized, executed and delivered by the Company. (v) To such counsel's knowledge, there is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any public, regulatory or governmental agency or body pending or threatened against, or involving the properties or business of, the Company or any of its subsidiaries, which is of a character required to be disclosed in the Registration Statement and the Prospectus which has not been properly disclosed therein and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (vi) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company do not and will not (A) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any agreement, instrument, franchise, license or permit known to such counsel to which the Company or any of its subsidiaries is a party or by which any of such corporations or their respective properties or assets may be bound, subject to such exceptions that would not have a Material 13 Adverse Effect, or (B) violate or conflict with any provision of applicable law or the certificate of incorporation or by-laws (or other organizational documents) of the Company or any of its subsidiaries, or, to the knowledge of such counsel, any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental, or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion) and (2) such as have been made or obtained under the Act. (vii) The statements (A) in the Prospectus under the captions "Risk Factors--Most of our revenues are derived from contracts with agencies of the United States government, and uncertainties in government contracts could adversely affect our business,""Business--Contracts--Governement Contracts," "--Certain Regulatory Matters,""--Legal Proceedings," "Management--Employment Severance and Other Agreements with Management,""-- Executive Officers and Directors," "--1998 Long Term Incentive Plan," "Description of Securities" and "Shares Eligible for Future Sale" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein. (viii) The Company is not, and upon consummation of the transactions contemplated hereby, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (ix) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and schedules and other financial data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations. (x) The Registration Statement is effective under the Act, and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefor have been initiated or threatened by the Commission and all filings required by Rule 424(b) of the Regulations have been made. (xi) To such counsel's knowledge, no holder of any security of the Company has any right, not effectively satisfied or waived, to require inclusion of 14 shares of Common Stock or any other security of the Company in the Registration Statement. In addition, such opinion shall also contain a statement that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, no facts have come to the attention of such counsel which would lead such counsel to believe that either the Registration Statement at the time it became effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date as of the date of such amendment, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial data included therein). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States, the General Corporation Law of the State of Delaware, the laws of the State of New York and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and its subsidiaries, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. The opinion of Swidler Berlin Shereff Friedman, LLP described in this Section 6(b) shall be rendered to the Underwriters at the request of the Company and shall so state therein. (c) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. 15 (d) At the Closing Date, you shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date, to the effect that (i) the condition set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of the Closing Date, the representations and warranties of the Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date, the obligations of the Company to be performed hereunder on or prior thereto have been duly performed and (iv) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a material adverse change, in the business, prospects, properties, operations, condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole, except in each case as described in or contemplated by the Prospectus. (e) At the time this Agreement is executed and at the Closing Date, you shall have received a letter, from Ernst & Young LLP, independent public accountants for the Company and the Predecessor Companies, dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent certified public accountants with respect to the Company and the Predecessor Companies within the meaning of the Act and the Regulations and stating that the answer to Item 10 of the Registration Statement is correct insofar as it relates to them; (ii) stating that, in their opinion, the financial statements and schedules of the Company and the Predecessor Companies included in the Registration Statement and the Prospectus and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder; (iii) on the basis of procedures consisting of a reading of the latest available unaudited interim consolidated financial statements of the Company, and its subsidiaries, a reading of the minutes of meetings and consents of the stockholders and boards of directors of the Company and its subsidiaries and the committees of such boards subsequent to December 31, 1998, inquiries of officers and other employees of the Company and its subsidiaries who have responsibility for financial and accounting matters of the Company and its subsidiaries with respect to transactions and events subsequent to December 31, 1998 and other specified procedures and inquiries to a date not more than five days (three days in the case of the letter delivered on the Closing Date) prior to the date of such letter, nothing has come to their attention that would cause them to believe that: (A) the unaudited consolidated financial statements and schedules of the Company presented in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder or that such unaudited consolidated financial statements are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements of the Company included in the Registration Statement and the Prospectus; (B) with respect to the period subsequent to 16 [ ], 1999, there were, as of the date of the most recent available monthly consolidated financial statements of the Company and its subsidiaries, if any, and as of a specified date not more than five days (three days in the case of the letter delivered on the Closing Date) prior to the date of such letter, any changes in the capital stock or long-term indebtedness of the Company or any decrease in the net current assets or stockholders' equity of the Company, in each case as compared with the amounts shown in the most recent balance sheet presented in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter or (C) that during the period from [ ], 1999 to the date of the most recent available monthly consolidated financial statements of the Company and its subsidiaries, if any, and to a specified date not more than five days (three days in the case of the letter delivered on the Closing Date) prior to the date of such letter, there was (1) any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues, or any increase, as compared with the corresponding period in the prior fiscal year, in operating loss or the total or per share net loss or (2) any decrease, as compared with the corresponding period in the prior fiscal quarter, in revenues, except in any such case for decreases or increases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; (iv) nothing has come to their attention that would cause them to believe that the pro forma financial information included in the Registration Statement do not comply in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such financial information; and (v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, and other financial information pertaining to the Company and its subsidiaries set forth in the Registration Statement and the Prospectus, which have been specified by you prior to the date of this Agreement, to the extent that such amounts, numbers, percentages, and information may be derived from the general accounting and financial records of the Company and its subsidiaries or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries, and other appropriate procedures specified by you set forth in such letter, and found them to be in agreement. (f) Prior to the Closing Date, the Company shall have furnished to you such further information, certificates and documents as you may reasonably request. (g) You have shall received from each person who is a director or officer of the Company or such stockholder as have been heretofore designated by the Representatives and listed on Schedule II hereto an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell, offer or agree to sell, grant any option to purchase, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended), or otherwise dispose of, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock) of the Company or of any of its subsidiaries or (ii) enter into any swap, derivative transaction or other arrangement that transfers to another, in whole or in part, any of the 17 economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, for a period of 180 days after the date of the Prospectus. (h) At the Closing Date, the Shares shall have been approved for quotation on the Nasdaq National Market System. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and to their counsel, all obligations of the Underwriters hereunder may be cancelled by the Representatives at, or at any time prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be cancelled by the Representatives at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company in writing, or by telephone, telex or telegraph, confirmed in writing. 7. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will -------- ------- not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have including under this Agreement. 18 (b) Each Underwriter severally, and not jointly, agrees to indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), jointly or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use therein; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to any liability which any Underwriter may otherwise have including under this Agreement. The Company acknowledges that the statements set forth in the fifth, seventh, eleventh and twelfth paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for use in the Registration Statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (c) In connection with the offer and sale of the Directed Shares, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of the Directed Shares Purchasers to pay for and accept delivery of the Directed Shares which, by the end of the day following the date of this Agreement, were subject to a properly confirmed agreement to purchase such Directed Shares. (d) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7). In case any such 19 action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have retained counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such -------- --------- consent was not unreasonably withheld. 8. Contribution. In order to provide for contribution in circumstances in ------------ which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company any contribution received by the Company from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and (y) the underwriting discounts and commissions received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material 20 fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 8 and the preceding sentence, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise. No party shall be liable for contribution with respect to any action or claim settled without its consent; provided, however, that such consent was not unreasonably withheld. - -------- ------- 9. Default by an Underwriter. ------------------------- (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, the Representatives may in their discretion arrange for yourself or for another party or parties (including any non-defaulting Underwriter or 21 Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 9, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Company to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representatives or the Company shall have the right to postpone the Closing Date or the applicable Additional Closing Date, as the case may be, for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 10. Survival of Representations and Agreements. All representations and ------------------------------------------ warranties, covenants and agreements of the Underwriters and the Company contained in this Agreement, including the agreements contained in Section 5, the indemnity agreements contained in Section 7 and the contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof or by or on behalf of the Company, any of its officers and directors or any controlling person thereof, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 1 and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement, including termination pursuant to Section 9 or 11 hereof. 11. Effective Date of Agreement; Termination. ---------------------------------------- (a) This Agreement shall become effective, upon the later of when (i) the Representatives and the Company shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the initial public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by 22 notifying you or by the Representatives notifying the Company. Notwithstanding the foregoing, the provisions of this Section 11 and of Section 1, 5, 7 and 8 hereof shall at all times be in full force and effect. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date or the obligations of the Underwriters to purchase Additional Shares at any time prior to the applicable Additional Closing Date, as the case may be (A) if any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the immediate future materially disrupt, the market for the Company's securities or securities in general; or (B) if trading on the New York or American Stock Exchanges or the Nasdaq shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York or American Stock Exchanges or the Nasdaq by the New York or American Stock Exchanges, the National Association of Securities Dealers, Inc. or by order of the Commission or any other governmental authority having jurisdiction; or (C) if a banking moratorium has been declared by a state or federal authority or if any new restriction materially adversely affecting the distribution of the Firm Shares or the Additional Shares, as the case may be, shall have become effective; or (D) (i) if the United States becomes engaged in hostilities or there is an escalation of hostilities involving the United States or there is a declaration of a national emergency or war by the United States or (ii) if there shall have been such change in political, financial or economic conditions if the effect of any such event in (i) or (ii) as in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus. (c) Any notice of termination pursuant to this Section 11 shall be by telephone, telex, or telegraph, confirmed in writing by letter. (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by the Representatives as provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by the Representatives, reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 12. Notices. All communications hereunder, except as may be otherwise ------- specifically provided herein, shall be in writing and , if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: [ ] with copies to Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, Attention: Julie M. Allen, Esq.; if sent to the Company, shall be mailed, delivered, or telegraphed and confirmed in writing to the Company, 23 Fourth Avenue, Burlington, Massachusetts 01803, Attention: Chief 23 Financial Officer, with copies to Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York 10022, Attention: Gerald Adler, Esq. 13. Parties. This Agreement shall inure solely to the benefit of, and ------- shall be binding upon, the Underwriters and the Company and the controlling persons, directors, officers, employees and agents referred to in Section 7 and 8, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 14. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New York, but without regard to principles of conflicts of law. 24 If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, AverStar, Inc. By ___________________________________ Michael B. Alexander Chairman of the Board and Chief Executive Officer Accepted as of the date first above written BEAR, STEARNS & CO. INC. Legg Mason Wood Walker, Incorporated on behalf of themselves and the other Underwriters named in Schedule I hereto BY: BEAR, STEARNS & CO. INC. By __________________________ Name: Title: 25 SCHEDULE I ---------- Number of Firm Name of Underwriter Shares to be Purchased ------------------- ---------------------- Bear, Stearns & Co. Inc Legg Mason Wood Walker, Incorporated Total............. _________________ 26 SCHEDULE II ----------- [To be provided] 27 EX-3.3 3 2ND AMENDED & RESTATED CERT. OF INCORPORATION EXHIBIT 3.3 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AVERSTAR, INC. _______________________________________ AverStar, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is AverStar Inc. (the "Corporation"). The Corporation was originally incorporated under IP Technologies, Inc., and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 4, 1998. The original Certificate of Incorporation was amended by an Amended and Restated Certificate of Incorporation of IP Technologies, Inc. filed with said Secretary on February 27, 1998. 2. Pursuant to Sections 241 and 245 of the General Corporation Law of the State of Delaware, this Second Amended and Restated Certificate of Incorporation amends and restates the provisions of the Certificate of Incorporation of the Corporation in all respects. 3. The text of the Second Amended and Restated Certificate of Incorporation as heretofore amended or supplemented is hereby amended and restated to read in its entirety as follows: FIRST: Name. The name of the Corporation is: AverStar, Inc. SECOND: Registered Agent. The registered office of the Corporation is to be located at 1013 Centre Road, Wilmington, Delaware 19085, in the County of New Castle, State of Delaware. The name of its registered agent at that address is Corporation Service Company. THIRD: Purpose. The purpose of the Corporation and the nature of its business are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and, in general, to possess powers and privileges granted by the General Corporation Law of the State of Delaware or by this Certificate of Incorporation, together with any powers incidental thereto. FOURTH: Capitalization. -1- SECTION 1. Authorized Capital. The total number of shares of stock ------------------ which the Corporation shall have authority to issue is Twenty-Six Million (26,000,000) shares, of which Twenty-Five Million (25,000,000) shares shall be common stock, par value $.001 per share, and One Million (1,000,000) shares shall be preferred stock, par value $.001 per share. SECTION 2. Preferred Stock. The designations and the powers, --------------- preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock are as follows: The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, subject to the limitations prescribed by law and in accordance with the provisions hereof, including (but without limiting the generality thereof) the following: (a) The designation of the series and the number of shares to constitute the series; (b) The dividend rate, if any, of the series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or noncumulative; (c) Whether the shares of the series shall be subject to redemption by the Corporation and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption; (d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of the series; (e) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (f) The extent, if any, to which the holders of the shares of the series shall be entitled to vote with respect to the election of directors or otherwise; (g) The restrictions, if any, on the issue or reissue of any additional preferred stock; and (h) The rights of the holders of the shares of the series upon the dissolution, liquidation, or winding up of the Corporation. -2- Subject to the prior or equal rights, if any, of the preferred stock of any and all series stated and expressed by the Board of Directors in the resolution or resolutions providing for the issuance of such preferred stock, the holders of common stock shall be entitled (i) to receive dividends when and as declared by the Board of Directors out of any funds legally available therefor, (ii) in the event of any dissolution, liquidation or winding up of the Corporation, to receive the remaining assets of the Corporation, ratably according to the number of shares of common stock held, and (iii) to one vote for each share of common stock held on all matters submitted to a vote of stockholders. No holder of common stock shall have any preemptive right to purchase or subscribe for any part of any issue of stock or of securities of the Corporation convertible into stock of any class whatsoever, whether now or hereafter authorized. FIFTH: Board of Directors. SECTION 1. Number. The business and affairs of the Corporation shall ------ be managed by or under the direction of the Board of Directors. The number of directors, subject to any right of the holders of any series of Preferred Stock to elect additional directors, shall be fixed from time to time by the Board of Directors pursuant to the By-Laws. SECTION 2. Classification. The Board of Directors shall be divided -------------- into three classes, as nearly equal in number as the then total number of directors constituting the whole board permits, with the term of office of one class expiring each year. At each annual meeting of stockholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and each director so elected shall hold office until his successor is elected and qualified, or until his earlier resignation or removal. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the three classes so as to make all classes as nearly equal in number as possible, and the Board of Directors shall decide which class shall contain an unequal number of directors. Notwithstanding the foregoing, whenever holders of any shares of Preferred Stock, or any series thereof, shall be entitled, voting separately as a class, to elect any directors, all directors so elected shall be allocated, each time they are so elected, to the class whose term expires at the next succeeding annual meeting of stockholders. SECTION 3. Nomination. Only persons who are nominated in accordance ---------- with the procedures set forth in this Article Fifth, Section 3 of the Certificate of Incorporation shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving notice provided for in this Section 3, who shall be entitled to vote for the election of directors at the meeting and who complies with the procedures set forth below. Any such nominations (other than those made by or at the direction of the Board of Directors) must be made -3- pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the annual meeting with respect to which such notice is to be tendered is not held within 30 days before or after such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which notice of the meeting or public disclosure thereof was given or made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person's written consent to being named as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder, (ii) the class and number of shares of stock of the Corporation which are beneficially owned by such stockholder and (iii) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with such nomination and any material interest of such stockholder in such nomination. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Notwithstanding anything in this Section 3 to the contrary, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3. If the Board of Directors shall determine, based on the facts, that a nomination was not made in accordance with the procedures set forth in this Section 3, the Chairman shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3. SECTION 4. Vacancies. Subject to the rights of the holders of any --------- series of Preferred Stock, newly created directorships resulting from death, resignation, retirement, disqualification, removal from office or other cause, may be filled by a majority vote of the remaining directors then in office, although less than a quorum, or by the sole remaining director, and each director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which he or she has been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the authorized number of directors shall shorten the term of any incumbent director. SECTION 5. Removal. A director may be removed only for cause by the ------- holders of a majority of the outstanding shares of all classes of capital stock of the Corporation entitled to vote in the election of directors, considered for this purpose as one class. -4- SIXTH: Stockholder Action. Subject to the rights of the holders of any series of Preferred Stock, any action required or permitted to be taken by stockholders pursuant to Articles Fifth, Seventh, Tenth or Eleventh may be effected only at a duly called annual or special meeting of stockholders with prior notice and with a vote, and may not be effected by consent in writing. Except as otherwise required by law and subject to the rights of Preferred Stock, annual meetings may be called only by the Board of Directors pursuant to a resolution approved by a majority of the Continuing Directors (as defined in Article Seventh), or by the Chairman, the President or the Chief Executive Officer, and special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the President, the Chief Executive Officer or the Board of Directors pursuant to a resolution approved by a majority of the Continuing Directors (as defined in Article Seventh). Subject to the rights of holders of any series of Preferred Stock, stockholders are not permitted to call an annual meeting and, subject to the rights of holders of any series of preferred stock, stockholders are not permitted to call a special meeting of stockholders or to require that the Board of Directors call such an annual or special meeting. SEVENTH: Certain Business Combinations. SECTION 1. Stockholder Approval. In addition to any affirmative vote -------------------- required by or other conditions to be complied with pursuant to applicable law or this Certificate of Incorporation, and except as otherwise expressly provided in Section 2 of this Article Seventh, (a) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) an Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate (as such terms are hereinafter defined) of an Interested Stockholder, or (b) any sale, lease, exchange, mortgage, pledge, grant of a security interest, transfer or other disposition (in one transaction or a series of transactions) to or with (i) an Interested Stockholder or (ii) any other Person (as hereinafter defined)(whether or not itself an Interested Stockholder) which is, or after such sale, lease, exchange, mortgage, pledge, grant of a security interest, transfer or other disposition would be, an Affiliate or Associate of an Interested Stockholder, directly or indirectly, of assets of the Corporation (including, without limitation, any voting securities of a Subsidiary) or any Subsidiary, or both, having an aggregate Fair Market Value (as hereinafter defined) of $8,000,000 or more, or (c) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or series of transactions) of any securities of the Corporation or any Subsidiary, or both, to (i) an Interested Stockholder or (ii) any other Person (whether or not itself an Interested Stockholder) which is, or after such issuance or transfer would be, an Affiliate or Associate of an Interested Stockholder, in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair -5- Market Value of $8,000,000 or more, other than the issuance of securities upon the conversion of convertible securities of the Corporation or any Subsidiary which were not acquired by such Interested Stockholder (or such Affiliate or Associate) from the Corporation or a Subsidiary, or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of an Interested Stockholder, or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder), which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary directly or indirectly beneficially owned by (i) an Interested Stockholder or (ii) any other Person (whether or not itself an Interested Stockholder) which is, or after such reclassification, recapitalization, merger or consolidation or other transaction would be, an Affiliate or Associate or an Interested Stockholder; shall not be consummated unless such consummation shall have been approved by the affirmative vote of the holders of record of outstanding shares representing (i) at least 80% of the voting power of the then outstanding Voting Shares (as hereinafter defined) of the Corporation, voting together as a single class and (ii) at least a majority of the voting power of the then outstanding Voting Shares of the Corporation, voting together as a single class, which are not beneficially owned, directly or indirectly, by such Interested Stockholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, in this Certificate of Incorporation or in any agreement with any national securities exchange or otherwise. SECTION 2. Alternative Procedural Requirements. The provisions of ----------------------------------- Section 1 of this Article Seventh shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law and any other provisions of this Certification of Incorporation, if the Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). The approval of a majority of the Continuing Directors shall be required whether or not the particular Business Combination meets the criteria set forth below, provided, however, that if such criteria are not met, then prior to approving such Business Combination, the Continuing Directors shall obtain the advice of a financial advisor to the effect that such Business Combination is fair to the holders of Voting Shares (other than an Interested Stockholder); provided, further, that the Continuing Directors shall have no obligation to approve such Business Combination (but meeting such criteria shall not be deemed to mean the proposed Business Combination is fair and must be approved by the Continuing Directors) unless: -6- (a) The transaction constituting the Business Combination shall provide for a consideration to be received by all holders of Common Stock in exchange for all shares of their Common Stock, and the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (i) if applicable, the highest per-share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any shares of Common Stock beneficially owned by an Interested Stockholder (1) within the two-year period immediately prior to the Announcement Date (as hereinafter defined), (2) within the two-year period immediately prior to the Determination Date (as hereinafter defined) or (3) in the transaction in which it became an Interested Stockholder, whichever is highest; or (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher; (b) If the transaction constituting the Business Combination shall provide for consideration to be received by holders of any class or series of outstanding Voting Shares other than Common Stock, the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of such class or series of Voting Shares shall be at least equal to the highest of the following (it being intended that the requirements of this subsection (b) shall be required to be met with respect to every class and series of outstanding Voting Shares, whether or not an Interested Stockholder has previously acquired any shares of a particular class of Voting Shares): (i) if applicable, the highest per-share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any shares of such class or series of Voting Shares beneficially owned by an Interested Stockholder (1) within the two-year period immediately prior to the Announcement Date, (2) within the two-year period immediately prior to the Determination Date or (3) in the transaction in which it became an Interested Stockholder, whichever is highest; or (ii) the Fair Market Value per share of such class or series of Voting Shares on the Announcement Date or the Determination Date, whichever is higher; or (iii) if applicable, the highest preferential amount per share to which the holders of shares of such class or series of Voting Shares are -7- entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (c) The consideration to be received by holders of a particular class or series of outstanding Voting Shares (including Common Stock) shall be in cash or in the same form as was previously paid in order to acquire shares of such class or series of Voting Shares which are beneficially owned by an Interested Stockholder and, if an Interested Stockholder beneficially owns shares of any class or series of Voting Shares which were acquired with varying forms of consideration, the form of consideration for such class or series of Voting Shares shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Shares beneficially owned by it. The price determined in accordance with subsections (a) and (b) of this Section 2 shall be subject to appropriate adjustment in the event of any recapitalization, stock dividend, stock split, combination of shares or similar event; (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (ii) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and (iii) such Interested Stockholder shall not have become the Beneficial Owner (as hereinafter defined) of any additional Voting Shares except as part of the transaction in which it became an Interested Stockholder; (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and -8- (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act or such rules and regulations) shall be mailed to the stockholders of the Corporation, not later than the earlier of (i) 30 days prior to any vote on the proposed Business Combination or (ii) if no vote on such Business Combination is required, 60 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or subsequent provisions). Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from the point of view of the holders of Voting Shares other than an Interested Stockholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). SECTION 3. Certain Definitions. For the purposes of this Article ------------------- Seventh: (a) "Business Combination" shall mean any transaction which is referred to in any one or more of subsections (a) through (e) of Section 1 of this Article Seventh. (b) "Voting Shares" shall mean shares of all classes and series of stock of the Corporation entitled to vote generally in the election of directors. (c) "Person" shall mean any individual, corporation, partnership, unincorporated association or other entity. (d) "Interested Stockholder" shall mean any person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or any Subsidiary of the Corporation or any entity holding shares of Common Stock for or pursuant to the terms of any such plan, any person who is the Beneficial Owner of more than 15% of the outstanding Voting Shares prior to consummation of an initial registered underwritten public offering of shares of common stock under the Securities Act of 1933, as amended, or any person who acquires beneficial ownership of more than 15% of the outstanding Voting Shares with the prior approval of a majority of the Continuing Directors), who or which; (i) is the Beneficial Owner, directly or indirectly, of more than 15% of the combined voting power of the then outstanding Voting Shares; or -9- (ii) is an assignee of or has otherwise succeeded to the beneficial ownership of any Voting Shares which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Stockholder. Notwithstanding the foregoing, no person shall become an Interested Stockholder as the result of an acquisition of Voting Shares by the Corporation which, by reducing the number of shares of Common Stock outstanding, increases the proportionate number of shares beneficially owned by such person to 15% or more of the Voting Shares of the Corporation then outstanding; provided, however, -------- ------- that if a person shall become the Beneficial Owner of 15% or more of the Voting Shares of the Corporation then outstanding by reason of shares purchased by the Corporation, and after such purchases by the Corporation becomes the Beneficial Owner of any additional Voting Shares of the Corporation, then such person shall be deemed to be an Interested Stockholder. For purposes of determining whether a person is an "Interested Stockholder," the number of Voting Shares deemed to be outstanding shall include shares deemed owned through application of subsection (e) below but shall not include any other Voting Shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (e) A person shall be a "Beneficial Owner" of any Voting Shares: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise; (ii) which such person or any of its Affiliates or Associates has (1) the right to acquire beneficial ownership (whether such right is exercisable immediately or within 60 days) pursuant to (A) any agreement, arrangement or understanding; (B) upon the exercise of any option, warrants or rights; or (C) upon the conversion of a security; or (2) the right to vote or to direct the voting thereof pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Voting Shares. (f) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. -10- (g) "Subsidiary" shall mean any corporation, partnership or other entity of which a majority of any class of equity security (as defined in Rule 3a(11)-1 of the General Rules and Regulations under the Exchange Act), is owned, directly or indirectly, by the Corporation; provided, however, that for purposes of the definition of Interested Stockholder set forth above in subsection (d), the term "Subsidiary" shall mean only a corporation, partnership or other entity of which a majority of each class of equity security is beneficially owned, directly or indirectly, by the Corporation. (h) "Continuing Director" shall mean any member of the Board of Directors who is unaffiliated with, and not a nominee of, an "Interested Stockholder," and was a director prior to any person becoming or was approved or not opposed by a majority of the Board of Directors in office prior to any person becoming an Interested Stockholder. (i) "Announcement Date" shall mean the date of the first public announcement of the proposed Business Combination. (j) "Determination Date" shall mean the date which is two years prior to the date on which the Interested Stockholder became an Interested Stockholder. (k) "Fair Market Value" shall mean: (1) in the case of stock, (A) if the shares are listed or admitted for trading on any national securities exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market, the last reported sales price as reported on such exchange or market; (B) if the shares are not listed or admitted for trading on any national securities exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market, the average of the last reported closing bid and asked quotation for the shares as reported on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or a similar service if NASDAQ is not reporting such information; (C) if the shares are not listed or admitted for trading on any national securities exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market or quoted by NASDAQ or a similar service, the average of the last reported bid and asked quotation for the shares as quoted by a market maker in the shares (or if there is more than one market maker, the bid and asked quotation shall be obtained from two market makers and the average of the lowest bid and highest asked quotation), or (D) if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith. SECTION 4. Determinations by the Board of Directors. A majority of the ---------------------------------------- Continuing Directors shall have the power and duty to determine for the purposes of this Article Seventh, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article Seventh including, without limitation, (i) whether a person is an Interested Stockholder, (ii) the number of Voting Shares beneficially owned by any person, (iii) whether a person is an Affiliate or Associate of another, (iv) whether the assets which are the -11- subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $8,000,000 or more, (v) whether the requirements of Section 2 of this Article Seventh have been met and (vi) such other matters with respect to which a determination is required under this Article Seventh. The good faith determination of a majority of the Continuing Directors on such matters shall be conclusive and binding for all purposes of this Article Seventh, and no director will have any liability to the Corporation or any other person by reason of any such determination so made. SECTION 5. Fiduciary Obligations. Nothing contained in this Article Seventh --------------------- shall be construed to relieve the members of the Board of Directors or an Interested Stockholder from any fiduciary obligation imposed by law. The fact that any Business Combination complies with the provisions of Section 2 of this Article Seventh shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of the Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. EIGHTH: Liability of Directors. No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that to the extent required by the provisions of Section 102(b)(7) of the General Corporation Law of the State of Delaware or any successor statute, or any other laws of the State of Delaware, this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware hereafter is amended to authorize the further elimination or limitation on personal liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. Any repeal or modification of this Article Eighth by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. NINTH: Indemnification and Advancement of Expenses SECTION 1. Indemnification. The Corporation shall indemnify each person --------------- who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or -12- investigative (other than an action by or in the right of the Corporation) (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or alleged action in any other capacity while service as a director, officer, employee or agent, to the maximum extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement) actually and reasonably incurred by such person in connection with such proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe that the person's conduct was unlawful. Such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. The right to indemnification conferred in this Article Ninth shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided that, if the General Corporation Law of the State of Delaware so requires, the payment of such expenses incurred by a director or officer in advance of the final disposition of a proceeding shall be made only upon receipt by the Corporation of an undertaking by or on behalf of such person to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article Ninth or otherwise. SECTION 2. Nonexclusivity. The right to indemnification and advancement of -------------- expenses conferred on any person by this Article Ninth shall not limit the Corporation from providing any other indemnification permitted by law nor shall it be deemed exclusive of any other right which any such person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 3. Insurance. The Corporation may purchase and maintain insurance, --------- at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprises against any expenses, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. TENTH: Amendment of By-Laws. The Board of Directors shall have power to make, amend and repeal the By-Laws. Any By-Laws made by the Board of Directors under the powers conferred hereby may be amended or repealed by the Board of Directors or by the -13- stockholders. Notwithstanding the foregoing and anything contained in this Certificate of Incorporation to the contrary, Article II, Sections 2.3, 2.4, 2.6 and 2.11, Article II, Sections 3.1 and 3.2 and Article VIII, Section 8.1 of the By-Laws shall not be amended or repealed, and no provision inconsistent therewith shall be adopted, without the affirmative vote of the holders of record of outstanding shares representing (i) at least 80% of the voting power of the then outstanding Voting Shares (as defined in Article Seventh) of the Corporation, voting together as a single class and (ii) if there is then an Interested Stockholder (as defined in Article Seventh), at least a majority of the voting power of the then outstanding Voting Shares of the Corporation, voting together as a single class, which are not beneficially owned, directly or indirectly, by an Interested Stockholder, effected at a duly called annual or special meeting of such stockholders, with such prior notice as is required by the By-Laws; provided, however, that the provisions of this sentence shall not apply to any amendment, repeal or adoption of any inconsistent provision declared advisable by the Board of Directors by the affirmative vote of a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors and, if there is then an Interested Stockholder, a majority of the Continuing Directors (as defined above in Article Seventh). ELEVENTH: Amendment of Certificate of Incorporation. The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws (and in addition to any other vote that may be required by applicable law, by this Certificate of Incorporation or by the By- Laws), the affirmative vote of the holders of record of outstanding shares representing (i) at least 80% of the voting power of the then outstanding Voting Shares of the Corporation, voting together as a single class, and (ii) if there is then an Interested Stockholder (as defined in Article Seventh), at least a majority of the voting power of the then outstanding Voting Shares of the Corporation, voting together as a single class, which are not beneficially owned, directly or indirectly, by an Interested Stockholder, effected at a duly called annual or special meeting of such stockholders, with prior notice, and with a vote and not by written consent, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article Eleventh, or Articles Fifth through Tenth of this Certificate of Incorporation; provided, however, that the provisions of this sentence shall not apply to any amendment, repeal or adoption of any inconsistent provision declared advisable by the Board of Directors by the affirmative vote of a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors and, if there is then an Interested Stockholder, a majority of the Continuing Directors (as defined above in Article Seventh). -14- IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed and alleged to under penalties of perjury this _____th day of June, 1999. AVERSTAR, INC. By: __________________________________ Michael B. Alexander Chief Executive Officer and Chairman of the Board of Directors Attest: _______________________ Nicholas A. Pettinella Secretary -15- EX-3.5 4 AMENDED & RESTATED BYLAWS OF AVERSTAR Exhibit 3.5 AMENDED AND RESTATED BY-LAWS OF AVERSTAR, INC. _______________________________________ ARTICLE I OFFICES Section 1.1 Registered Office. The registered office of the ----------- ----------------- Corporation within the State of Delaware shall be located at the principal place of business in said State of such corporation or individual acting as the Corporation's registered agent in Delaware. Section 1.2 Other Offices. The Corporation may also have offices and ----------- ------------- places of business at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF THE STOCKHOLDERS Section 2.1 Place of Meetings. All meetings of stockholders shall be ----------- ----------------- held at the principal office of the Corporation, or at such other place within or without the State of Delaware as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2 Annual Meetings. The annual meeting of stockholders for ----------- --------------- the election of directors and for the transaction of any other proper business shall be held on the date and at the time fixed, from time to time, by the person or persons set forth in the Certificate of Incorporation. Section 2.3 Special Meetings. Subject to the rights of holders of any ----------- ---------------- series of Preferred Stock, special meetings of stockholders, for any purpose or purposes, may be called only by or at the direction of the person or persons set forth in the Certificate of Incorporation. At any special meeting of stockholders, only such business may be transacted as is related to the purpose or purposes set forth in the notice of such meeting. Section 2.4 Notice of Meetings. Written notice of every meeting of ----------- ------------------ stockholders, stating the place, date and hour thereof and, in the case of a special meeting of stockholders, the purpose or purposes thereof and the person or persons by whom or at whose direction such meeting has been called and notice is being issued, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, President, or the persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Section 2.5 Quorum. The holders of a majority of the issued and ----------- ------ outstanding shares of stock of the Corporation entitled to vote, represented in person or by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at any meeting of stockholders. If, however, such quorum shall not be present or represented at any meeting of stockholders, the stockholders entitled to vote there at, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Notwithstanding the foregoing, if after any such adjournment the Board of Directors shall fix a new record date for the adjourned meeting, or if the adjournment is for more than thirty (30) days, a notice of such adjourned meeting shall be given as provided in Section 2.4 of these By-Laws. Section 2.6 Voting. The voting rights of stockholders shall be as ----------- ------ provided in the Certificate of Incorporation. Section 2.7 Proxies. Every stockholder entitled to vote at a meeting ----------- ------- or by consent without a meeting may authorize another person or persons to act for him by proxy. Each proxy shall be in writing executed by the stockholder giving the proxy or by his duly authorized attorney. No proxy shall be valid after the expiration of eleven (11) months from its date, unless a longer period is provided for in the proxy. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it, or his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. Section 2.8 Stock Records. The Secretary or agent having charge of ----------- ------------- the stock transfer books shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order and showing the address of and the number and class and series, if any, of shares held by each. Such list, for a period of ten (10) days prior to such meeting, shall be kept at the principal place of business of the Corporation or at the office of the transfer agent or registrar of the Corporation and such other places as required by statute and shall be subject to inspection by any stockholder at any time during the meeting. Section 2.9 Conduct of Meeting. The Chairman of the Board shall ----------- ------------------ preside at all meetings of the stockholders. In the absence of a Chairman, the Vice Chairman shall preside at all such meetings. If neither the Chairman of the Board nor the Vice Chairman are present, then any other director chosen by the directors in attendance shall preside. The Secretary of the Corporation, or, in his absence, an Assistant Secretary, if any, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman for the meeting shall appoint a secretary of the meeting. -2- Section 2.10 Inspection and Judges. The directors, in advance of any ------------ --------------------- meeting, may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If an inspector or inspectors or judge or judges are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by appointment made by the person presiding at the meeting. Each inspector or judge, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector or judge at such meeting with strict impartiality and according to the best of his ability. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing on any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Section 2.11 Stockholder Proposals. At any annual meeting of the ------------ --------------------- stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 2.11, who shall be entitled to vote at such meeting and who complies with the procedure set forth below. For business to be properly brought before a stockholder annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the annual meeting with respect to which such notice is to be tendered is not held within 30 days before or after such anniversary date, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which notice of the date of the meeting or public disclosure thereof was given or made. Such stockholder's notice shall be set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and the number of shares of stock of the Corporation which are beneficially owned by the stockholder and (d) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with such business and any material interest of the stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section 2.11. If the Board of Directors at the meeting shall determine, based on the facts, that business was not properly brought before the -3- meeting in accordance with the procedures set forth in this Section 2.11, the Chairman of the Board shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.11, a stockholder shall also comply with all applicable requirements of the Securities and Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.11. ARTICLE III DIRECTORS Section 3.1 Number. Subject to any right of the holder of any series ----------- ------ of preferred stock to elect additional directors, the number of directors shall be fixed from time to time by the Board of Directors. Section 3.2 Nomination, Classification, Election, Term, Removal and ----------- ------------------------------------------------------- Vacancies. The nomination, classification, election, term and removal of - --------- directors and the filling of newly created directorships and vacancies in the Board of Directors shall be governed by the Certificate of Incorporation. Section 3.3 Powers and Duties. Subject to the applicable provisions of ----------- ----------------- law, these By-Laws or the Certificate of Incorporation, but in furtherance and not in limitation of any rights therein conferred, the Board of Directors shall have the control and management of the business and affairs of the Corporation and shall exercise all such powers of the Corporation and do all such lawful acts and things as may be exercised by the Corporation. Section 3.4 Place of Meeting. All meetings of the Board of Directors ----------- ---------------- may be held either within or without the State of Delaware. Section 3.5 Annual Meetings. An annual meeting of each newly elected ----------- --------------- Board of Directors shall be held immediately following the annual meeting of stockholders, and no notice of such meeting to the newly elected directors shall be necessary in order legally to constitute the meeting, provided a quorum shall be present, or the newly elected directors may meet at such time and place as shall be fixed by the written consent of all of such directors. Section 3.6 Regular Meetings. Regular meetings of the Board of ----------- ---------------- Directors may be held upon such notice or without notice, and at such time and at such place as shall from time to time be determined by the Board of Directors. Section 3.7 Special Meetings. Special meetings of the Board of ----------- ---------------- Directors may be called by the Chairman of the Board, Vice-Chairman, President or Vice President and shall be called promptly by the Chairman of the Board, the President or the Secretary upon the written request of at least 75% of the Board of Directors specifying the special purpose thereof, on not less than two (2) days notice to each director. Such request shall ]state the date, time and place of the -4- meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 3.8 Notice of Meetings. Notice of each special meeting of the ----------- ------------------ Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary or an Assistant Secretary and shall state the place, date and time of the meeting. Notice of each such meeting shall be given orally or shall be mailed to each director at his residence or usual place of business. If notice of less than two (2) days is given, it shall be oral, whether by telephone or in person, or sent by special delivery mail or telegraph. If mailed, the notice shall be given when deposited in the United States mail, postage prepaid. Notice of any adjourned meeting, including the place, date and time of the new meeting, shall be given to all directors not present at the time of the adjournment, as well as to the other directors unless the place, date and time of the new meeting is announced at the adjourned meeting. Section 3.9 Quorum and Voting. At all meetings of the Board of ----------- ----------------- Directors a majority of the entire Board of Directors shall be necessary to and shall constitute a quorum for the transaction of business, unless otherwise provided by any applicable provision of law, by these By-Laws or by the Certificate of Incorporation. The act of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board of Directors, unless otherwise provided by any applicable provision of law, by these By-Laws or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, until a quorum shall be present. Section 3.10 Compensation. The Board of Directors, by the affirmative ------------ ------------ vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise. Section 3.11 Books and Records. The directors may keep the books of ------------ ----------------- the Corporation, except such as are required by law to be kept within the state, outside of the State of Delaware, at such place or places as they may from time to time determine. Section 3.12 Action Without a Meeting. Any action required or ------------ ------------------------ permitted to be taken by the Board of Directors, or by a committee of the Board of Directors, may be taken without a meeting if all members of the Board of Directors or the committee, as the case may be, consent in writing to the adoption of a resolution authorizing the action. Any such resolution and the written consents thereto by the members of the Board of Directors or committee shall be filed with the minutes of the proceedings of the Board of Directors or committee. Section 3.13 Telephone Participation. Any one or more members of the ------------ ----------------------- Board of Directors, or any committee of the Board of Directors, may participate in a meeting of the Board of Directors or committee by means of a conference telephone call or similar communications -5- equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 3.14 Committees of the Board of Directors. The Board of ------------ ------------------------------------ Directors, by resolution adopted by a majority of the entire Board of Directors, may designate one or more committees, each consisting of one or more directors. The Board of Directors may designate one or more directors as alternate members of any such committee. Such alternate members may replace any absent member or members at any meeting of such committee. Each committee (including the members thereof) shall serve at the pleasure of the Board of Directors and may keep minutes of its meetings and report the same to the Board of Directors. Except as otherwise provided by law, each such committee, to the extent provided in the resolution establishing it, shall have and may exercise all the authority of the Board of Directors with respect to all matters. However, no such committee shall have power or authority to: (a) amend the Certificate of Incorporation; (b) adopt an agreement of merger or consolidation; (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets; (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution; (e) amend these By-Laws; and unless expressly so provided by resolution of the Board of Directors, no such committee shall have power or authority to: (f) declare a dividend; or (g) authorize the issuance of shares of the Corporation of any class. ARTICLE IV WAIVER Section 4.1 Waiver. Whenever a notice is required to be given by any ----------- ------ provision of law, by these By-Laws, or by the Certificate of Incorporation, a waiver thereof in writing, whether before or after the time stated therein, shall be deemed equivalent to such notice. In addition, any stockholder attending a meeting of stockholders in person or by proxy without protesting prior to the conclusion of the meeting the lack of notice thereof to him, and any director attending a meeting of the Board of Directors without protesting prior to the meeting or at its commencement such lack of notice, shall be conclusively deemed to have waived notice of such meeting. -6- ARTICLE V OFFICERS Section 5.1 Executive Officers. The executive officers of the ----------- ------------------ Corporation shall be a Chairman of the Board, President, one or more Vice Presidents, a Secretary and a Treasurer, one or more Assistant Secretaries and Assistant Treasurers. Any person may hold two or more of such offices. The executive officers of the Corporation shall be elected annually (and from time to time by the Board of Directors, as vacancies occur) at the annual meeting of the Board of Directors following the meeting of stockholders at which the Board of Directors was elected. Section 5.2 Other Officers. The Board of Directors may also elect ----------- -------------- or may delegate to the Chairman of the Board the power to appoint such other officers as it may at any time or from time to time deem advisable, and any officers so elected or appointed shall have such authority and perform such duties as the Board of Directors or the Chairman of the Board, if he shall have appointed them, may from time to time prescribe. Section 5.3 Authorities and Duties. All officers, as between ----------- ---------------------- themselves and the Corporation, shall have such authority and perform such duties in the management of the business and affairs of the Corporation as may be provided in these By-Laws, or, to the extent not so provided, as may be prescribed by the Board of Directors. Section 5.4 Tenure and Removal. The officers of the Corporation ----------- ------------------ shall be elected or appointed to hold office until their respective successors are elected or appointed. All officers shall hold office at the pleasure of the Board of Directors, and any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors for cause or without cause at any regular or special meeting. Section 5.5 Vacancies. Any vacancy occurring in any office of the ----------- --------- Corporation, whether because of death, resignation or removal, with or without cause, or any other reason, shall be filled by the Board of Directors. Section 5.6 Compensation. The salaries and other compensation of all ----------- ------------ officers and agents of the Corporation shall be fixed by or in the manner prescribed by the Board of Directors. Section 5.7 Chairman of the Board. The Chairman of the Board shall ----------- --------------------- preside at the meetings of the Stockholders and of the Board of Directors and shall be the Chief Executive Officer of the Corporation and shall have the general management of the general affairs of the Corporation. Section 5.8 Vice Chairman. In the absence of the Chairman, the Vice ----------- ------------- Chairman shall perform the duties of the Chairman and shall preside at the meetings of the Stockholders and of the Board of Directors. -7- Section 5.9 President. The President, if there shall be one, shall ----------- --------- exercise and perform those duties delegated to him or her by the Board of Directors, Chairman or Vice Chairman. Section 5.10 Vice President. The Vice-Presidents shall, in the ------------ -------------- absence or incapacity of the President, perform the duties of the President; they shall also perform such other duties and have such powers as may be prescribed or assigned to them from time to time by the Board of Directors or the By-laws. Section 5.11 Chief Financial Officer. The Chief Financial Officer ------------ ----------------------- shall perform all the duties customary to that office, shall have the care and custody of the funds and securities of the Corporation, subject always to the control and supervision of the Board of Directors, and shall have the general supervision of the books of account. The Chief Financial Officer shall have such other powers and duties as the Board of Directors from time to time may prescribe. The Chief Financial Officer shall give such bonds for the faithful performance of his or her duties as the Board of Directors from time to time may determine. Section 5.12 Treasurer. The Treasurer shall supervise the ------------ --------- Corporation's relationships with banking and lending institutions, subject always to the control and supervision of the Board of Directors. The Treasurer shall have such other powers and duties as the Board of Directors from time to time may prescribe. Section 5.13 Secretary. The Secretary shall keep the minutes of the ------------ --------- meetings of the Board of Directors and of the Stockholders and shall have the custody of the seal of the Corporation and shall affix the same to certificates of stock and other documents when authorized to do so. The Secretary shall perform all the other duties usual to that office, and such other duties as the Board of Directors from time to time may prescribe. ARTICLE VI PROVISIONS RELATING TO STOCK CERTIFICATES AND STOCKHOLDERS Section 6.1 Form and Signature. The shares of the Corporation shall ----------- ------------------ be represented by certificates signed by the Chairman of the Board of Directors, the Vice Chairman, the President or a Vice-President, and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, and shall bear the seal of the Corporation or a facsimile thereof. Each certificate representing shares shall state upon its face (a) that the Corporation is formed under the laws of the State of Delaware, (b) the name of the person or persons to whom it is issued, (c) the number of shares which such certificate represents and (d) the par value, if any, of each share represented by such certificate. Where any such certificate is signed by a transfer agent or transfer clerk and by a registrar, the signatures of any such Chairman of the Board, Vice Chairman, President, Vice-President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer, may be facsimiles, engraved or printed.. -8- Section 6.2 Registered Stockholders. The Corporation shall be ----------- ----------------------- entitled to recognize the exclusive right of a person registered on its books as the owner of shares of stock to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares of stock, and shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person. Section 6.3 Transfer of Stock. Upon surrender to the Corporation or ----------- ----------------- the appropriate transfer agent, if any, of the Corporation, of a certificate representing shares of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and, in the event that the certificate refers to any agreement restricting transfer of the shares which it represents, proper evidence of compliance with such agreement, a new certificate shall be issued to the person entitled thereto, and the old certificate cancelled and the transaction recorded upon the books of the Corporation. Section 6.4 Lost Certificates, etc. The Corporation may issue a new ----------- ---------------------- certificate for shares in place of any certificate theretofore issued by it, alleged to have been lost, mutilated, stolen or destroyed, and the Board of Directors may require the owner of such lost, mutilated, stolen or destroyed certificate, or his legal representatives, to make an affidavit of that fact and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation on account of the alleged loss, mutilation, theft or destruction of any such certificate or the issuance of any such new certificate. Section 6.5 Record Date. For the purpose of determining the ----------- ----------- stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or to express written consent to any corporate action without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action. Section 6.6 Regulations. Except as otherwise provided by law, the ----------- ----------- Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient, concerning the issue, transfer and registration of certificates for the securities of the Corporation. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars and may require all certificates for shares of capital stock to bear the signature or signatures of any of them. ARTICLE VII GENERAL PROVISIONS Section 7.1 Dividends and Distributions. Dividends and other ----------- --------------------------- distributions upon or with respect to outstanding shares of stock of the Corporation may be declared by the Board of -9- Directors at any regular or special meeting, and may be paid in cash, bonds, property, or in stock of the Corporation. The Board of Directors shall have full power and discretion, subject to the provisions of the Certificate of Incorporation or the terms of any other corporate document or instrument binding upon the Corporation to determine what, if any, dividends or distributions shall be declared and paid or made. Section 7.2 Checks, etc. All checks or demands for money and notes ----------- ----------- or other instruments evidencing indebtedness or obligations of the Corporation shall be signed by such officer or officers or other person or persons as may from time to time be designated by the Board of Directors. Section 7.3 Seal. The corporate seal shall have inscribed thereon ----------- ---- the name of the Corporation, the year of its incorporation and the words "Corporate Seal Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be ----------- ----------- determined by the Board of Directors. Section 7.5 General and Special Bank Accounts. The Board of ----------- --------------------------------- Directors may authorize from time to time the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board of Directors may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may be delegated by the Board of Directors from time to time. The Board of Directors may make such special rules and regulations with respect to such bank accounts not inconsistent with the provisions of these By-Laws, as it may deem expedient. ARTICLE VIII ADOPTION AND AMENDMENTS Section 8.1 Power to Amend. The power to make, amend and repeal the ----------- -------------- By-Laws shall be as provided in the Certificate of Incorporation. -10- EX-5.1 5 OPINION OF SWIDLER BERLIN EXHIBIT 5.1 July __, 1999 AverStar, Inc. 23 Fourth Avenue Burlington, MA 01803 Ladies and Gentlemen: On the date hereof, AverStar, Inc., a Delaware corporation (the "Company"), is transmitting for filing with the Securities and Exchange Commission Amendment No. 1 to a Registration Statement under the Securities Act of 1933, as amended, on Form S-1 (the "Registration Statement") relating to the sale of up to 4,600,000 shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), (including 4,000,000 shares to be sold by the Company, and 600,000 shares subject to the underwriters' over-allotment option. This opinion is an exhibit to the Registration Statement. We have acted as special counsel to the Company with respect to certain corporate and securities matters, and in such capacity we have participated in various corporate and other proceedings taken by or on behalf of the Company in connection with the proposed offer and sale of the Shares by the Company as contemplated by the Registration Statement. However, we are not general counsel to the Company and would not ordinarily be familiar with or aware of matters relating to the Company unless they are brought to our attention by representatives of the Company. We have examined copies (in each case signed, certified or otherwise proven to our satisfaction to be genuine) of the Company's Certificate of Incorporation and all amendments thereto, and By-Laws as presently in effect, minutes and other instruments evidencing actions taken by the Company's directors and stockholders, the Registration Statement and exhibits thereto, and such other documents and instruments relating to the Company and the proposed offering as we have deemed necessary under the circumstances. In our examination of all such agreements, documents, certificates and instruments, we have assumed the completeness of the minutes submitted to us by the Company, the genuineness of all signatures, the legal capacity of all signatures and the authenticity of all agreements, documents, certificates and instruments submitted to us as originals and the AverStar, Inc. July___, 1999 Page 2 conformity with the originals of all agreements, instruments, documents and certificates submitted to us as copies. Except as expressly set forth in the next sentence, we express no opinion on the laws of any jurisdiction other than the State of New York, the federal laws of the United States and, to the extent set forth below, the laws of the State of Delaware. This opinion, insofar as it relates to the law of Delaware, based solely on our reading of standard published compilations of the Delaware General Corporation Law. We express no opinion as to the application of the securities or "blue sky" laws of any state, including the State of Delaware or the State of New York, to the offer and sale of the Shares. Our opinion in paragraph 1 below as to the due incorporation of the Company in its state of incorporation is (i) based solely upon a Certificate of Good Standing from the Secretary of State of the State of Delaware and (ii) rendered as of the date of said certificate. Based on the foregoing, and subject to and in reliance on the accuracy and completeness of the information relevant thereto provided to us, it is our opinion that: 1. The Company has been duly incorporated under the laws of the State of Delaware and, upon proper filing of the Second Amended and Restated Certificate of Incorporation of the Company in the form filed as Exhibit 3.3 to the Registration Statement, the Company will have an authorized capital stock consisting of 25,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, par value $.001 per share. 2. Upon proper filing of the Second Amended and Restated Certificate of Incorporation of the Company in the form filed as Exhibit 3.3 to the Registration Statement, the maximum of 4,600,000 shares of Common Stock to be sold by the Company will have been duly authorized and, subject to the effectiveness of the Registration Statement and compliance with applicable securities or other laws of the states of the United States in which the Shares will be offered and/or sold in the proposed public offering, when issued and delivered against payment therefor in accordance with the terms set forth in the Registration Statement, will be legally and validly issued, fully paid and non- assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and as an exhibit to any filing made by the Company under the securities or other laws of any state AverStar, Inc. July___, 1999 Page 3 of the United States, which relate to the proposed public offering which is the subject of this opinion, and to the reference to this firm appearing under the heading "Legal Matters" in the prospectus which is contained in the Registration Statement. This opinion is as of the date hereof and we undertake no obligation to advise you of any change, any applicable law or in facts or circumstances which might affect any matters or opinions set forth herein. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purposes, except as expressly provided in the preceding paragraph. Very truly yours, /s/ Swidler Berlin Shereff Friedman, LLP SWIDLER BERLIN SHEREFF FRIEDMAN, LLP SBSF, LLP:GA:JSH:RMF EX-10.1 6 BUSINESS LOAN AND SECURITY AGREEMENT Exhibit 10.1 BUSINESS LOAN AND SECURITY AGREEMENT dated as of March 18, 1999, by and among AVERSTAR, INC., COMPUTER BASED SYSTEMS, INC. and other Borrower parties hereto from time to time, as the Borrowers, FIRST UNION COMMERCIAL CORPORATION and other Lender parties hereto from time to time, as the Lenders, and FIRST UNION COMMERCIAL CORPORATION, as the Agent TABLE OF CONTENTS CERTAIN DEFINITIONS........................................................ 1 ARTICLE 1 COMMITMENT................................................... 15 Section 1.1 Maximum Loan Amount.......................................... 15 Section 1.2 Use of Proceeds.............................................. 16 Section 1.3 Borrowing Base and Maximum Advances.......................... 16 Section 1.4 Advances..................................................... 17 Section 1.5 Additional Mandatory Payments; Reduction of Commitment....... 18 Section 1.6 Field Audits................................................. 20 Section 1.7 Fees......................................................... 20 Section 1.8 Termination of Advances; Reduction of the Revolving Facility Commitment Amount............................................ 21 Section 1.9 Appointment of AverStar...................................... 21 Section 1.10 Joinder of New Subsidiaries and Affiliates................... 22 ARTICLE 2 LETTERS OF CREDIT............................................ 22 Section 2.1 Issuance..................................................... 22 Section 2.2 Amounts Advanced Pursuant to Letters of Credit............... 23 Section 2.3 Letter of Credit Fees........................................ 23 ARTICLE 3 SECURITY..................................................... 24 Section 3.1 Security Generally........................................... 24 Section 3.2 No Preference or Priority.................................... 26 Section 3.3 Release of Security Interest................................. 26 ARTICLE 4 CONDITIONS TO THE OBLIGATIONS OF THE LENDER(S)............... 26 Section 4.1 Satisfaction of Commitment Letter Conditions; Compliance with Agreements................................... 26 Section 4.2 No Default................................................... 28 Section 4.3 Documentation................................................ 28 ARTICLE 5 REPRESENTATIONS AND WARRANTIES............................... 29 Section 5.1 Corporate Existence and Qualification........................ 29 Section 5.2 Corporate Authority; Noncontravention........................ 29 Section 5.3 Financial Position........................................... 29 Section 5.4 Payment of Taxes............................................. 30 Section 5.5 Accuracy of Submitted Information; Omissions................. 30 Section 5.6 Government Contracts......................................... 30
i Section 5.7 No Defaults or Liabilities................................... 31 Section 5.8 No Violations of Law......................................... 31 Section 5.9 Litigation and Proceedings................................... 31 Section 5.10 Security Interest in the Collateral.......................... 31 Section 5.11 Principal Place of Business; Location of Books and Records; No Inventory........................... 32 Section 5.12 Fiscal Year.................................................. 32 Section 5.13 Pension Plans................................................ 32 Section 5.14 O.S.H.A., ADA and Environmental Compliance................... 33 Section 5.15 Intellectual Property........................................ 34 Section 5.16 Existing or Pending Defaults; Material Contracts............. 34 Section 5.17 Leases and Real Property..................................... 34 Section 5.18 Labor Relations.............................................. 34 Section 5.19 Assignment of Government Contracts........................... 35 Section 5.20 Ownership Interests.......................................... 35 Section 5.21 Contribution Agreement....................................... 35 Section 5.22 Solvency..................................................... 35 Section 5.23 Year 2000 Compliance......................................... 35 Section 5.24 Joint and Several Liability.................................. 36 Section 5.25 Survival of Representations and Warranties................... 36 ARTICLE 6 AFFIRMATIVE COVENANTS........................................ 36 Section 6.1 Payment of Loan Obligations.................................. 36 Section 6.2 Payment of Taxes............................................. 36 Section 6.3 Delivery of Financial and Other Statements................... 36 Section 6.4 Maintenance of Records; Review by the Lenders................ 38 Section 6.5 Maintenance of Insurance Coverage............................ 38 Section 6.6 Maintenance of Property/Collateral; Performance of Contracts. 38 Section 6.7 Maintenance of Corporate Existence........................... 39 Section 6.8 Maintenance of Certain Accounts with Lender.................. 39 Section 6.9 Maintenance of Management.................................... 39 Section 6.10 Disclosure of Defaults, Etc.................................. 39 Section 6.11 Security Perfection; Assignment of Claims Act; Payment of Costs............................................. 40 Section 6.12 Defense of Title to Collateral............................... 40 Section 6.13 Compliance with Law.......................................... 40 Section 6.14 Further Assurances; Additional Requested Information......... 41 Section 6.15 Financial Covenants.......................................... 41 Section 6.16 Year 2000 Compliance......................................... 44 Section 6.17 Landlord Waivers; Subordination.............................. 44 Section 6.18 Substitute Notes............................................. 44 Section 6.19 Interest Rate Contracts...................................... 45 Section 6.20 Joint and Several Liability.................................. 45
ii ARTICLE 7 NEGATIVE COVENANTS........................................... 45 Section 7.1 Change of Control; Disposition of Assets; Merger....................................................... 45 Section 7.2 Margin Stocks................................................ 46 Section 7.3 Change of Operations......................................... 46 Section 7.4 Judgments; Attachments....................................... 46 Section 7.5 Further Assignments; Performance and Modification of Contracts; etc............................... 46 Section 7.6 Affect Rights of the Agent or Lender(s)...................... 46 Section 7.7 Indebtedness; Granting of Security Interests................. 47 Section 7.8 Dividends; Loans; Advances; Investments and Certain Other Events..................................... 47 Section 7.9 Lease Obligations............................................ 48 Section 7.10 Capital Expenditures......................................... 48 Section 7.11 Lockbox Deposits............................................. 49 Section 7.12 Shareholders Agreement; Merger Agreement, Etc................ 49 Section 7.13 Transactions With Affiliates................................. 49 Section 7.14 Joint and Several Liability.................................. 49 ARTICLE 8 COLLATERAL ACCOUNT........................................... 49 ARTICLE 9 DEFAULT AND REMEDIES......................................... 50 Section 9.1 Events of Default............................................ 50 Section 9.2 Remedies..................................................... 52 ARTICLE 10 THE AGENT; AGENCY............................................ 55 Section 10.1 Appointment.................................................. 55 Section 10.2 General Nature of the Agent's Duties......................... 55 Section 10.3 Exercise of Powers........................................... 56 Section 10.4 General Exculpatory Provisions............................... 57 Section 10.5 Administration by the Agent.................................. 58 Section 10.6 Lenders Not Relying on the Agent or Other Lenders............ 59 Section 10.7 Indemnification.............................................. 60 Section 10.8 The Agent in its Individual Capacity......................... 60 Section 10.9 Holders of Notes............................................. 60 Section 10.10 Successor Agent.............................................. 61 Section 10.11 Additional Agents............................................ 61 Section 10.12 Calculations................................................. 61 Section 10.13 Funding by Agent............................................. 62 Section 10.14 Benefit of Article........................................... 64 ARTICLE 11 CERTAIN ADDITIONAL RIGHTS AND OBLIGATIONS REGARDING THE COLLATERAL............................................... 64 Section 11.1 Power of Attorney............................................ 64 Section 11.2 Lockbox...................................................... 65
iii Section 11.3 Other Agreements............................................. 66 ARTICLE 12 MISCELLANEOUS................................................ 66 Section 12.1 Remedies Cumulative.......................................... 66 Section 12.2 Waiver....................................................... 67 Section 12.3 Notices...................................................... 67 Section 12.4 Entire Agreement............................................. 68 Section 12.5 Relationship of the Parties.................................. 68 Section 12.6 Waiver of Jury Trial......................................... 69 Section 12.7 Submission to Jurisdiction; Service of Process; Venue........ 69 Section 12.8 Changes in Capital Requirements.............................. 69 Section 12.9 Captions..................................................... 70 Section 12.10 Modification and Waiver...................................... 70 Section 12.11 Transferability.............................................. 70 Section 12.12 Governing Law; Binding Effect................................ 70 Section 12.13 Gender; Number............................................... 71 Section 12.14 Materiality.................................................. 71 Section 12.15 Counterparts................................................. 71
LIST OF EXHIBITS: EXHIBIT 1 - Request for Advance EXHIBIT 1(a)- Request for Swing Line Loan EXHIBIT 2 LIBOR Election Form and Certification EXHIBIT 3 LIBOR Interest Election Procedure and Requirements EXHIBIT 4 - Borrowing Base/Non-Default Certificate (with Schedules A, B & C) EXHIBIT 5 - Quarterly Covenant Compliance/Non-Default Certificate EXHIBIT 6 Form of Joinder Agreement EXHIBIT 7 Pricing Grid EXHIBIT 8 Form of Payment Direction Letter EXHIBIT 9 Form of Assignment and Acceptance Agreement SCHEDULES iv BUSINESS LOAN AND SECURITY AGREEMENT ------------------------------------ THIS BUSINESS LOAN AND SECURITY AGREEMENT, dated as of March 18, 1999, is by and among (i) FIRST UNION COMMERCIAL CORPORATION, a North Carolina corporation, having offices at 1970 Chain Bridge Road, 9th Floor, McLean, Virginia 22102; (ii) FIRST UNION COMMERCIAL CORPORATION, a North Carolina corporation, acting in its capacity as Agent for the Lenders, having offices at 1970 Chain Bridge Road, 9th Floor, McLean, Virginia 22102; (iii) each other person or entity who is now or hereafter becomes a "Lender" pursuant to this Agreement; (iv) AVERSTAR, INC., a Delaware corporation ("AverStar"), having offices at 23 Fourth Avenue, Burlington, Massachusetts 01803, COMPUTER BASED SYSTEMS, INC., a Virginia corporation ("CBSI"), having offices at 2750 Prosperity Avenue, Suite 300, Fairfax, Virginia 22031, COMPUTING APPLICATIONS SOFTWARE TECHNOLOGY, INC., a California corporation, having offices at 23 Fourth Avenue, Burlington, Massachusetts 01803, INTERMETRICS SECURITIES, INC., a Massachusetts corporation, having offices at 23 Fourth Avenue, Burlington, Massachusetts 01803, and INTERMETRICS INTERNATIONAL, INC., a Massachusetts corporation, having offices at 23 Fourth Avenue, Burlington, Massachusetts 01803; and (v) each other person or entity hereafter becoming a "Borrower" by executing, among other things, a "Joinder Agreement" pursuant to this Agreement. W I T N E S S E T H T H A T: - - - - - - - - - - - - - - In consideration of the mutual covenants and agreements herein contained, Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree, represent and warrant as follows: CERTAIN DEFINITIONS ------------------- For the purposes of this Business Loan and Security Agreement, the terms set forth below shall have the following definitions: "Acceleration Date" shall mean the date on which all principal, interest and other sums owing on the Obligations shall be declared immediately due and payable in full prior to the stated maturity thereof. "Account Debtor" shall mean any person or entity who is (i) unrelated and unaffiliated with any Borrower, and (ii) indebted to any Borrower for the payment of any Receivable; it being understood and agreed that when computations are being made with respect to amounts due and owing from an Account Debtor (a) such computations shall be made on a contract by contract basis (as opposed to on an Account Debtor basis), with respect to amounts owing in connection with Government Contracts, and (b) such computations shall be made on the basis of all amounts due from the Account Debtor and any other person or entity related to or affiliated with the particular Account Debtor, with respect to amounts owing in connection with contracts which are not Government Contracts. "Acquisition" shall mean the acquisition by AverStar of all of the issued and outstanding capital stock of CBSI pursuant to the terms and provisions of the Merger Agreement. "Additional Base Rate Interest Margin" shall have the meaning assigned to such term in the Notes and in Exhibit 7 attached to this Agreement. --------- "Additional Libor Interest Rate Margin" shall have the meaning assigned to such term in the Notes and in Exhibit 7 attached to this Agreement. --------- "Agent" shall mean First Union Commercial Corporation, a North Carolina corporation, acting in its capacity as agent for the Lenders, or any successor Agent appointed pursuant to Section 10.10 of this Agreement. "Agreement" or "Loan Agreement" shall mean this Business Loan and Security Agreement, together with all exhibits and schedules attached hereto and any and all amendments or modifications of any of the foregoing made in accordance with Section 12.10 of this Agreement. "Applicable Interest Rate" shall mean either the (i) LIBOR or (ii) Base Rate, as set forth in the Notes. "Applicable Laws" shall mean any federal, state or local law, ordinance, rule or regulation to which any Borrower or the property of any Borrower is subject, whether domestic or international. "Assignment of Claims Act" shall mean the Assignment of Claims Act of 1940, 31 U.S.C. Section 3727 and 41 U.S.C. Section 15, as amended. "Assignment of Promissory Notes as Collateral" shall mean that certain Assignment of Promissory Notes as Collateral of even date herewith, made by AverStar and accepted by the Agent for the ratable benefit of the Lenders, together with any and all modifications and/or amendments thereof. "Averstar" shall have the meaning attributed to such term in the Preamble of this Agreement. "Base Rate" shall mean the higher of the (i) Federal Funds Rate, plus one-half of one percent (.50%) or (ii) Prime Rate. 2 "Borrower" or "Borrowers" shall mean AverStar, Inc., a Delaware corporation, Computer Based Systems, Inc., a Virginia corporation, Computing Applications Software Technology, Inc., a California corporation, Intermetrics Securities, Inc., a Massachusetts corporation, Intermetrics International, Inc., a Massachusetts corporation, and/or each other person or entity hereafter executing a Joinder Agreement pursuant to Section 1.10 of this Agreement, individually or collectively, as the context may require. "Borrowing Base/Non-Default Certificate" shall mean a certificate in the form of Exhibit 4 hereto. --------- "Borrowing Base Deficiency" shall have the meaning assigned to such term in Section 1.3 of this Agreement. "Business Day" shall mean any day other than (i) a Saturday, Sunday, or public holiday under the laws of the Commonwealth of Virginia; (ii) any other day on which banking institutions are authorized or obligated to close in the city in which the Agent's office is located; or (iii) with respect to all notices and determinations in connection with, and payments of principal and interest on, any Loan bearing interest on a LIBOR basis, any day on which banks are not open for trading in Dollar deposits in the London interbank market. "CBSI" shall have the meaning attributed to such term in the Preamble of this Agreement. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.). "Closing" shall mean the settlement of the transactions contemplated hereby. "Closing Date" shall mean the date on which Closing occurs. "Collateral" shall have the meaning assigned to such term in Section 3.1 of this Agreement. "Collateral Account" shall have the meaning assigned to such term in Article 8 of this Agreement. "Commercial Contract" shall mean any written contract to which the Borrower is a party (other than a Government Contract or a contract with the District of Columbia or any department, instrumentality or agency thereof) which gives rise or may give rise to a Receivable. "Commitment Amount" shall mean Seventy-five Million and No/100 Dollars ($75,000,000.00), or if the maximum aggregate commitment of the Lender(s) hereunder is reduced pursuant to the terms of this Agreement, such lesser amount. 3 "Commitment Fee" shall have the meaning assigned to such term in Section 1.7(a) of this Agreement. "Commitment Letter" shall mean that certain letter dated February 1, 1999 from the Agent and First Union Capital Markets Corp. to the Borrowers relating to the Loan. "Contribution Agreement" shall mean that certain Contribution Agreement of even date herewith, executed and delivered by and among the Borrowers immediately prior to the Closing, as amended from time to time pursuant to the terms thereof. "Default Rate" shall mean the Applicable Interest Rate, plus the applicable Additional Base Rate Interest Margin and/or the applicable Additional Libor Interest Rate Margin (as the case may be), plus two percent (2%). "EBITDA" shall mean, as of the date of any determination, the Borrowers' net income (or loss), plus interest expense, plus all charges against income for foreign, federal, state and local income taxes, plus depreciation expense, plus amortization expense, and excluding any other non-cash items to the extent included in determining net income (or loss), all as determined on a consolidated basis in accordance with GAAP. For the purpose of any applicable EBITDA calculation, EBITDA for the fiscal quarter ending 12/31/98 may include "add-backs" for the one-time, non-recurring items set forth on Schedule A ---------- hereto. "Eligible Accounts Receivables" shall mean, collectively, Eligible Billed Government Accounts Receivable, Eligible Billed Commercial Accounts Receivable and Eligible Unbilled Government Costs. "Eligible Assignee" shall mean any Lender, an affiliate of any Lender, a Federal Reserve Bank or any other "Qualified Institutional Buyer," as such term is defined under Rule 144(A), promulgated under the Securities Act of 1933, as amended. "Eligible Billed Government Accounts Receivable" shall mean all Receivables arising from Government Contracts which (a) represent amounts due and owing for products actually delivered or services actually performed or rendered by or on behalf of any Borrower to or for the benefit of an Account Debtor pursuant to a Government Contract; (b) have been properly billed and are outstanding less than one hundred twenty-one (121) days from the date of original invoice; (c) arise in the ordinary course of such Borrower's business; (d) are due, owing and not subject to any defense, set-off or counterclaim; and (e) are not Ineligible Receivables. "Eligible Billed Commercial Accounts Receivable" shall mean all Receivables (other than Receivables arising from Government Contracts) which (a) represent amounts due and owing for products actually delivered or services actually performed or rendered by 4 or on behalf of any Borrower to or for the benefit of an Account Debtor (other than the Government); (b) have been properly billed and are outstanding less than ninety-one (91) days from the date of original invoice; (c) arise in the ordinary course of such Borrower's business; (d) are due, owing and not subject to any defense, set-off or counterclaim; and (e) are not Ineligible Receivables. "Eligible Unbilled Government Costs" shall mean all costs actually incurred by any Borrower and arising out of work actually performed by such Borrower under Government Contracts which (a) are eligible to be billed to the Government in accordance with the applicable Government Contract within thirty (30) days of the certification date of the applicable Borrowing Base/Non-Default Certificate (or within forty-five (45) days of the certification date of the applicable Borrowing Base/Non-Default Certificate if incurred in connection with progress payment/milestone contracts), in each case, with no additional performance required by any person, and no condition to payment by the Government, other than receipt of an appropriate invoice); (b) may, in accordance with GAAP, be included as current assets of such Borrower, even though such amounts have not been billed to the Government; (c) satisfy all requirements of Eligible Billed Government Receivables (except that such costs have not yet been billed and are therefore not yet due and payable); and (d) are not (i) cost or profit retentions; (ii) variances from approved government reimbursement rates; or (iii) otherwise deemed ineligible by the Agent or the Required Lenders. "Event of Default" shall have the meaning assigned to such term in Section 9.1 of this Agreement. "Excess Cash Event" shall mean (i) any sale or disposition of any of the assets of any Borrower which is (a) not in the ordinary course of business; or (b) prohibited by the terms of this Agreement; (ii) the receipt by or on behalf of any Borrower of insurance proceeds in excess of (a) Five Hundred Thousand and No/100 Dollars ($500,000.00), in the aggregate, during any fiscal year, or (b) One Million and No/100 Dollars ($1,000,000.00), in the aggregate, during the term of the Facilities; and/or (iii) the reversion of any pension plan assets. "Excess Cash Flow" shall mean, as of the date of determination (which shall occur no later than March 31st of each fiscal year of the Borrowers), the sum of the Borrowers' net income, plus non-cash charges, minus scheduled principal payments, minus capital expenditures and minus any increase (or plus any decreases) in working capital requirements (i.e., any increase or decrease in the amount by which current assets exceed current liabilities), and minus any payments required to be paid by the Borrowers pursuant to certain retirement plans and repurchase agreements described on Schedule B hereto, as the case may ---------- be, in each case for the immediately preceding fiscal year, and determined on a consolidated basis in accordance with GAAP. 5 "Facility" or "Facilities" shall mean the Revolving Facility, Term Facility "A", Term Facility "B" and/or Swing Line Facility, individually or collectively, as the context may require. "Federal Funds Rate" for any day shall mean the rate per annum (rounded upward to the nearest 1/8 of 1%) determined by the Agent to be the rate per annum announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal Funds transactions arranged by Federal Funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided that if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Rate for the last day on which such rate was announced. "Fee Letter" shall mean that certain letter dated February 1, 1999, by and between the Borrower and the Agent with respect to certain fees payable in connection with the Loan. "First Union" shall mean First Union Commercial Corporation, a North Carolina corporation, acting individually, together with its successors and assigns. "Fixed Charge Coverage Ratio" shall have the meaning assigned to such term in Section 6.15(b) of this Agreement. "GAAP" shall mean domestic generally accepted accounting principles, consistently applied. "Government" shall mean the United States government or any department, instrumentality or agency thereof, and any state government or any department, instrumentality or agency thereof; it being expressly understood and agreed that the District of Columbia is not included within this definition of Government. "Government Contract Assignments" shall have the meaning assigned to such term in Section 6.11 of this Agreement. "Government Contract" or "Government Contracts" shall mean each and all written contracts between a Borrower and the Government. "Hazardous Substance" shall mean, without limitation, any flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, hazardous wastes, hazardous or toxic substances, pollutants or contaminants as 6 defined in CERCLA, HMTA, RCRA or any other applicable environmental law, rule, order or regulation. "Hazardous Wastes" shall mean, without limitation, all waste materials subject to regulation under CERCLA, RCRA or analogous state law, and/or any other applicable Federal and/or state law now in force or hereafter enacted relating to hazardous waste treatment or disposal. "HMTA" shall mean the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801 et seq.) "IES Notes" shall have the meaning attributed to such term in Section 7.8(b) of this Agreement. "Ineligible Receivables" shall mean Receivables which are (a) evidenced by a promissory note or similar instrument; (b) owed or payable by an Account Debtor pursuant to a Commercial Contract, if payment of fifty percent (50%) or more of the aggregate balance due from that Account Debtor is outstanding for more than ninety (90) days from the date of original invoice; (c) owed or payable by an Account Debtor pursuant to a Government Contract, if payment of fifty percent (50%) or more of the aggregate balance due from that Account Debtor under such Government Contract is outstanding for more than one hundred twenty (120) days from the date of original invoice; (d) owing from any person that is the subject of any (i) suit, lien, levy or judgment which could reasonably be expected to affect the collectibility of said account(s), or (ii) bankruptcy, insolvency or a similar process or proceeding; (e) owing from foreign Account Debtors; (f) unbilled as a result of rate variances or retainage provisions; (g) bonded accounts receivable; (h) at-risk receivables (i.e., receivables arising from work for which payment from an Account Debtor is not certain); or (i) other receivables deemed ineligible by the Agent or the Required Lenders in their sole and absolute discretion. "Intellectual Property Security Agreement" shall mean that certain Intellectual Property Security Agreement of even date herewith, made by the Borrowers in favor of the Agent for the ratable benefit of the Lenders, together with any and all modifications and/or amendments thereto. "Interest Expense" shall mean, as of the date of any determination, the Borrowers' aggregate cash interest expense for borrowed money (including, without limitation, premiums and interest expense arising from or relating to interest rate protection agreements and original issue discounts), plus the amount of all other interest due (whether paid or not paid) on any indebtedness of the Borrowers for the applicable measurement period, all as determined on a consolidated basis in accordance with GAAP. "Interest Period" means as to any Loan proceeds for which LIBOR based interest has been elected in accordance with this Agreement, the period commencing on 7 and including the date such LIBOR election is effective (or the effective date of the election to convert any portion of the Loan to a LIBOR interest basis in accordance with the provisions of this Agreement) and ending on and including the day which is 30, 60, 90 or 180 days thereafter, as available, and as selected in accordance with the provisions of this Agreement; provided, however, that: (i) the first day of any Interest Period shall be a Business Day; (ii) if any Interest Period would end on a day that would not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day; and (iii) no Interest Period shall extend beyond the Revolving Facility Maturity Date, Term Facility "A" Maturity Date or Term Facility "B" Maturity Date, as applicable. "Joinder Agreement" shall have the meaning assigned to such term in Section 1.10 of this Agreement. "Lender" and/or "Lenders" shall mean, individually or collectively as the context may require, First Union Commercial Corporation, a North Carolina corporation, and any and all other banking or financial institutions which have (i) extended credit to the Borrowers pursuant to this Agreement, and (ii) agreed to be bound by the terms and provisions of this Agreement. "Letter of Credit" and "Letters of Credit" shall mean, respectively, each and all of the trade and standby letters of credit issued pursuant to this Agreement, if any. "Letter of Credit Application" shall have the meaning assigned to such term in Section 2.1 of this Agreement. "Letter of Credit Administration Fee" shall have the meaning assigned to such term in Section 2.3 of this Agreement. "Letter of Credit Fee" shall have the meaning assigned to such term in Section 2.3 of this Agreement. "LIBOR" shall mean for any Interest Period with respect to any Loan proceeds for which a LIBOR election has been made and is effective, the per annum interest rate (rounded upward, if necessary, to the nearest next 1/8 of 1%) set forth on Telerate Page 3750, on an immediately available funds basis, at or about 11:00 a.m. (London time) on the date that is two (2) Business Days prior to the first day of such Interest Period, for the offering by leading banks in the London Interbank Eurodollar market of Dollar deposits for a period comparable in time to the duration of such Interest Period and in amounts comparable to the amounts for which LIBOR is to be determined, adjusted for reserve requirements, if any. If the Agent shall be unable to obtain LIBOR quotes on Telerate Page 3750, LIBOR shall be the average of those rates quoted on the REUTERS "LIBO" page for a period comparable to the applicable Interest Period (rounded upward, if necessary, to the nearest next 1/8 of 1%). 8 "LIBOR Election Form and Certification" shall mean that certain LIBOR Election Form and Certification attached as Exhibit 2 hereto. --------- "Loan" and "Loans" shall mean, individually or collectively as the context may require, the loan or loans made by the Lender(s) to the Borrowers in the aggregate maximum principal amount of Seventy-five Million and No/100 Dollars ($75,000,000.00), or so much thereof as shall be advanced or readvanced from time to time, which are represented by the Facilities, and which shall be evidenced by, bear interest and be payable in accordance with the terms and provisions of the Notes and this Agreement. "Loan Document" and "Loan Documents" shall mean, respectively, each and all of this Agreement, the Notes, the Stock Security Agreement, the Pledge of Accounts, the Assignment of Promissory Notes as Collateral, the Intellectual Property Security Agreement and each and every other document, instrument or certificate now or hereafter executed and/or delivered by any Borrower in connection with the Loan. "Mandatory Payments" shall mean the mandatory payments required to be made on the Loan pursuant to Section 1.5 of this Agreement. "Mass Mutual" shall mean Massachusetts Mutual Life Insurance Company, a Massachusetts corporation. "Mass Mutual Entities" shall mean, individually or collectively as the context may require, Mass Mutual, MassMutual Corporate Investors, a Massachusetts business trust, MassMutual Participation Investors, a Massachusetts business trust, MassMutual Corporate Value Partners, a Grand Cayman Islands corporation and MassMutual High Yield Partners II, LLC, a Delaware limited liability company, and their successors and assigns. "Material Contract" shall mean (i) any and all Government Contracts pursuant to which a Borrower is or may be (a) entitled to receive payments in excess of One Million and No/100 Dollars ($1,000,000.00), in the aggregate, per annum, or (b) obligated to make payments or have any other obligation or liability thereunder (direct or contingent) in excess of One Million and No/100 Dollars ($1,000,000.00), in the aggregate, per annum; and (ii) any and all contracts or agreements (other than Government Contracts) to which a Borrower is a party and pursuant to which such Borrower is or may be (a) entitled to receive payments in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), in the aggregate, per annum, or (b) obligated to make payments or have any other obligation or liability thereunder (direct or contingent) in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), in the aggregate, per annum. 9 "Maximum Borrowing Base" shall have the meaning assigned to such term in Section 1.3(a) of this Agreement. "Merger Agreement" shall mean that certain Agreement and Plan of Merger dated as of January 31, 1999, by and among (i) AverStar, (ii) AverStar Acquisition, Inc., a Virginia corporation, (iii) CBSI, and (iv) the Stockholders of CBSI party thereto. "Note" and "Notes" shall mean, individually or collectively as the context may require, the Revolving Facility Note(s), the Term Facility "A" Note(s), the Term Facility "B" Note(s), the Swing Line Note and/or any other promissory notes executed pursuant to this Agreement, together with all extensions, renewals, modifications, replacements and substitutions thereof and therefor. "Note "B" Holder" and "Note "B" Holders" shall mean, individually or collectively as the context may require, each and all of the holders from time to time of the Term Facility "B" Notes, and their respective successors and assigns. "Obligation" and "Obligations" shall mean, respectively, any and all obligations or liabilities of any Borrower to any Lender(s) and/or the Agent, whether now existing or hereafter created or arising, direct or indirect, matured or unmatured, and whether absolute or contingent, joint, several or joint and several, and no matter how the same may be evidenced or shall arise (including, without limitation, any and all interest rate protection agreements, overdraft protection contracts and foreign exchange contracts). "Payment Default" shall have the meaning attributed to such term in Section 9.2(c) of this Agreement. "Percentage" shall mean with respect to each Lender, the percentage set forth next to such Lender's name on Schedule 1 to this Agreement, as the same ---------- may be amended from time to time. "Permitted Liens" shall mean: (a) liens for taxes which are not yet due and payable or which are being contested in good faith and by appropriate proceedings, which (i) the Borrower has the financial ability to pay, including penalties and interest, and (ii) the non-payment thereof will not result in the execution of any such tax lien or otherwise adversely affect the interests of the Agent in any part of the Collateral; (b) deposits or pledges to secure obligations under workers' compensation, social security or similar laws, incurred in the ordinary course of business; (c) liens securing indebtedness of the Borrowers permitted by Section 7.7 of this Agreement; (d) cash deposits pledged to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature made in the ordinary course of business; (e) mechanics', workmen's, repairmen's, warehousemen's, vendors' or carriers' liens or other similar liens; provided that such liens arise in the ordinary course of the Borrower's business and secure sums which are not past 10 due, or which are separately secured by cash deposits or pledges in an amount adequate to obtain the release of such liens; (f) except as otherwise provided in this Agreement, statutory or contractual landlord's liens on the Borrower's tangible personal property located in the demised premises; (g) zoning or other similar and customary land use restrictions, which do not materially impair the use or value of the subject property; (h) judgment liens which are not prohibited by Section 7.4 of this Agreement; (i) other liens expressly permitted by the terms and provisions of this Agreement; and (j) liens in favor of the Agent. "Pledge of Accounts" shall mean that certain Pledge of Accounts of even date herewith, made by the Borrowers in favor of the Agent for the ratable benefit of the Lenders, together with any and all amendments and/or modifications thereof. "Prepayment Fee" shall have the meaning attributed to such term in Exhibit 3 to this Agreement. - --------- "Prime Rate" shall mean the rate of interest from time to time established and publicly announced by First Union as its prime rate, in First Union's sole discretion, which rate of interest may be greater or less than other interest rates charged by First Union to other borrowers and is not solely based or dependent upon the interest rate which First Union may charge any particular borrower or class of borrowers. "Principal Borrowers" shall mean, individually or collectively as the context may require, AverStar, CBSI and/or any other Borrower which, as of any date of determination, is a "significant subsidiary," as such term is defined in Title 17, Code of Federal Regulations, Part 210.1-02. "Quarterly Covenant Compliance Certificate" shall have the meaning attributed to such term in Section 6.3(d) of this Agreement. "RCRA" shall mean the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901 et. seq.). "Receivables" shall mean all of the Borrowers' present and future accounts, contracts, contract rights, chattel paper, general intangibles, notes, drafts, acceptances, chattel mortgages, conditional sale contracts, bailment leases, security agreements, contribution rights and other forms of obligations now or hereafter arising out of or acquired in the course of or in connection with any business the Borrowers conduct, together with all liens, guaranties, securities, rights, remedies and privileges pertaining to any of the foregoing, whether now existing or hereafter created or arising, and all rights with respect to returned and repossessed items of inventory. "Reduction/Termination Date" shall mean the date on which, in accordance with Section 1.8 of this Agreement, the Borrowers shall have terminated the obligation of 11 the Lender(s) to make additional advances under the Loan, or irrevocably reduced the Revolving Facility Commitment Amount. "Request for Advance and Certification" shall mean the form Request for Advance and Certification attached as Exhibit 1 hereto. --------- "Required Lenders" shall mean all of the Lenders who, at any given time (a) are not in default under or in breach of any of the terms and conditions of this Agreement applicable to such Lender, and (b) hold Notes or participation interests representing, in the aggregate, at least fifty-one percent (51%) of the aggregate Commitment Amount (excluding the Swing Line Commitment Amount). "Revolving Facility" shall mean the revolving credit facility being extended pursuant to this Agreement on the basis of Eligible Accounts Receivable, in the original maximum principal amount of Thirty Million and No/100 Dollars ($30,000,000.00). "Revolving Facility Commitment Amount" shall mean Thirty Million and No/100 Dollars ($30,000,000.00), or if the Revolving Facility Commitment Amount shall be permanently reduced pursuant to Section 1.8 of this Agreement, such lesser amount. "Revolving Facility Lender" shall mean each Lender who, as of any date of determination, owns and holds a Percentage of the Revolving Facility Commitment Amount. "Revolving Facility Maturity Date" shall mean March 17, 2004. "Revolving Facility Note" and "Revolving Facility Notes" shall mean each and all of the Revolving Facility Promissory Notes of even date herewith, made by the Borrowers and payable to the order of certain Lenders, in the aggregate maximum principal amount of Thirty Million and No/100 Dollars ($30,000,000.00), together with all extensions, renewals, modifications, replacements and substitutions thereof or therefor. "Securities Purchase Agreement" shall mean, individually or collectively as the context may require, each and all of those certain Amended and Restated Securities Purchase Agreements dated February 27, 1998, by and among AverStar, Apollo Holding, Inc., a Delaware corporation, Intermetrics, Inc., a Delaware corporation, Pacer Infotech, Inc., a Massachusetts corporation, and the respective Mass Mutual Entities, as amended by that certain letter agreement dated March 18, 1999 by and among AverStar, Apollo Holding, Inc., a Delaware corporation, Intermetrics, Inc., a Delaware corporation, Pacer Infotech, Inc., a Massachusetts corporation and the respective Mass Mutual Entities. "Shareholders Agreement" shall mean that certain Shareholders Agreement dated as of February 27, 1998, by and among AverStar and the shareholder parties thereto. 12 "Stock Security Agreement" shall mean that certain Stock Security Agreement of even date herewith, by and between AverStar and the Agent, made for the benefit of the Lender(s), together with any and all amendments and/or modifications thereof. "Subordination Agreement" shall have the meaning attributed to such term in Section 7.7 of this Agreement. "Subordinated Notes" shall have the meaning attributed to such term in the Subordination Agreement. "Swing Line Commitment" shall mean the Swing Line Lender's obligation to make Swing Line Loans to the Borrowers in an aggregate principal amount not to exceed Two Million and No/100 Dollars ($2,000,000.00). "Swing Line Commitment Amount" shall mean Two Million and No/100 Dollars ($2,000,000.00). "Swing Line Commitment Period" shall mean the period commencing on the Closing Date and ending on the fifth (5th) Business Day prior to the Revolving Facility Maturity Date. "Swing Line Facility" shall mean the swing line credit facility being extended pursuant to this Agreement, in the original maximum principal amount of Two Million and No/100 Dollars ($2,000,000.00). "Swing Line Lender" shall mean First Union Commercial Corporation, a North Carolina corporation. "Swing Line Loan" or "Swing line Loans" shall have the meaning attributed to such term in Section 1.1(b) of this Agreement. "Swing Line Note" shall mean that certain Swing Line Promissory Note of even date herewith, made by the Borrowers and payable to the order of the Swing Line Lender, in the aggregate maximum principal amount of Two Million and No/100 Dollars ($2,000,000.00) or so much thereof as shall be advanced, together with all extensions, renewals, modifications and substitutions thereof or therefor. "Swing Line Outstandings" shall mean, as of any date of determination, the aggregate principal amount of all Swing Line Loans then outstanding. "Swing Line Termination Date" shall mean the fifth (5th) Business Day prior to the Revolving Facility Maturity Date, or such earlier date on which the Revolving Facility shall terminate, as provided herein. 13 "Term Facilities" shall mean, collectively, Term Facility "A" and Term Facility "B". "Term Facility "A"" shall mean the term loan facility being extended pursuant to this Agreement, in the original principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00). "Term Facility "A" Commitment Amount" shall mean Fifteen Million and No/100 Dollars ($15,000,000.00). "Term Facility "A" Maturity Date" shall mean March 17, 2004. "Term Facility "A" Note" and "Term Facility "A" Notes" shall mean each and all of Term Facility "A" Promissory Notes of even date herewith, made by the Borrowers and payable to the order of certain Lenders, in the original aggregate principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00), together with all extensions, renewals, modifications, replacments and substitutions thereof or therefor. "Term Facility "B"" shall mean the term loan facility being extended pursuant to this Agreement, in the original principal amount of Thirty Million and No/100 Dollars ($30,000,000.00). "Term Facility "B" Commitment Amount" shall mean Thirty Million and No/100 Dollars ($30,000,000.00). "Term Facility "B" Maturity Date" shall mean March 17, 2005. "Term Facility "B" Note" and "Term Facility "B" Notes" shall mean each and all of Term Facility "B" Promissory Notes of even date herewith, made by the Borrowers and payable to the order of certain Lenders, in the original aggregate principal amount of Thirty Million and No/100 Dollars ($30,000,000.00), together with all extensions, renewals, modifications, replacements and substitutions thereof or therefor. "Total Debt" shall mean, as of the date of determination, the actual amount of borrowed money (including, without limitation, subordinated debt, capital leases and synthetic leases, that remain unpaid or outstanding as of the date of any determination), plus the aggregate amount of any and all financial guarantees, contingent obligations (including, without limitation, any obligation to provide financing pursuant to the IES Notes) and the face amount of any and all outstanding letters of credit; it being understood and agreed that trade debt incurred in the ordinary course of the Borrowers' business shall not be included in the computation of Total Debt. "Total Debt to EBITDA Ratio" shall have the meaning attributed to such term in Section 6.15 of this Agreement. 14 "Year End Compliance Certificate" shall mean the Quarterly Covenant Compliance Certificate required to be delivered by the Borrowers to the Agent and each Lender on or before the one hundred twentieth (120th) day following the close of each of the Borrowers' fiscal years. ARTICLE 1 --------- COMMITMENT Section 1.1 Maximum Loan Amount. ----------- ------------------- (a) Subject to the terms and conditions of this Agreement, (i) each Lender severally agrees to make the Loan to the Borrowers (except for the Swing Line Loan, which shall be extended only by the Swing Line Lender), with the maximum amount of each Lender's obligation being equal to the Lender's Percentage of the Revolving Facility Commitment Amount, Term Facility "A" Commitment Amount and Term Facility "B" Commitment Amount; and (ii) as more fully set forth in Section 1.1(b) below, the Swing Line Lender shall make the Swing Line Loan to the Borrowers. The Loan, including the Swing Line Loan, shall bear interest and be payable in accordance with the terms and provisions of the Notes, each of which shall be payable to the order of a Lender and all of which together (excluding the Swing Line Note) shall equal the Commitment Amount. The Notes shall be executed and delivered to the Agent on the Closing Date, and may be substituted and/or replaced from time to time upon the Agent's request if the number of Lender parties to this Agreement shall change. (b) Subject to the terms and conditions of this Agreement, the Swing Line Lender shall make swing line loans (each, a "Swing Line Loan" and collectively, the "Swing Line Loans") to the Borrowers from time to time during the Swing Line Loan Commitment Period, in the aggregate principal amount at any one time outstanding not to exceed Two Million and No/100 Dollars ($2,000,000.00); provided, however, that at no time may the aggregate outstanding principal amount of the Swing Line Loans, plus the aggregate principal amount of the Revolving Facility (including the aggregate face amount of all Letters of Credit outstanding), exceed the Maximum Borrowing Base. During the Swing Line Commitment Period, the Borrowers may use the Swing Line Commitment by borrowing, repaying Swing Line Loans in whole or in part, and reborrowing, all in accordance with the terms of this Agreement. At the request of the Swing Line Lender, the Agent may, at any time, on behalf of the Borrowers (which hereby irrevocably direct the Agent to act on their behalf) request each Lender having a Percentage of the Revolving Facility, including the Swing Line Lender, to make, and each such Lender, including the Swing Line Lender, shall make an advance under the Revolving Facility, in an amount equal to such Lender's Percentage of the Revolving Facility, of the amount of the Swing Line Outstandings as of the date such request is made. In such event, each such Lender shall make the requested proceeds available to the Agent for the account of the Swing Line Lender in accordance with the funding provisions set forth in this Agreement. The 15 proceeds of the Revolving Facility advanced pursuant to this Section 1.1(b) shall be immediately applied to repay the Swing Line Outstandings. Section 1.2 Use of Proceeds. The Loan shall be used by the Borrowers only --------------- for the following purposes: (i) to refinance certain existing indebtedness of the Borrowers; (ii) to finance certain costs and expenses incurred by the Borrowers in connection with the Closing; (iii) to finance the Acquisition and certain costs and expenses incurred by the Borrowers in connection with the Acquisition; and (iv) for working capital and general corporate needs. Notwithstanding the foregoing, the proceeds of (a) the Revolving Facility necessary to finance the Acquisition may only be used for such purpose if advanced on the Closing Date and, with respect to certain costs and expenses (including attorneys' fees and other professional fees) incurred by the Borrowers in connection with the Acquisition, may only be used for such purpose if advanced within sixty (60) days of the Closing Date; and (b) any Swing Line Loan made pursuant to this Agreement shall only be used for general working capital purposes. The Borrowers agree that the Loan proceeds (including, without limitation, Swing Line Loan proceeds) shall not be used for any other purpose without the Agent's prior written consent. Section 1.3 Borrowing Base and Maximum Advances. Notwithstanding any term ----------------------------------- or provision of this Agreement or any other Loan Document to the contrary, it is understood and agreed that in no event whatsoever shall the Agent or any Lender be obligated to: (a) advance any amount under the Revolving Facility or Swing Line Facility, or issue any Letter(s) of Credit hereunder, if such advance or the issuance of such Letter(s) of Credit would cause the aggregate amount of the outstanding Loans under the Revolving Facility, the face amount of all outstanding Letters of Credit, and the Swing Line Outstandings to exceed the lesser of (the "Maximum Borrowing Base"): (i) the Revolving Facility Commitment Amount; or (ii) the aggregate of: (A) Ninety percent (90%) of Eligible Billed Government Accounts Receivable which are outstanding less than one hundred twenty-one (121) days from the date of original invoice; plus (B) Eighty percent (80%) of Eligible Billed Commercial Accounts Receivable which are outstanding less than ninety-one (91) days from the date of original invoice; plus 16 (C) Fifty percent (50%) of Eligible Unbilled Receivables which are billable within thirty (30) days; provided, however, that in no event shall the amount set forth in this clause (C) exceed the lesser of: (1) an amount equal to twenty-five percent (25%) of the sum of (A) and (B) above; or (2) $10,000,000.00. (b) advance any amount under Term Facility "A" in excess of the Term Facility "A" Commitment Amount; and/or (c) (c) advance any amount under Term Facility "B" in excess of the Facility "B" Commitment Amount. If at any time the outstanding principal balance of the Revolving Facility (including the aggregate face amount of all Letters of Credit Outstanding and Swing Line Outstandings) exceeds the Maximum Borrowing Base (such excess being referred to herein as a "Borrowing Base Deficiency"), the Borrowers shall immediately make a principal payment in the amount of the Borrowing Base Deficiency. Notwithstanding the foregoing, in the event a Borrowing Base Deficiency shall occur as a result of (i) the Agent's determination that a particular Receivable included in computing the Maximum Borrowing Base is no longer eligible for inclusion or (ii) the Agent or the Required Lenders imposing any additional eligibility requirement which has not been previously imposed as a basis for classifying Receivables as ineligible, the Borrower shall make a principal payment in the amount of the resulting Borrowing Base Deficiency within three (3) Business Days of the date on which the Borrower is notified by the Agent of the ineligibility of the particular Receivable or the additional eligibility requirement. Section 1.4 Advances. -------- (a) Agreement to Advance and Readvance; Procedure. So long as no --------------------------------------------- Event of Default shall have occurred and be continuing, and no act, event or condition shall have occurred and be continuing which with notice or the lapse of time, or both, shall constitute an Event of Default, and subject to the terms and provisions of this Agreement, the Lender(s) shall (i) advance and readvance the proceeds of the Revolving Facility from time to time in accordance with this Agreement; and (ii) advance the proceeds of the Term Facilities, in their entirety, to the Borrowers at Closing. Requests for advances of Loan proceeds with respect to the Revolving Facility shall be in the form of Exhibit 1 hereto, --------- and requests for advances of Swing Line Loan proceeds shall be in the form of Exhibit 1(a) hereto; it being understood and agreed that in each case such - ------------ requests may be made via facsimile on a Business Day if the Borrower provides the Agent, in advance, with a written 17 list of the names of the specific officers authorized to request disbursements by facsimile. Upon request by the Agent, the Borrower shall confirm in an original writing each facsimile request for advance made by the Borrower. Notwithstanding the foregoing, (a) the Lender(s) shall have no obligation to make any advance with respect to the Revolving Facility after the Revolving Facility Maturity Date; and (b) the Swing Line Lender shall have no obligation to make any advance with respect to the Swing Line Facility after the Swing Line Termination Date. (b) Interest Rate Election; Certain Advance Procedures and Limits. ------------------------------------------------------------- Amounts advanced in connection with the Loan shall bear interest on a Base Rate basis or LIBOR basis as more fully set forth in the Notes, except that Swing Line Loans shall only be made available to the Borrowers on a Base Rate basis. The Borrowers' right to request LIBOR based interest, as well as the terms, conditions and requirements relating thereto, are set forth in the Notes and/or on Exhibit 3 of this Agreement, and the parties expressly acknowledge and --------- consent to such terms, conditions and requirements. Advances bearing interest on a Base Rate basis shall be in minimum and incremental amounts of One Hundred Thousand and No/100 Dollars ($100,000.00), and shall be made available on a same-day basis, if requested by 12:00 Noon Washington, D.C. time on a Business Day. Advances bearing interest on a LIBOR basis shall be in a minimum amount of Five Hundred Thousand and No/100 Dollars ($500,000.00) and in incremental amounts of One Hundred Thousand and No/100 Dollars ($100,000.00), and shall be made available three (3) Business Days after request therefor, subject to the terms of the Loan Documents. It is expressly understood and agreed that the Borrowers shall have the right, subject to the foregoing terms, conditions and requirements, to elect that amounts previously advanced and outstanding under the Facilities bear interest on a LIBOR basis following the Agent's receipt of a LIBOR Election Form and Certification, in the form attached as Exhibit 2 to this --------- Agreement. Section 1.5 Additional Mandatory Payments; Reduction of Commitment. In ------------------------------------------------------ addition to all other sums payable by the Borrowers pursuant to any of the Notes, this Agreement or any other Loan Document, the Borrowers shall also make mandatory payments on the Notes (applied to the Facilities as provided hereinbelow), in the following amounts: (i) one hundred percent (100%) of the cash proceeds (net of reasonable and customary costs paid to unrelated and unaffiliated third parties in connection with the particular transaction) arising from any Excess Cash Event; (ii) seventy-five percent (75%) of the cash proceeds (net of reasonable and customary costs paid to unrelated and unaffiliated third parties in connection with the particular transaction) arising from any issuance by the Borrower of subordinated debt after the Closing Date ("Subordinate Debt Issuance"); 18 (iii) fifty percent (50%) of the cash proceeds (net of reasonable and customary costs paid to unrelated and unaffiliated third parties in connection with the particular transaction) arising from any issuance by the Borrower of any equity interests in any Borrower ("Equity Issuance"); it being understood and agreed that the cash proceeds arising from the issuance of stock in connection with the stock options listed on Schedule 1.5 hereto shall not be deemed an Equity ------------ Issuance for the purpose of this clause (iii); (iv) seventy-five percent (75%) of Excess Cash Flow, if the Borrowers' Total Debt to EBITDA Ratio shall be greater than 3.0 to 1.0, calculated as of the applicable date of determination for Excess Cash Flow; and (v) fifty percent (50%) of Excess Cash Flow, if the Borrowers' Total Debt to EBITDA Ratio shall be less than or equal to 3.0 to 1.0, calculated as of the applicable date of determination for Excess Cash Flow. Mandatory payments arising from any Excess Cash Event, Subordinate Debt Issuance and/or Equity Issuance shall be due and payable in full upon the occurrence of such Excess Cash Event, Subordinate Debt Issuance and/or Equity Issuance (as applicable), and mandatory payments arising from Excess Cash Flow shall be due and payable in full simultaneously with the Agent's receipt of the Borrowing Base/Non-Default Certificate for the month of December of each calendar year (or the date on which such certificate is required to be delivered, if the Borrowers fail to deliver the same as required by this Agreement), which Borrowing Base/Non-Default Certificate shall include the Borrower's detailed computation of Excess Cash Flow. Furthermore, if the Mandatory Payment amount for Excess Cash Flow set forth in the Year End Compliance Certificate (the "Required Excess Cash Flow Payment") shall be greater than the Mandatory Payment arising from Excess Cash Flow paid by the Borrowers pursuant to the immediately preceding sentence (the "Excess Cash Flow Paid Amount"), then the Borrowers shall make an additional Mandatory Payment, simultaneously with the Borrower's submission of the Year End Compliance Certificate (or the date on which such certificate is required to be delivered, if the Borrowers fail to deliver the same as required by this Agreement), in an amount equal to the difference between the Required Excess Cash Flow Payment and the Excess Cash Flow Paid Amount Any mandatory payment(s) made pursuant to this Section 1.5 shall be accompanied by the applicable Prepayment Fee, if any, payable pursuant to Exhibit 3 of this --------- Agreement. Such mandatory payments shall be applied to the Term Facilities, in inverse order of maturities, on a pro-rata basis (unless all of the Note "B" Holders shall have instructed the Agent in writing to apply such payments first to Term Facility "A" until Term Facility "A" shall have 19 been paid and satisfied in full), then to any Swing Line Outstandings, and then to principal outstanding under the Revolving Facility. Section 1.6 Field Audits. The Agent will schedule and conduct not less ------------ than two (2) field audits per annum with respect to the Collateral and the Borrowers' accounts receivable, inventory, business and operations, and shall have the right at any time to conduct such other field audits with respect to the Collateral and the Borrowers' accounts receivable, inventory, business and operations, as the Agent deems necessary or appropriate, in its sole discretion. All field audits shall be at the cost and expense of the Borrowers; provided, however, that, except as otherwise expressly set forth below, in the absence of an Event of Default hereunder, the cost and expense to the Borrowers of field audits shall be limited to the cost and expense of no more than two (2) field audits conducted during any twelve (12) month period (the "Field Audit Cost Limitation"). Notwithstanding the foregoing, any field audit conducted with respect to the joinder of a new Borrower pursuant to Section 1.10 of this Agreement shall not be subject to the Field Audit Cost Limitation. Section 1.7 Fees. ---- (a) Commitment Fee. In addition to principal, interest and other -------------- sums payable under the Notes, so long as any amounts remain outstanding in connection with the Revolving Facility, or any Lender has any obligation to make any advance in connection therewith, the Borrowers agree to pay to the Agent, for the benefit of the Lender(s), pro-rata based on each Lender's Percentage of the Revolving Facility Commitment Amount, a quarter-annual commitment fee (the "Commitment Fee"), at the annual rate corresponding to the Borrower's Total Debt to EBITDA Ratio reported as of the immediately preceding quarter, as set forth on Exhibit 7 hereto, and calculated on the difference between (i) the Revolving --------- Facility Commitment Amount, and (ii) the sum of the average daily outstanding principal balance of the Revolving Facility during the applicable quarter, plus the aggregate face amount of all Letters of Credit issued and/or outstanding during the applicable quarter. Notwithstanding the foregoing, during the six (6) month period immediately following the Closing Date, the Commitment Fee annual percentage shall be fixed and equal to one-half of one percent (.50%). The Commitment Fee shall be calculated on the basis of the actual number of days elapsed and a three hundred sixty (360) day year, shall be due for any quarter in which the Revolving Facility is available to the Borrower or outstanding (for all or any portion of such quarter), and shall be payable in arrears, commencing on March 31, 1999, and continuing on the last Business Day of every third (3rd) calendar month thereafter so long as this Agreement remains in effect. (b) Out-of-Pocket Fees and Expenses. The Borrowers shall timely pay ------------------------------- all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and expenses of counsel for the Agent, and of other special and local counsel and other experts, if any, engaged by the Agent) from time to time incurred by the Agent in connection with the Agent's administration of, preservation of rights in and enforcement of this Agreement, 20 the other Loan Documents and the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, the Borrowers shall be liable for all reasonable out-of-pocket costs and expenses associated with fixed asset appraisals and environmental reports deemed necessary or appropriate by the Agent, in its reasonable discretion, as well as any and all amendments, waivers and/or consents relating to any of the Facilities. Furthermore, following the occurrence of an Event of Default which has continued unremedied beyond any applicable notice and/or grace period, the Borrowers shall be liable for all reasonable attorneys' fees and expenses incurred by each Lender in connection with such Lender's preservation of rights in and enforcement of this Agreement, the other Loan Documents and the transactions contemplated by this Agreement. (c) Letter of Credit Fees. The Borrowers shall also pay all fees and --------------------- expenses related to Letters of Credit, as set forth in Article 2 below. Section 1.8 Termination of Advances; Reduction of the Revolving Facility ------------------------------------------------------------ Commitment Amount. The Borrowers may (a) following the date on which the Term - ----------------- Facilities shall have been paid and satisfied in full, terminate the obligation of the Lender(s) to make additional advances under the Revolving Facility, or (b) irrevocably reduce the Revolving Facility Commitment Amount in whole or in part; provided that, in each case, (i) the Borrowers shall have provided written notice thereof to the Agent at least five (5) Business Days prior to the Reduction/Termination Date; (ii) any reduction of the Revolving Facility Commitment Amount shall be in minimum and incremental amounts of Five Hundred Thousand and No/100 Dollars ($500,000.00), and after giving effect to any such reduction, the aggregate outstanding principal amount of the Revolving Facility, together with all accrued interest and all other sums payable under the Revolving Facility, shall not exceed the Maximum Borrowing Base; (iii) simultaneously with any such reduction or termination of the Revolving Facility Commitment Amount, the Borrowers shall have paid to the Agent, for the benefit of the Lender(s), pro-rata based on each Lender's Percentage of the Revolving Facility Commitment Amount, the applicable Prepayment Fee, if any; and (iv) no Event of Default exists hereunder and no act, event or condition shall have occurred or be continuing which with notice or the passage of time, or both, would constitute an Event of Default. Section 1.9 Appointment of Averstar. Each Borrower acknowledges that (i) ----------------------- the Lenders have agreed to extend credit to each of the Borrowers on an integrated basis for the purposes herein set forth; (ii) it is receiving direct and/or indirect benefits from each such extension of credit; and (iii) the obligations of the "Borrower" or "Borrowers" under this Agreement are the joint and several obligations of each Borrower. To facilitate the administration of the Loan, each Borrower hereby irrevocably appoints AverStar as its true and lawful agent and attorney-in-fact with full power and authority to execute, deliver and acknowledge on such Borrower's behalf, each Request for Advance and Certification, Borrowing Base/Non-Default Certificate and all other Loan Documents or other materials provided or to be provided to the Agent or Lenders pursuant to this Agreement or in connection with the Loan. This power-of- attorney is coupled with an 21 interest and cannot be revoked, modified or amended without the prior written consent of the Agent. Upon request of the Agent, each Borrower shall execute, acknowledge and deliver to the Agent a form Power of Attorney confirming and restating the power-of-attorney granted herein. Section 1.10 Joinder Of New Subsidiaries and Affiliates. Any present or ------------------------------------------ future subsidiary of any Borrower in which such Borrower now or hereafter owns, directly or indirectly, an ownership interest of greater than fifty percent (50%) shall, at the Agent's option, execute and deliver to the Agent (a) a Joinder Agreement in the form attached hereto as Exhibit 6 (A "Joinder --------- Agreement"), pursuant to which such subsidiary shall (i) join in and become a party to this Agreement and the other Loan Documents; (ii) agree to comply with and be bound by the terms and conditions of this Agreement and all of the other Loan Documents; and (iii) become a "Borrower" and thereafter be jointly and severally liable for the performance of all the past, present and future obligations and liabilities of the Borrowers hereunder and under the Loan Documents; and (b) such other documents, instruments and agreements as may be reasonably required by the Agent in connection therewith (including, without limitation, an opinion of counsel), in form and substance acceptable to the Agent in all respects. The Borrowers acknowledge and agree that the Agent shall perform a field audit of the accounts receivable, inventory, business and operations of any present or future subsidiary proposed to be joined as a "Borrower" hereunder, if requested by the Required Lenders, and without limiting any other terms and provisions of this Agreement, the results of such field audit must be reasonably satisfactory to the Agent. ARTICLE 2 --------- LETTERS OF CREDIT Section 2.1 Issuance. The Borrowers and Lenders acknowledge that from -------- time to time the Borrowers may request that First Union issue or amend Letter(s) of Credit. Subject to the terms and conditions of this Agreement, and any other reasonable requirements for letters of credit normally and customarily imposed by First Union from time to time, First Union agrees to issue such requested letters of credit, provided that no Event of Default has occurred and is continuing, and no act, event or condition which with notice or the passage of time, or both, would constitute an Event of Default has occurred and is continuing. If any such Letter(s) of Credit are issued by First Union, each Revolving Facility Lender shall purchase from First Union a risk participation with respect to such Letter(s) of Credit in an amount equal to such Lender's Percentage of such Letter(s) of Credit. First Union shall have no obligation to issue any Letter of Credit which has an expiration date beyond the Revolving Facility Maturity Date, unless the Borrowers shall have deposited with the Agent, concurrent with the issuance of any such Letter of Credit, cash security therefor in an amount equal to the face amount of the Letter of Credit. Any request for a Letter of Credit shall be made by the Borrowers submitting to the Agent an Application and Agreement for Letter of Credit or Amendment to Letter of Credit (each 22 being herein referred to as a "Letter of Credit Application") on First Union's standard form, at least three (3) Business Days prior to the date on which the issuance or amendment of the Letter of Credit shall be required, which Letter of Credit Application shall be executed by an authorized officer of the Borrower, and be accompanied by such other supporting documentation and information as the Agent may from time to time reasonably request. Each Letter of Credit Application shall be deemed to govern the terms of issuance of the subject Letter of Credit, except to the extent inconsistent with the terms of this Agreement. It is understood and agreed that Letters of Credit shall not be issued for durations of longer than one (1) year. Any outstanding Letter of Credit may be renewed from time to time; provided that (i) at least sixty (60) days' prior written notice thereof shall have been given by the Borrowers to the Agent; and (ii) as of the date of application for such renewal, and as of the date of issuance of such renewal, no Event of Default exists under the terms and provisions of the particular Letter of Credit or this Agreement, and no act, event or condition has occurred which with notice or the passage of time, or both, would constitute an Event of Default under the terms and provisions of the particular Letter of Credit or this Agreement. Section 2.2 Amounts Advanced Pursuant to Letters Of Credit. Upon the ---------------------------------------------- issuance of any Letter(s) of Credit (i) any amounts drawn under any Letter of Credit shall be deemed advanced ratably under the Revolving Facility Notes, shall bear interest and be payable in accordance with the terms of the Revolving Facility Notes and shall be secured by the Collateral (in the same manner as all other sums advanced under the Revolving Facility Notes); and (ii) each Revolving Facility Lender shall purchase from First Union such risk participations in the Letter(s) of Credit as shall be necessary to cause each such Lender to share the funding obligations with respect thereto ratably in accordance with its particular Percentage. It is expressly understood and agreed that all obligations and liabilities of the Borrowers to First Union in connection with any such Letter(s) of Credit shall be deemed to be "Obligations," and the Agent shall not be required to release its security interest in the Collateral until (i) all Notes and all other sums due to the Lender(s) in connection with the Loan have been paid and satisfied in full, (ii) all Letters of Credit have been canceled or expired, and (iii) no Lender has any further obligation or responsibility to make additional Loan advances or issue additional Letters of Credit. Furthermore, in no event whatsoever shall First Union have any obligation to issue any Letter of Credit which would cause the face amount of all then outstanding Letters of Credit issued for the benefit of the Borrower, in the aggregate, to exceed Five Million Dollars ($5,000,000.00). Section 2.3 Letter of Credit Fees. In connection with each Letter of --------------------- Credit issued, amended or renewed pursuant to this Agreement, the Borrowers shall pay: (i) to the Revolving Facility Lender(s) ratably, in advance, a per annum fee (the "Letter of Credit Fee") at the annual rate corresponding to the Borrower's Total Debt to EBITDA Ratio reported as of the immediately preceding quarter, as set forth on Exhibit 7 hereto, which shall be calculated on the face --------- amount of each Letter of Credit as of the date of issuance (or the anniversary or amendment date, as applicable), and shall be calculated on the basis of 23 the actual number of days elapsed and a three hundred sixty (360) day year; and (ii) to First Union, customary issuance and administrative charges in an amount not less than one-eighth of one percent (.125%) of the face amount of each Letter of Credit issued and/or outstanding (the "Letter of Credit Administration Fee"). The Letter of Credit Administration Fee shall be due and payable in full, in advance, on the date the Letter of Credit is issued, amended or renewed. ARTICLE 3 --------- SECURITY Section 3.1 Security Generally. As collateral security for the Loan and ------------------ all other Obligations, the Borrowers hereby grant and convey to the Agent, for the ratable benefit of the Lender(s), a security interest in all of the following (collectively, the "Collateral"): Receivables. All of each Borrower's present and future accounts, ----------- contracts, contract rights (including, without limitation, all of each Borrower's rights and remedies under the Merger Agreement), chattel paper, general intangibles, notes (including, without limitation, the IES Notes), drafts, acceptances, chattel mortgages, conditional sale contracts, bailment leases, security agreements and other forms of obligations now or hereafter arising out of or acquired in the course of or in connection with any business any Borrower conducts, together with all liens, guaranties, securities, rights, remedies and privileges pertaining to any of the foregoing, whether now existing or hereafter created or arising, and all rights with respect to returned and repossessed items of inventory; Inventory. All of each Borrower's inventory and goods (as defined in --------- the Uniform Commercial Code in effect in the Commonwealth of Virginia) now or hereafter owned by each Borrower, whenever acquired and wherever located, and whether held for sale or lease or furnished or to be furnished under contracts of service, and all raw materials, work in process and materials now or hereafter owned by any Borrower, wherever located, and used or consumed in its business, including all returned and repossessed items; and all other property now or hereafter constituting inventory (as defined in the Uniform Commercial Code in effect in the Commonwealth of Virginia); 24 Other Collateral. All of each Borrower's present and future ---------------- furniture, fixtures, equipment, machinery, supplies and other assets and personal property of every type or nature whatsoever, including without limitation, all of each Borrower's present and future investment property (as defined in the Uniform Commercial Code in effect in the Commonwealth of Virginia), instruments, documents, inventions, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, goodwill, registrations, copyrights, licenses, franchises, customer lists, tax refunds, tax refund claims, rights of claims against carriers and shippers, leases and rights to indemnification; Leases. All of each Borrower's present and future right, title and ------ interest in and to any and all leases, occupancy agreements, subleases, contracts, licenses, agreements and other understandings of or relating to the use, enjoyment and occupancy of real property or any improvements thereon; Stock. All of AverStar's right, title and interest in and to all of ----- the issued and outstanding capital stock of the Borrowers (other than AverStar), whether common and/or preferred, and whether now or hereafter issued or outstanding and whether now or hereafter acquired by AverStar, together with all voting or other rights appurtenant thereto, including, without limitation, the right to receive all dividends and/or distributions, and all proceeds thereof, pursuant to the terms and conditions of the Stock Security Agreement; together with all right, title and interest of any Borrower in and to all of the issued and outstanding capital stock or other ownership interests of any entity, whether now or hereafter issued or outstanding and whether now or hereafter acquired by such Borrower, together with all voting or other rights appurtenant thereto, including, without limitation, the right to receive all dividends and/or distributions, and all proceeds thereof; Accounts. All of each Borrower's bank accounts, cash from time to -------- time on deposit therein and all interest from time to time earned thereon, pursuant to the Pledge of Accounts; Records. All of each Borrower's records, documents and files, in ------- whatever form, pertaining to the foregoing or any part thereof; and 25 Proceeds, Etc. Any and all cash and non-cash proceeds, increases, -------------- substitutions, replacements and/or additions to any or all of the foregoing. Notwithstanding the foregoing, the above described grant and conveyance shall not be deemed to include the grant or conveyance of any Government Contract, which by its terms or applicable law may not be conveyed; it being understood, however, that in any such situation(s), the Agent's security interest shall include (i) the entirety of each Borrower's right, title and interest in and to all accounts receivable and all other proceeds directly or indirectly arising from such Government Contract, and (ii) all other rights and interests which each Borrower may lawfully convey to the Agent. Section 3.2 No Preference or Priority. It is expressly understood and ------------------------- agreed that each of the Notes shall be secured without preference or priority; it being the intention of the parties that the Notes shall be co-equal and coordinate in right of payment of principal, interest, late charges and other sums due thereunder, except as may otherwise be expressly set forth herein. Section 3.3 Release of Security Interest. At such time as (i) the Notes ---------------------------- and all other sums due to the Lender(s) pursuant to all of the Loan Documents and/or in connection with the Loan have been paid and satisfied in full, (ii) all Letters of Credit and interest rate protection agreements have been cancelled, terminated or expired, and (iii) no Lender has any further obligation or responsibility hereunder to make additional Loan advances or issue additional Letters of Credit, the Agent shall, upon request of the Borrower and at no cost to the Agent or any Lender, execute and deliver such documentation as the Borrower may reasonably request to release the Collateral from the Agent's lien, terminate this Agreement and mark the Notes paid and satisfied in full. ARTICLE 4 --------- CONDITIONS TO THE OBLIGATIONS OF THE LENDER(S) The obligation of the Lender(s) to proceed to Closing shall be subject to the following conditions: Section 4.1 Satisfaction of Commitment Letter Conditions; Compliance with ------------------------------------------------------------- Agreements. The Borrowers shall have satisfied all conditions precedent to - ---------- Closing set forth in the Commitment Letter, including without limitation, each of the following items: (a) Execution and delivery of Loan Documents, as well as other ancillary documentation, in each case satisfactory to the Agent in all respects. 26 (b) The Agent's review of and satisfaction with the (a) organizational structure of the Borrowers, (b) the Loan structure, and (c) tax, ownership, capital and legal structure of the Borrowers. (c) The Agent shall have a perfected first lien security interest in all Collateral described herein, with such exceptions as shall be satisfactory to the Agent. Additionally, for each Government Contract the Agent selects to have specifically assigned pursuant to the Assignment of Claims Act of 1940 as of the date of Closing, the Borrowers shall have executed all documents necessary to be executed by the Borrowers in order to cause compliance with such act. (d) The Agent's review and satisfaction with the final terms and conditions of, and all documentation relating to, the Acquisition (including all representations, warranties and indemnities contained in the Merger Agreement and related documents, as well as arrangements for the transition of management, termination of employees and non-compete matters). (e) The Agent's review and satisfaction with evidence provided by the Borrowers that all conditions to closing the Acquisition have been satisfied or waived. (f) Receipt of legal opinion(s) from counsel to the Borrowers, in form and substance acceptable to the Agent in all respects. (g) Evidence of each Borrower's solvency (i.e., a consolidated balance sheet dated as of the Closing Date), in form and substance satisfactory to the Agent in all respects. (h) The Agent's satisfaction that the Loan shall be in full compliance with all legal requirements, including without limitation, that the Borrowers have obtained all necessary regulatory and third party consents and approvals. (i) Delivery of, and Agent's satisfaction with, an initial Borrowing Base/Non-Default Certificate. (j) Evidence satisfactory to the Agent that the Borrowers are in full compliance with all financial covenants set forth in this Agreement as of the Closing Date. (k) Evidence satisfactory to the Agent of the repayment in full of all outstanding indebtedness of the Borrowers, both direct and contingent, other than trade payables incurred in the ordinary course of business, operating leases and/or other indebtedness permitted pursuant to the terms and provisions of this Agreement; it being understood and agreed that the indebtedness owing by the Borrower to Mass Mutual shall have been modified or amended to the Agent's satisfaction. 27 (l) No litigation by any entity (private or governmental) shall be pending or threatened against any Borrower at Closing (i) with respect to the Loan, Loan Documents or transactions contemplated thereby; or (ii) which in the Agent's good faith judgment could reasonably be expected to have a materially adverse effect on the business, property, assets, liabilities, condition (financial or otherwise), or results of operations of the Borrowers going forward. (m) The Agent's satisfaction that the Borrowers will be able to service and maintain any performance bonds that may be required in the ordinary course of business. (n) The Borrowers' compliance in all material respects with all applicable federal, state, local and foreign laws and regulations, including all applicable labor and environmental laws and regulations. (o) The Agent's satisfaction with the terms, conditions and existence of insurance coverage appropriate to the conduct of the Borrowers' business. (p) No material adverse change in the business, assets, properties, prospects or condition (financial, proforma financial or otherwise) of AverStar or CBSI shall have occurred since the date of the most recent financial statements delivered to the Agent, and the Agent shall be satisfied with the business, assets, properties, prospects and condition (financial, proforma financial and otherwise) of AverStar and CBSI. (q) The Agent's satisfaction that prior to and during the syndication of the Loan, there shall be no additional offering, placement or arrangement of any debt securities or bank financing by or on behalf of the Borrowers. (r) All costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of closing the transactions hereunder shall have been paid in full, to the extent due. Section 4.2 No Default. There shall exist no Event of Default, and no ---------- act, event or condition shall have occurred which with notice or the lapse of time, or both, would constitute an Event of Default; and the Borrowers shall have performed all agreements theretofore to be performed by the Borrowers pursuant to the Commitment Letter. Section 4.3 Documentation. The Agent shall have received such certificates ------------- of good standing, corporate resolutions, opinions and certifications, in such form and content and from such parties, as the Agent shall require. All documentation relating to the Acquisition, the Loan and all related transactions must be satisfactory in all respects to the Agent and its counsel. 28 ARTICLE 5 --------- REPRESENTATIONS AND WARRANTIES ------------------------------ To induce the Lender(s) to enter into this Agreement, each Borrower jointly and severally represents, warrants, covenants and agrees as follows: Section 5.1 Corporate Existence and Qualification. Each Borrower is a ------------------------------------- corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, with all corporate power and authority and all necessary licenses and permits to own, operate and lease its properties and carry on its business as now being conducted. Each Borrower is duly qualified and authorized to do business and is in good standing in each jurisdiction in which the nature of its activities or the character of its properties makes qualification necessary, except for such failures to qualify which would not have a material adverse effect on (a) the Borrowers, taken as a whole, or any of the Principal Borrowers or (b) the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers, to conduct their respective business or operations. Section 5.2 Corporate Authority; Noncontravention. The execution, ------------------------------------- delivery and performance by each Borrower of its obligations set forth in this Agreement, the Notes and the other Loan Documents (i) have been duly authorized by all necessary corporate and/or stockholder action; (ii) do not require the consent of any governmental body, agency or authority; (iii) will not violate or result in (and with notice or the lapse of time will not violate or result in) the breach of any provision of the Articles of Incorporation/Certificate of Incorporation or By-laws of such Borrower, any material indenture, material instrument, material agreement or other material undertaking to which such Borrower is a party or by which such Borrower is bound, or any order or regulation of any governmental authority or arbitration board or tribunal; and (iv) except as expressly permitted by the terms and provisions of this Agreement, result in the creation of a lien, charge or encumbrance of any nature upon any of the properties or assets of any Borrower. When the Loan Documents are executed and delivered, they will constitute legal, valid and binding obligations of the Borrowers, enforceable against the Borrowers in accordance with their respective terms, except as such enforceability may be subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to the effect of general principals of equity (whether considered in a proceeding in equity or at law). Section 5.3 Financial Position. The financial statements dated December ------------------ 31, 1998, copies of which have been delivered to the Agent, present fairly the financial condition of the Borrowers as of the date thereof and the results of the Borrowers' operations for the periods indicated therein, were prepared in accordance with GAAP, are true and accurate in all material respects, and with respect to the Borrowers (other than CBSI), are not misleading in any respect. All liabilities, fixed or contingent (other than those liabilities, whether fixed or contingent, not required by GAAP to be reflected or 29 reserved on financial statements and which (i) are not letters of credit or (ii) do not exceed $10,000.00 individually or $200,000 in the aggregate), are fully shown or provided for on the referenced financial statements or the notes thereto as of the dates thereof. There has been no material adverse change in the business, property or condition (financial or otherwise) of any Borrower since the date of the most recent financial statement dated December 31, 1998, and all other financial statements and information delivered to First Union prior to the Closing Date are true and accurate in all material respects, and are not misleading in any material respect. Section 5.4 Payment of Taxes. Each Borrower has filed all tax returns and ---------------- reports required to be filed by it with the United States Government and/or with all state and local governments, and has paid in full or made adequate provision on its books for the payment of all taxes, interest, penalties, assessments or deficiencies shown to be due or claimed to be due on or in respect of such tax returns and reports, except to the extent that the validity or amount thereof is being contested in good faith by appropriate proceedings and the non-payment thereof pending such contest will not result in the execution of any tax lien or otherwise adversely affect the Agent's interests in any part of the Collateral. Section 5.5 Accuracy of Submitted Information; Omissions. All documents, -------------------------------------------- certificates, information, materials and financial statements (other than projections) furnished or to be furnished to the Agent or any Lender pursuant to this Agreement or otherwise in connection with the Loan, as of the date furnished, (i) are and will be true and correct in all material respects; (ii) do not and will not contain any untrue statement of a material fact; and (iii) do not and will not omit any material fact necessary to make the statements contained therein or herein not misleading. No Borrower is aware of any fact which has not been disclosed to the Agent in writing which materially adversely affects, or so far as any Borrower can now reasonably foresee, could reasonably be expected to materially adversely affect, the properties, business, profit or condition (financial or otherwise) of the Borrowers, taken as a whole, or any of the Principal Borrowers or the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers to perform their respective obligations under this Agreement or any other Loan Document. Section 5.6 Government Contracts. Except as set forth on Schedule 5.6(a) -------------------- --------------- hereto, no notice of suspension, debarment, cure notice, show cause notice or notice of termination for default has been received by any Borrower (or to the best of each Borrower's knowledge issued) in connection with any Government Contract, and no Borrower is a party to any pending (or to each Borrower's knowledge, there is no threatened) suspension, debarment or termination for default issued or being pursued by the Government or any other adverse Government action or proceeding in connection with any Government Contract. All Government Contracts which have a remaining value in excess of One Million and No/100 Dollars ($1,000,000.00) and a remaining term of twelve (12) months or longer are listed on Schedule 5.6(b) hereto, and documentation necessary for --------------- compliance with the Assignment of Claims Act, has been executed and 30 delivered by the Borrowers to the Agent in connection with each such Government Contract. Section 5.7 No Defaults or Liabilities. Except as set forth on Schedule -------------------------- -------- 5.7 hereto, no Borrower is (a) in default in the performance of any obligation, - --- covenant or condition contained in any agreement to which it is a party, which default could reasonably be expected to materially adversely affect the properties, business, profit or condition (financial or otherwise) of the Borrowers, taken as a whole, or any of the Principal Borrowers or the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers to perform their respective obligations under this Agreement or any other Loan Document; or (b) aware of any condition, act, event or occurrence, including, without limitation, any pending or threatened litigation, legal or administrative proceeding or investigation, not disclosed to the Agent in writing which could reasonably be expected to prejudice the Agent's or any Lender's rights under any Loan Document in any respect. Section 5.8 No Violations of Law. No Borrower is in violation of any -------------------- Applicable Laws, except for such violations which could not reasonably be expected to materially adversely affect the properties, business, profit or condition (financial or otherwise) of the Borrowers, taken as a whole, or any of the Principal Borrowers or the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers to perform their respective obligations under this Agreement or any other Loan Document; no Borrower has failed to obtain any material license, material permit, material franchise or other material governmental authorization necessary to the ownership of its properties or to the conduct of its business; and each Borrower has conducted its business and operations in full compliance with all Applicable Laws, except for any non- compliance which is not reasonably likely to limit the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers, to conduct their respective business or operations in the manner in which the same are now being conducted. Section 5.9 Litigation and Proceedings. Except as set forth on Schedule -------------------------- -------- 5.9 hereto, no action, suit or proceeding against or affecting any Borrower is - --- presently pending, or to the knowledge of each Borrower, threatened, in any court, before any governmental agency or department, or before any arbitration board or tribunal, which could reasonably be expected to result in any judgment or liability against any Borrower in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) and which is not fully covered by insurance. No Borrower is aware of any existing basis that is reasonably likely to result in any such action, suit or proceeding. No Borrower is in default in any material respect of any applicable order, writ, injunction or decree of any court, governmental authority or arbitration board or tribunal. Section 5.10 Security Interest in the Collateral. Each Borrower is the ----------------------------------- sole legal and beneficial owner of the Collateral owned or purported to be owned by it, free and clear of all liens, claims and encumbrances of any nature, except for the Permitted Liens. Each Borrower has provided or will provide to the Agent upon request written landlord 31 waivers from each lessor/landlord of any premises at which such Borrower's tangible personal property (having an aggregate value in excess of $500,000.00) is located. Each such landlord waiver subordinates or will subordinate any statutory, contractual or other lien the lessor/landlord may have in any of the Collateral to the lien, operation and effect of the lien being granted to the Agent pursuant to this Agreement. Section 5.11 Principal Place of Business; Location of Books and Records; ----------------------------------------------------------- No Inventory. Each Borrower (other than CBSI) maintains its principal place of - ------------ business and the office where it keeps its books and records with respect to accounts and contracts rights at AverStar's offices located at the address set forth in the preamble of this Agreement. CBSI's principal place of business and the office where it keeps its books and records with respect to accounts and contracts rights is at 2750 Prosperity Avenue, Suite 300, Fairfax, Virginia 22031. Set forth on Schedule 5.11 hereto is a list of each Borrower's business ------------- locations as of the Closing Date, and all places where Collateral having a value in excess of One Hundred Thousand and No/100 Dollars ($100,000.00), in the aggregate, is located. Except as expressly set forth above, the Borrowers agree to notify the Agent in writing at least ten (10) days prior to any change in any Borrower's principal place of business, or any change in the location of the office where the Borrowers keep their books and records with respect to accounts and contract rights, or any change of or addition to the locations where any Collateral is located. Section 5.12 Fiscal Year. Each Borrower's fiscal year ends on December ----------- 31. Section 5.13 Pension Plans. ------------- (a) The present value of all benefits vested under all "employee pension benefit plans," as such term is defined in Section 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which are defined benefit plans, and which are from time to time maintained by each Borrower (individually, a "Pension Plan" and collectively, the "Pension Plans") did not, as of December 31, 1998, exceed the value of the assets of the Pension Plans allocable to such vested benefits; (b) No Pension Plan, trust created thereunder or other person dealing with any Pension Plan has engaged in a non-exempt transaction proscribed by Section 406 of ERISA or a non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code, that could have a material adverse effect on the Borrowers, taken as a whole, or any of the Principal Borrowers or the ability of the Borrowers, taken as a whole, or any of the Principal Borrowers to conduct their respective business or operations; (c) No Pension Plan or trust created thereunder has been terminated within the last three (3) years (except pursuant to a "standard termination," within the meaning of Section 4041(B) of ERISA), and there have been no material "reportable events" (as such term is defined in Section 4043 of ERISA and the regulations thereunder) 32 with respect to any pension plan or trust created within the three (3) year period immediately preceding the Closing Date (other than reportable events for which reporting has been waived pursuant to applicable PGBC regulations); and (d) No Pension Plan or trust created thereunder has incurred any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA or Section 412 of the Internal Revenue Code) as of the end of any plan year, whether or not waived. Section 5.14 O.S.H.A., ADA and Environmental Compliance. ------------------------------------------- (a) Each Borrower is in compliance with, and its facilities, business assets, property, leaseholds and equipment are in compliance with, the provisions of the Federal Occupational Safety and Health Act ("O.S.H.A."), the Americans with Disabilities Act ("ADA"), the Environmental Protection Act, RCRA and all other applicable environmental and handicapped access laws; and there have been no citations, notices, notifications or orders of any such non- compliance issued to any Borrower or relating to its business, assets, property, leaseholds or equipment under any such laws, rules or regulations; (b) each Borrower has been issued all required federal, state and local licenses, certificates and permits necessary or appropriate in the operation of its facilities, businesses, assets, property, leaseholds and equipment; and (c) (i) there are no visible signs of releases, spills, discharges, leaks or disposal (collectively referred to herein as "Releases") of Hazardous Substances at, upon, under or within any real property owned, or premises leased, by any Borrower; (ii) to the knowledge of each Borrower, there are no underground storage tanks or polychlorinated biphenyls on any real property owned, or premises leased, by any Borrower; (iii) to the knowledge of each Borrower, no real property owned, or premises leased, by any Borrower has ever been used by any Borrower or any other person as a treatment, storage or disposal facility for Hazardous Waste; and (iv) to the knowledge of each Borrower, no Hazardous Substances are present on any real property owned, or premises leased, by any Borrower, except for such quantities of Hazardous Substances as are handled in accordance with all applicable manufacturer's instructions and governmental regulations, and as are necessary or appropriate for the operation of the business of such Borrower. Each Borrower, for itself and its successors and assigns, hereby covenants and agrees to indemnify, defend and hold harmless the Agent and each Lender from and against any and all liabilities, losses, claims, damages, suits, penalties, costs and expenses of every kind or nature, including, without limitation, reasonable attorneys' fees arising from or in connection with (i) the presence or alleged presence of any Hazardous Substance or Hazardous Waste on, under or about any property of any Borrower (including, without limitation, any property or premises now or hereafter owned or leased by any Borrower), or which is caused by or results from, directly or indirectly, any act or omission to act by any Borrower; and (ii) any Borrower's violation of the ADA or any environmental statute, ordinance, order, rule or 33 regulation of any governmental entity or agency thereof (including, without limitation, any liability arising under CERCLA, RCRA, HMTA or any Applicable Laws). Section 5.15 Intellectual Property. All registered patents, patent --------------------- applications, registered trademarks, trademark applications, registered copyrights, copyright applications, registered tradenames, trade secrets and licenses necessary for the conduct of the business of each Borrower, if any, are and shall remain (i) owned or utilized by such Borrower, (ii) domestic property of such Borrower; and (iii) valid and, except with respect to licenses and trade secrets, have been duly registered or filed with all appropriate governmental authorities; there is no objection or, to the knowledge of any Borrower, pending challenge to the validity of any such patent, trademark, copyright, tradename, trade secret or license, and no Borrower is aware of any grounds for any such challenge or objection thereto. Except as set forth on Schedule 5.15 attached ------------- hereto, no Borrower pays any royalty to anyone in connection with any patent, trademark, copyright, tradename, trade secret or license; and no Borrower has assigned and each Borrower has the right to bring any legal action for the infringement of any such patent, trademark, copyright, tradename, trade secret or license that is owned by such Borrower in accordance with Applicable Laws. Section 5.16 Existing or Pending Defaults; Material Contracts. All ------------------------------------------------ Material Contracts are listed on Schedule 5.16(a) hereto. Except as set forth on ---------------- Schedule 5.16(b) attached hereto, no Borrower is aware of any pending or - ---------------- threatened litigation, or any other legal or administrative proceeding or investigation pending or threatened, against any Borrower arising from or related to any Material Contract. Section 5.17 Leases and Real Property. All material leases and other ------------------------ material agreements under which each Borrower occupies real property are in full force and effect and constitute legal, valid and binding obligations of, and are legally enforceable against, each Borrower, and to the best of each Borrower's knowledge, are the binding obligations of and legally enforceable against, the other parties thereto. All necessary governmental approvals required to have been obtained by each Borrower, if any, have been obtained for each such material lease or agreement, and to each Borrower's knowledge there have been no threatened cancellations thereof, and there are no outstanding material disputes with respect thereto. No Borrower owns any interest in real property (other than the real property and leasehold interests listed on Schedule 5.17 hereto). ------------- SECTION 5.18 Labor Relations. There are no strikes, work stoppages, --------------- grievance proceedings, union organization efforts or other labor controversies pending, or to any Borrower's knowledge, threatened or reasonably anticipated, between any Borrower and (i) any current or former employee of any Borrower, or (ii) any union or other collective bargaining unit representing any such employee. Each Borrower is in compliance in all material respects with all Applicable Laws relating to employment or the workplace, including, without limitation, provisions relating to wages, hours, collective bargaining, safety and health, work authorization, equal employment opportunity, immigration, withholding, unemployment compensation, employee privacy and right to know. Except 34 as set forth on Schedule 5.18, there are no collective bargaining agreements, ------------- employment agreements between any Borrower and any of its employees, or professional service agreements not terminable at will relating to the businesses or assets of any Borrower. The consummation of the transactions contemplated hereby will not cause any Borrower to incur or suffer any liability relating to, or obligation to pay, severance, termination or other similar payments to any person or entity. Section 5.19 Assignment of Government Contracts. No existing Government ---------------------------------- Contract of any Borrower (and no present or future interest of any Borrower, in whole or in part, in, to or under any such Government Contract) is currently assigned, pledged, hypothecated or otherwise transferred to any person or entity (other than the Agent). Section 5.20 Ownership Interests. All of the issued and outstanding ------------------- capital stock of AverStar is wholly owned and controlled by the persons and/or entities set forth on SCHEDULE 5.20 hereto. All of the issued and outstanding capital stock of the Borrowers (other than AverStar) is wholly owned and controlled by AverStar, free and clear of all liens, claims and encumbrances (other than the security interest in favor of the Agent). As of the date hereof (and except as described above), no Borrower has any subsidiaries or owns any interest in any other entity or venture. Section 5.21 Contribution Agreement. The Contribution Agreement is in ---------------------- full force and effect, has not been modified, altered or amended in any respect (other than to add a new Borrower party thereto from time to time), and no Borrower is in default thereunder. Section 5.22 Solvency. Both immediately prior to and after giving effect -------- to the transactions contemplated by the terms and provisions of this Agreement, each Borrower (i) owned and owns property whose fair salable value is greater than the amount required to pay all of such Borrower's Indebtedness (including contingent debts), (ii) was and is able to pay all of its Indebtedness as such Indebtedness matures, and (iii) had and has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. For purpose hereof, "Indebtedness" means, without duplication (a) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Borrower, as of the date on which Indebtedness is to be determined, (b) all obligations of any other person or entity which such Borrower has guaranteed, (c) reimbursement obligations in connection with letters of credit issued for the benefit of such Borrower, and (d) the Obligations. Section 5.23 Year 2000 Compliance. Each Borrower has reviewed the areas -------------------- within its business and operations which could be adversely affected by, and has developed or is developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer based systems and applications used by such Borrower may be unable to recognize and perform properly date- sensitive functions involving certain dates 35 prior to and any date on or after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such review and program, each Borrower believes that the "Year 2000 Problem" will not have a material adverse affect on its business administration or operations. Section 5.24 Joint and Several Liability. Each and all of the --------------------------- representations and warranties made or remade to the Agent and each Lender pursuant to this Article 5 are hereby made and shall be remade by each Borrower severally and on a joint and several basis. Section 5.25 Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made herein shall survive the making of the Loan, and shall be deemed remade and redated as of the date of each request for an advance or readvance of any Loan proceeds, unless any Borrower is unable to remake and/or redate any such representation or warranty (other than the representation and warranty set forth in Section 5.9 hereof), discloses the same to the Agent in writing, and such inability does not constitute or give rise to an Event of Default. ARTICLE 6 --------- AFFIRMATIVE COVENANTS --------------------- So long as any Obligation remains outstanding or this Agreement remains in effect, each Borrower jointly and severally covenants and agrees with the Agent and each Lender that: Section 6.1 Payment of Loan Obligations. Each Borrower will duly and --------------------------- punctually pay all sums to be paid to the Agent and/or any Lender in accordance with the terms and conditions of the Loan Documents, and will comply with, perform and observe all of the terms thereof. Section 6.2 Payment of Taxes. Each Borrower will promptly pay and ---------------- discharge when due all federal, state and other governmental taxes, assessments, fees and charges imposed upon each Borrower, or upon any of its properties or assets, except to the extent that validity or amount thereof is being contested in good faith by appropriate proceedings and the non-payment thereof will not result in the execution of any tax lien or otherwise jeopardize the Agent's interest in any part of the Collateral. Section 6.3 Delivery of Financial and Other Statements. The Borrowers ------------------------------------------ shall deliver to the Agent and each Lender financial and other statements, each of which shall, unless otherwise expressly provided to the contrary, be prepared in accordance with GAAP consistently applied, as follows: 36 (a) on or before the one hundred twentieth (120th) day following the close of each fiscal year, the Borrowers will submit to the Agent and each Lender (i) annual audited and unqualified financial statements of the Borrowers, which shall be accompanied by schedules and management letters (if issued) and certified by an independent certified public accountant acceptable to the Agent, (ii) an annual budget for the Borrowers for the then current year and projections for the remainder of the Loan term, in form reasonably satisfactory to the Agent, certified by the Borrower's Chief Financial Officer or another duly authorized executive officer of the Borrowers, and (iii) the Year End Covenant Compliance Certificate, certified by an authorized executive officer of the Borrowers; (b) on or before the forty-fifth (45) day following the close of each calendar quarter, the Borrowers will submit to the Agent and each Lender internally prepared financial statements of the Borrowers, including a balance sheet, income statement, cash flow statement and statement of stockholders' equity, reporting the Borrowers' current financial position and the results of their respective operations for the month then ended and year-to-date, in form reasonably satisfactory to the Agent, certified by the Borrower's Chief Financial Officer or another duly authorized executive officer of the Borrowers; (c) on or before the fifteenth (15th) day following the close of each calendar month, the Borrowers will submit to the Agent and each Lender a Borrowing Base/Non-Default Certificate in the form of Exhibit 4 hereto, --------- accompanied by a current accounts receivable agings report, an unbilled agings report and an accounts payable listing, each of which shall be certified by an authorized executive officer of the Borrowers; (d) on or before the forty-fifth (45th) day following the close of each calendar quarter (other than each calendar quarter ending on December 31st), the Borrowers will submit to the Agent and each Lender a contract status/backlog report and a Quarterly Covenant Compliance/Non-Default Certificate in the form of Exhibit 5 hereto (the "Quarterly Covenant Compliance --------- Certificate"), each of which shall be certified by the Borrower's Chief Financial Officer or another duly authorized executive officer of the Borrowers; (e) the Borrowers will submit to the Agent and each Lender copies of all public filings, disclosure statements and/or registration statements which any Borrower issues to, distributes to or files with the Securities and Exchange Commission or any state agency or department regulating securities (or any other person or entity, pursuant to the rules and/or regulations of the Securities and Exchange Commission or any state agency or department regulating securities). Each such public filing, disclosure statement and/or registration statement shall be submitted by the Borrowers to the Agent and each Lender not later than five (5) days prior to the issuance, distribution or filing thereof (as applicable), except in circumstances in which it is not practicable to make any such submission to the Agent and each Lender on an earlier date, in which case such public filing, disclosure statement and/or registration statement shall be submitted by the 37 Borrower to the Agent and each Lender concurrent with the issuance, distribution or filing thereof (as applicable). (f) promptly upon the request of the Agent, the Borrowers will provide to the Agent and each Lender such other information and/or reports relating to the business, operations, properties or prospects of the Borrowers as the Agent may from time to time reasonably request. The Borrowers acknowledge and agree that any and all financial statements, schedules and other financial information required to be delivered to the Agent and each Lender pursuant to this Section 6.3 shall be prepared on a consolidated basis. Section 6.4 Maintenance of Records; Review by the Lenders. Each Borrower --------------------------------------------- will maintain at all times proper books of record and account in accordance with GAAP, consistently applied, and, subject to any confidentiality and secrecy requirements imposed by any Government agency, will permit the Agent's officers or any of the Agent's authorized representatives or accountants to visit and inspect the offices and properties of each Borrower, examine its respective books of account and other records, and discuss their respective affairs, finances and accounts with the officers of each Borrower, all at such reasonable times during normal business hours, and as often as the Agent may desire. Each Borrower acknowledges and agrees that, following the occurrence of an Event of Default which has continued unremedied beyond any applicable notice and/or grace period, each Lender shall have the right to accompany the Agent in the exercise of the Agent's rights set forth in this Section 6.4. Section 6.5 Maintenance of Insurance Coverage. Each Borrower will maintain --------------------------------- in effect fire and extended coverage insurance on any and all the tangible personal property comprising the Collateral, public liability insurance and workmen's compensation insurance, with responsible insurance companies, in such amounts and against such risks as are customary for similar businesses, required by governmental authorities, if any, having jurisdiction over all or part of its operations, or otherwise reasonably required by the Agent, and will furnish to the Agent certificates evidencing such continuing insurance. The Agent shall be named as loss payee on all hazard and casualty insurance policies by means of a standard noncontributory mortgagee clause and as an additional insured on all liability insurance policies. All insurance policies shall also provide for (i) not less than thirty (30) days written notice to the Agent prior to expiration, cancellation or material change; and (ii) waiver of subrogation. Section 6.6 Maintenance of Property/Collateral; Performance of Contracts. ------------------------------------------------------------ Each Borrower will at all times maintain the Collateral and its tangible property, both real and personal, in good order and repair (subject to ordinary wear and tear), and will permit the Agent's officers or authorized representatives to visit and inspect all or any part of the Collateral at such reasonable times during normal business hours, as 38 and when the Agent deems necessary or appropriate; provided, however, that the Agent's review of any and all "classified contracts" shall be subject to compliance with Applicable Laws. Each Borrower shall perform in all material respects all obligations under all contracts to which it is a party (including, without limitation, all obligations of such Borrower as a contractor under any Material Contract), including all exhibits and other attachments to such contracts, all modifications thereto and all documents and instruments delivered pursuant thereto, and will comply in all material respects with all laws, rules and regulations governing the execution, delivery and performance thereof. Section 6.7 Maintenance of Corporate Existence. Except as otherwise ---------------------------------- expressly permitted pursuant to this Agreement, each Borrower will maintain its corporate existence and will provide the Agent with evidence of the same from time to time upon the Agent's request. Section 6.8 Maintenance of Certain Accounts with Lender. Each Borrower ------------------------------------------- will maintain its primary operating accounts, including all depository accounts (time and demand), disbursement accounts and collection accounts with State Street Bank & Trust Company, N.A., a national banking association, at its offices located at 225 Franklin Street, Boston, Massachusetts 02110; it being understood and agreed that if at any time State Street Bank shall no longer be a "Lender" party to this Agreement, all such accounts shall be maintained with the Agent or another Lender designated by the Agent and reasonably satisfactory to the Borrowers. Section 6.9 Maintenance of Management. Each Borrower will at all times ------------------------- maintain management reasonably satisfactory to the Agent or the Required Lenders in all respects, and shall notify the Agent in writing of the change of any corporate officer or director of any Borrower, within ten (10) days of the date of any such change; it being understood and agreed that (a) the Borrowers shall be deemed in compliance with this covenant so long as (i) Joseph A. Saponaro is the acting President or Vice President in charge of business operations of AverStar and performs all duties material to the operation of the Borrowers' business, as may be required of him acting in such capacity, and (ii) Michael B. Alexander is the acting Chairman of the board of AverStar and performs all duties material to the operation of the Borrowers' business, as may be required of him acting in such capacity; and (b) in the event that Joseph A. Saponaro or Michael B. Alexander no longer acts as President (or Vice President in charge of business operations) or Chairman of the board of AverStar, respectively, or in the event that Joseph A. Saponaro or Michael B. Alexander fails to perform any duty material to the operation of the Borrowers' business, as may be required of each of them acting in their respective capacities, any replacement President (or Vice President in charge of business operations) and/or Chairman of the board of the Borrowers must be reasonably satisfactory to the Agent or the Required Lenders in all respects. Section 6.10 Disclosure of Defaults, Etc. Promptly upon the occurrence ---------------------------- thereof, the Borrowers will provide the Agent with written notice of any Event of Default, 39 or any act, event or occurrence that upon the giving of any required notice or the lapse of time, or both, would constitute an Event of Default. In addition, the Borrowers will promptly advise the Agent in writing of any condition, act, event or occurrence which comes to any Borrower's attention that would or could reasonably be expected to prejudice the Agent's or any Lender's rights in connection with any Material Contract, any Government Contract, the Collateral, this Agreement, any Note or any other Loan Document, including, without limitation, the details of any pending or threatened suspension, debarment or other governmental action or proceeding, any material pending or threatened litigation, and any other legal or administrative proceeding or investigation pending or threatened against any Borrower, including the entry of any judgment or lien (other than a Permitted Lien) against such Borrower, its assets or property. Section 6.11 Security Perfection; Assignment of Claims Act; Payment of --------------------------------------------------------- Costs. Each Borrower will execute and deliver and pay the costs of recording and - ----- filing financing statements, continuation statements, termination statements, assignments and other documents, as the Agent may from time to time deem necessary or appropriate for the perfection of any liens granted to the Agent pursuant hereto or pursuant to any other Loan Document, including, without limitation, all documents or materials necessary or appropriate in order to comply with the Assignment of Claims Act of 1940 (the "Government Contract Assignments") in connection with each Government Contract required to be assigned to the Agent in accordance with the terms of this Agreement; it being understood and agreed that (i) no Government Contract Assignment is being required for any Government Contract which (a) has a remaining value of less than One Million and No/100 Dollars ($1,000,000.00), or (b) has a remaining term of less than twelve (12) months; and (ii) the Agent will not submit any Government Contract Assignment to the Government in the absence of an Event of Default which has continued unremedied beyond any applicable notice and/or grace period. All costs and expenses incurred in connection with the Government Contract Assignments shall be borne solely by the Borrowers. Additionally, the Borrowers will pay any and all costs of Closing hereunder, as well as any and all taxes (other than the Agent's and each Lender's income and franchise taxes), which may be payable as a result of the execution of this Agreement or any agreement supplemental hereto, or as a result of the execution and/or delivery of any Note or other Loan Document. Section 6.12 Defense of Title to Collateral. Each Borrower will at all ------------------------------ times defend the Agent's and each Borrower's rights in the Collateral, subject to the Permitted Liens, against all persons and all claims and demands whatsoever, and will, upon request of the Agent (i) furnish such further assurances of title as may be reasonably required by the Agent, and (ii) do any other acts reasonably necessary to effectuate the purposes and provisions of this Agreement, or as required by law or otherwise in order to perfect, preserve, maintain or continue the security interests of the Agent in the Collateral. Section 6.13 Compliance with Law. Each Borrower will conduct its businesses ------------------- and operations in full compliance with (i) all Applicable Laws and requirements 40 of all federal, state and local regulatory authorities having jurisdiction, (ii) the provisions of its charter documents and by-laws, (iii) all agreements and instruments by which it or any of its properties may be bound, and (iv) all applicable decrees, orders and judgments. It is understood and agreed that any Borrower's failure to comply with any of the items set forth in clause (i), (iii) or (iv) of this Section 6.13 shall not constitute a violation of this covenant if such failure to comply is not reasonably likely to have a material adverse effect on (a) the Borrowers, taken as a whole, or any of the Principal Borrowers, or (b) the business, assets, operations, properties or financial condition of the Borrowers, taken as a whole, or any of the Principal Borrowers. Section 6.14 Further Assurances; Additional Requested Information. Each ---------------------------------------------------- Borrower will provide to the Agent such further assurances and additional documents regarding the Collateral and the Agent's security interest therein as the Agent may from time to time reasonably request, and each Borrower will promptly provide the Agent with such additional information, reports and statements respecting the business, operations, properties and financial condition of the Borrowers, and respecting their respective affiliated businesses and investments, as the Agent may from time to time reasonably request. Section 6.15 Financial Covenants. So long as any Obligation remains ------------------- outstanding or this Agreement remains in effect, the Borrowers will comply with each of the financial covenants set forth below: (a) Net Worth. The Borrowers will at all times maintain Net --------- Worth of not less than the sum of (i) $1,000,000.00, plus (ii) fifty percent (50%) of the Borrowers' consolidated positive net income arising after December 31, 1998 (not to be reduced for subsequently incurred consolidated losses), plus (iii) one hundred percent (100%) of the net proceeds (net of reasonable and customary costs paid to unrelated and unaffiliated third parties in connection with the particular transaction) of any issuance by the Borrower after the Closing Date of equity securities or other equity interests or obligations (determined on a cumulative basis and calculated in accordance with GAAP), less (iv) one hundred percent (100%) of the amount of stock redemptions paid pursuant to the Repurchase Agreements listed on Schedule B hereto. ---------- For purposes of this Agreement, "Net Worth" shall mean total assets minus all liabilities, determined in accordance with GAAP. Net Worth shall be measured on 3/31/99 and on the last day of each fiscal quarter thereafter, throughout the term of the Loan. 41 (b) Fixed Charge Coverage Ratio. The Borrowers will --------------------------- maintain on a consolidated basis at all times during the periods specified below, a Fixed Charge Coverage Ratio of not less than the following: Minimum Fixed Charge Period Coverage Ratio ------ -------------- For the calendar quarter ending on 3/31/99 through the calendar 1.25 to 1.0 quarter ending 12/31/1999. For the calendar quarter ending on 3/31/2000 through the calendar 1.30 to 1.0 quarter ending on 12/31/2000. For the calendar quarter ending on 3/31/2001 and for each calendar 1.35 to 1.0 quarter ending thereafter. For purposes of the foregoing, "Fixed Charge Coverage Ratio" shall mean the Borrowers' EBITDA, minus capital expenditures, minus cash paid for taxes, divided by the sum of Interest Expense, plus required principal payments on the Term Facilities and payments for capital lease obligations. The Fixed Charge Coverage Ratio shall be measured on the last day of each fiscal quarter, and at the end of each of the Borrowers' fiscal years, throughout the term of the Loan on a four (4) quarter rolling basis. (c) EBITDA to Interest Expense Ratio. The Borrowers will -------------------------------- maintain on a consolidated basis at all times during the periods specified below, an EBITDA to Interest Expense ratio of not less than the following: Minimum EBITDA to Period Interest Expense Ratio ------ --------------------- For the calendar quarter ending on 3/31/99 through 2.50 to 1.00 the calendar quarter ending 12/31/99. 42 For the calendar quarter ending on 3/31/2000 and 3.00 to 1.00 for each calendar quarter ending thereafter. The EBITDA to Interest Expense Ratio shall be calculated and tested on the last day of each fiscal quarter, throughout the term of the Loan on a four (4) quarter rolling basis. (d) Total Debt to EBITDA Ratio. The Borrowers will at all -------------------------- times maintain on a consolidated basis during the periods specified below, a Total Debt to EBITDA Ratio of not more than the following: Maximum Total Debt to EBITDA Period Ratio ------ ----- For the calendar quarter ending 3/31/99 through the calendar 4.25 to 1.00 quarter ending on 12/31/1999. For the calendar quarter ending 3/31/2000 through the calendar 3.75 to 1.00 quarter ending on 6/30/2000. For the calendar quarter ending 9/30/2000 through the calendar 3.50 to 1.00 quarter ending on 12/31/2000. For the calendar quarter ending 3/31/2001 through the calendar 3.25 to 1.00 quarter ending on 6/30/2001. For the calendar quarter ending 9/30/2001 through the calendar 3.00 to 1.00 quarter ending on 12/31/2001. For the calendar quarter ending 3/31/2002 through the calendar 2.50 to 1.00 quarter ending on 12/31/2002. For the calendar quarter ending on 3/31/2003 and for each calendar 2.00 to 1.00 quarter ending thereafter. 43 For purposes hereof, the "Total Debt to EBITDA Ratio" shall mean the ratio of Total Debt to EBITDA (a) calculated and tested using (i) the Borrower's twelve (12) month trailing EBITDA results and (ii) Total Debt as of the date of calculation, and (b) measured on the last day of each fiscal quarter, throughout the term of the Loan. The financial covenants referenced above shall be calculated on a four (4) quarter rolling basis. Unless otherwise defined, all financial terms used in this Section 6.15 shall have the meanings attributed to such terms in accordance with GAAP. Section 6.16 Year 2000 Compliance. Each Borrower shall take all action -------------------- necessary to assure that its computer systems are capable of effectively processing data and information, including dates on and after January 1, 2000, and that all such systems (i) shall not cease to perform or provide (and shall not cause any software and/or system which is material to the operations of such Borrower or any interface therewith to provide) invalid or incorrect results as a consequence of date functionality and/or data; (ii) shall not experience any degradation of performance or functionality arising from or relating to date functionality and/or data which is material to the operations of such Borrower or any material interface therewith and which represents or references different centuries, more than one century or leap years; (iii) shall effectively and accurately manage and manipulate data derived from, involving or relating in any way to dates, including single century formulas and multi-century or leap year formulas; and (iv) shall not cause an abnormal ending scenario within such business computer related systems or in any software and/or system with which such systems interface (or generate incorrect values or invalid results involving such dates). Each Borrower will, at the reasonable request of the Agent, provide evidence to the Agent of such compatibility. Section 6.17 Landlord Waivers; Subordination. Each Borrower shall provide ------------------------------- landlord waivers to the Agent prior to any Borrower storing, keeping or locating tangible personal property having an aggregate value in excess of Five Hundred Thousand and No/100 Dollars ($500,000.00) on any particular lessor's/landlord's premises. Each landlord waiver shall subordinate any statutory, contractual or other lien the lessor/landlord may have in any Collateral to the lien, operation and effect of the lien granted to the Agent pursuant to this Agreement, and shall be in form and substance reasonably acceptable to the Agent. Section 6.18 Substitute Notes. Upon request of the Agent, each Borrower ---------------- shall execute and deliver to the Agent substitute promissory notes, in form and substance satisfactory to the Agent in all respects, payable to the order of such person or entity as may be designated by the Agent; it being understood and agreed, however, that the aggregate principal amount of all outstanding promissory notes shall not exceed the Commitment Amount as of the date any such substitute note is issued. 44 Section 6.19 Interest Rate Contracts. If required by the Agent, the ----------------------- Borrowers shall have in effect at all times interest rate protection agreements for the Term Facilities ("Interest Rate Contracts") reasonably satisfactory to the Agent. Any such Interest Rate Contract must be purchased from a Lender, an affiliate of a Lender or another financial institution reasonably acceptable to the Agent. The Borrowers' obligations under any Interest Rate Contract purchased from a Lender or an affiliate of a Lender shall be secured by the Collateral on a pari passu basis, pursuant to documentation acceptable to the Agent in all respects. All other Interest Rate Contracts shall be unsecured in all respects. The Borrowers shall determine to their own satisfaction whether any such Interest Rate Contract is sufficient to meet the Borrowers' needs for interest rate protection, and neither the Agent nor any Lender shall have any obligation or liability with respect thereto, nor any obligation to propose, quote or enter into any Interest Rate Contract, unless such Interest Rate Contract shall be on terms and conditions satisfactory to the applicable Lender in all respects. Section 6.20 Joint and Several Liability. Each Borrower acknowledges and --------------------------- agrees that each Borrower shall be severally and jointly and severally liable for each and every affirmative covenant set forth in this Article 6. ARTICLE 7 --------- NEGATIVE COVENANTS ------------------ So long as any Obligation remains outstanding or this Agreement remains in effect, each Borrower jointly and severally covenants and agrees that, without the prior written consent of the Agent, no Borrower will: Section 7.1 Change of Control; Disposition of Assets; Merger. ------------------------------------------------ (a) Permit majority ownership of any Borrower or control of any Borrower's business or operations to be sold, assigned or otherwise transferred, legally or equitably, to any person or entity; or (b) suffer or permit the issuance of any capital stock of any Borrower (except for (i) any securities issued pursuant to a stock option plan approved by Agent in writing, or pursuant to any other equity-based employee incentive compensation plan approved by the Agent in writing and/or listed in Schedule 7.1(B) hereto; and (ii) issuances of any capital stock of AverStar - --------------- which do not, individually or in the aggregate, cause or result in a default of any other provision of this Agreement); or (c) sell, assign, loan, deliver, lease, transfer or otherwise dispose of property or assets of any Borrower (except in the ordinary course of business), in excess of Fifty Thousand and No/100 Dollars ($50,000.00), in the aggregate, per annum; or 45 (d) merge or consolidate with any company or enterprise, or acquire or purchase any company or enterprise; it being understood and agreed that this negative covenant shall not be deemed violated by the merger or consolidation of any wholly owned subsidiary of AverStar with or into (i) AverStar; provided that, after giving effect to any such merger or consolidation, AverStar shall be the surviving entity; or (ii) a Borrower (other than AverStar); provided that, after giving effect to any such merger or consolidation, the surviving entity shall be a Borrower party to this Agreement. Section 7.2 Margin Stocks. Use all or any part of the proceeds of any ------------- advance made hereunder to purchase or carry, or to reduce or retire any loan incurred to purchase or carry, any margin stocks (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any such margin stocks. Section 7.3 Change of Operations. Suffer or permit any change in the -------------------- general character of any Borrower's business as conducted on the Closing Date, or suffer or permit any Borrower to engage in any type of business not reasonably related to or compatible with such business as presently and normally conducted. Section 7.4 Judgments; Attachments. Suffer or permit any judgment in ---------------------- excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) against any Borrower or any attachment against any Borrower's property (for an amount not fully covered by insurance) to remain unpaid, undischarged or undismissed for a period of thirty (30) days, unless enforcement thereof shall be effectively stayed or bonded. Section 7.5 Further Assignments; Performance and Modification of ---------------------------------------------------- Contracts; etc. Except as may be expressly permitted by the Loan Documents (i) - -------------- make any further assignment, pledge or disposition of the Collateral or any part thereof (other than dispositions of inventory or equipment in the ordinary course of business or the sale of obsolete equipment or other equipment not material to the operation of such Borrower's business); (ii) permit any set-off or reduction, delay the timing of any payment under, or otherwise modify any Material Contract, if such set-off, reduction, delay or modification would give rise to a Borrowing Base Deficiency or otherwise adversely affect any of the Subsidiary Borrowers, taken as a whole, or any of the Principal Borrowers in any material respect; (iii) create, incur or permit to exist any lien or encumbrance (other than Permitted Liens) on any real or personal property now or hereafter owned by any Borrower; or (iv) do or permit to be done anything to impair the Agent's or any Lender's security in any Collateral or the payments due to any Borrower thereunder. Section 7.6 Affect Rights of the Agent or Lender(s). At any time do or --------------------------------------- perform any act or permit any act to be performed which would or reasonably could materially adversely affect the interests or rights of the Agent or any Lender under any Loan Document. 46 Section 7.7 Indebtedness; Granting of Security Interests. Suffer or -------------------------------------------- permit any Borrower to incur any new indebtedness, except for (i) trade debt and operating leases incurred in the ordinary course of business; (ii) indebtedness secured by liens listed on Schedule 7.7 hereto, or other indebtedness secured by ------------ Permitted Liens; (iii) indebtedness incurred to finance (by purchase or lease) equipment constituting capital expenditures, provided that all capital leases permitted hereby do not, in the aggregate, exceed Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) per annum; and (iv) the indebtedness owing directly (or indirectly by and through Gerlach & Co., Inc., as custodian) to the Mass Mutual Entities (other than Mass Mutual, acting in its capacity as a Lender party pursuant to this Agreement) in a principal amount not to exceed Five Million and No/100 Dollars ($5,000,000.00), evidenced by the Subordinated Notes and subordinated in all respects to the Obligations pursuant to a certain letter agreement dated as of the Closing Date (the "Subordination Agreement"), by and among the Agent, the Mass Mutual Entities and the Borrowers. Except as otherwise expressly permitted herein, no Borrower shall mortgage, assign, pledge, hypothecate or otherwise encumber or permit any lien, security interest or other encumbrance, including purchase money liens, whether under conditional or installment sales arrangements or otherwise, to affect the Collateral or any other assets or properties of any Borrower (except for Permitted Liens), nor shall any Borrower guarantee or otherwise become obligated for any indebtedness of others. Furthermore, each Borrower agrees that it will not enter into any agreement or understanding with any person or entity pursuant to which such Borrower agrees to be bound by a covenant not to encumber all or any part of its property or assets, unless such agreement or understanding is entered into in connection with the granting of purchase money security interests permitted pursuant to the terms and provisions this Agreement (and relates to solely to the property subject to such purchase money security interests). Section 7.8 Dividends; Loans; Advances; Investments and Certain Other --------------------------------------------------------- Events. - ------ Except as otherwise described on Schedule 7.8(a) hereto: --------------- (a) suffer or permit any dividend to be declared or paid on any Borrower's capital stock of any class (other than dividends payable solely to another Borrower and/or dividends payable in the form of additional capital stock of AverStar), suffer or permit any alteration or amendment to any Borrower's capital structure, or suffer or permit any Borrower to purchase, redeem or otherwise retire any shares of such Borrower's capital stock, or suffer or permit any voluntary prepayment, acquisition or anticipation of any sinking fund requirement of any indebtedness of any Borrower, or suffer or permit any distributions to be made in cash or assets to any shareholders of any Borrower (other than to another Borrower); or (b) suffer or permit any loans, salary advances or other payments to be made by any Borrower to (i) any shareholders of any Borrower (other than to another Borrower); (ii) any corporation or other enterprise directly or indirectly owned in whole or 47 in part by any shareholder of any Borrower (other than another Borrower); or (iii) any other person or entity; it being understood and agreed that this negative covenant shall not be deemed violated by (A) normal and customary operating expenses and trade credit extended to customers of the Borrowers, in each case made in the ordinary course of business; (B) regularly scheduled salary payments to shareholders of any Borrower who are also salaried employees of such Borrower; (C) loans and/or travel and expense reimbursement payments to salaried employees in an amount not to exceed, at any time, Fifteen Thousand and No/100 Dollars ($15,000.00), individually, or Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), in the aggregate; (D) regularly scheduled consulting fees payable pursuant to the consulting agreements listed on Schedule -------- 7.8(b) hereto; provided that (i) no Payment Default exists, and (ii) the payment - ------ of such consulting fees does not, individually or in the aggregate, exceed Three Hundred Thousand and No/100 Dollars ($300,000.00) per annum; (E) a loan or loans made by AverStar on or about the Closing Date to IES Holding, Inc., a Delaware corporation ("IES"), in an amount not to exceed, at any time, Two Million and No/100 Dollars ($2,000,000.00), in the aggregate, provided that (i) such loan(s) shall have been made and fully advanced on or before December 31, 1999, without any obligation to advance or readvance any proceeds of such loan(s) after December 31, 1999, (ii) such loan(s), including any other indebtedness owing by IES to a Borrower, shall have been properly evidenced by one or more duly executed and enforceable promissory notes (collectively, the "IES Notes"), and reflected as notes receivable on the Borrowers' books, (iii) concurrent with the making of such loan(s), all of the IES Notes evidencing such loan(s) and such other indebtedness shall have been pledged to the Agent, for the benefit of the Lenders, as additional Collateral for the Obligations, pursuant to the Assignment of Promissory Notes as Collateral, and (iv) at the time any such loan(s) shall have been made available to IES, no Event of Default exists hereunder; (F) regularly scheduled payments described in Schedule 7.8(c) hereto; --------------- and (G) subject to the terms of the Subordination Agreement, regularly scheduled payments of accrued and unpaid interest payable pursuant to the Subordinated Notes. Section 7.9 Lease Obligations. Enter into any new lease of real or ----------------- personal property, except in the ordinary course of business. Section 7.10 Capital Expenditures. Make any capital expenditure, -------------------- including, but not limited to, expenditures for leasehold improvements and capitalized costs, in excess of (a) $2,500,000, in the aggregate per annum, during the period commencing on the Closing Date and ending on the day immediately preceding the second (2nd) anniversary of the Closing Date; (b) $3,000,000, in the aggregate per annum, during the period commencing on the second (2nd) anniversary of the Closing Date and ending on the day immediately preceding the fourth (4th) anniversary of the Closing Date, and (c) $3,500,000, in the aggregate per annum, from and after the fourth (4th) anniversary of the Closing Date, except that, in each case, the Borrowers shall be entitled to carry over availability (on a non-cumulative basis) of any unused capital expenditure of any particular twelve (12) month period to the succeeding twelve (12) month period. By way of example 48 and not of limitation, if the Borrowers incur $2,000,000 in capital expenditures during the second year of the Loan term (and the applicable capital expenditure limitation is $2,500,000), the Borrowers may incur up to $3,500,000 of capital expenditures during the third year of the Loan term without being in violation of this negative covenant. However, if the Borrowers incur less than $3,500,000 in capital expenditures during the third year of the Loan term, the dollar limitation applicable to capital expenditures for the fourth year of the Loan term will not be increased by any amount whatsoever. Section 7.11 Lockbox Deposits. If a Lockbox shall have been established ---------------- pursuant to Section 11.2 of this Agreement, permit or cause any and all payments required to be made directly to the Agent or any Lender pursuant to Section 11.2 of this Agreement to be made or directed to any other person or entity, without the prior approval of the Agent. Section 7.12 Shareholders Agreement; Merger Agreement; Etc., Suffer or ---------------------------------------------- permit any modification or amendment to (a) the Shareholders Agreement; (b) the Subordination Agreement; (c) any of the Subordinated Notes; (d) any Securities Purchase Agreement, or (e) the Merger Agreement. Section 7.13 Transactions With Affiliates. Enter into or otherwise bind ---------------------------- any Borrower to any contract, agreement or other understanding with any person or entity directly or indirectly related to, affiliated with or under common control or ownership with any Borrower or any stockholder of any Borrower (other than another Borrower), except upon fair and reasonable terms which are at least as favorable to such Borrower as would be the case in a comparable, arm's-length transaction with an unaffiliated and unrelated entity or person. Section 7.14 Joint and Several Liability. Each Borrower acknowledges and --------------------------- agrees that each Borrower shall be severally and jointly and severally liable for each and every negative covenant set forth in this Article 7. ARTICLE 8 --------- COLLATERAL ACCOUNT ------------------ Following the occurrence of an Event of Default, the Agent may require that the Borrowers deposit or cause to be deposited into a collateral account (the "Collateral Account") designated by the Agent, all checks, drafts, cash and other remittances received by each Borrower, and the Borrowers shall deposit such items for credit to the Collateral Account within one (1) Business Day of the receipt thereof and in precisely the form received. Pending such deposit, no Borrower will commingle any such items of payment with any of its other funds or property, but will hold them separate and apart. 49 The Borrowers hereby covenant and agree that the Collateral Account shall secure the Obligations and hereby grant, assign and transfer to the Agent, for the ratable benefit of the Lenders, a continuing security interest in all of each Borrower's right, title and interest in and to the Collateral Account. Notwithstanding anything to the contrary under applicable state law, the Agent may apply funds in the Collateral Account to any of the Obligations, including, without limitation, any principal, interest or other payment(s) not made when due, whether arising under this Loan Agreement and/or any other Loan Document, or any other Obligation of any Borrower, without notice to the Borrowers, without regard to the origin of the deposits in the account, the beneficial ownership of the funds therein or whether such Obligations are owed jointly with another or severally; the order and method of such application to be in the sole discretion of the Agent. The Agent's right to deduct sums due under the Loan Documents from the account(s) of the Borrowers shall not relieve any Borrower from its obligation to make all payments required by the Loan Documents as and when required by the Loan Documents, and the Agent shall not have any obligation to make any such deductions or any liability whatsoever for any failure to do so. ARTICLE 9 --------- DEFAULT AND REMEDIES -------------------- Section 9.1 Events of Default. Any one of the following events shall be ----------------- an "Event of Default": (a) if any Borrower shall fail to pay any principal, interest or other sum owing on any of the Notes or any other Obligation when the same shall become due and payable, whether by reason of acceleration or otherwise; (b) if the Borrowers shall exceed the Maximum Borrowing Base and fail, immediately upon the happening of any such occurrence, without notice or demand therefor, to make a payment to the Agent, for the benefit of the Lender(s), in an amount equal to or greater than the Borrowing Base Deficiency; provided, however, that upon the occurrence of the circumstances described in the last paragraph of Section 1.3 of this Agreement, the Borrowers shall not be required to make an immediate payment, but rather, shall be required to make the required payment within the time frame specified in the last paragraph of Section 1.3 of this Agreement; (c) if any Borrower shall fail to pay and satisfy in full, within thirty (30) days of the rendering thereof, any judgment against such Borrower in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) which is not, to the reasonable satisfaction of the Agent, fully bonded, stayed, covered by insurance or covered by appropriate reserves; 50 (d) with respect to any warranty or representation expressly qualified by a "materiality" standard set forth herein or in any other Loan Document and made by any Borrower or any other person or entity on behalf of any Borrower, if such warranty or representation shall be untrue in any respect when made, including, without limitation, any information contained in any financial statement, application, schedule, report or other document given by any Borrower or any other person or entity on behalf of any Borrower in connection with any of the Obligations or Loan Documents; and/or with respect to any warranty or representation not expressly qualified with a "materiality" standard set forth herein or in any other Loan Document and made by any Borrower or any other person or entity on behalf of any Borrower, if such warranty or representation shall be untrue in any material respect when made, including, without limitation, any information contained in any financial statement, application, schedule, report or other document given by any Borrower or any other person or entity on behalf of any Borrower in connection with any of the Obligations or Loan Documents; (e) if there shall be non-compliance with or a breach of any of the Affirmative Covenants or Negative Covenants contained in this Agreement, or any other covenants or agreements of any Borrower, in any of the Notes or in any other Loan Document; (f) if (i) without the prior written consent of the Agent, any Borrower shall be liquidated or dissolved or shall discontinue its business; (ii) a trustee or receiver is appointed for any Borrower or for all or a substantial part of its assets; (iii) any Borrower makes a general assignment for the benefit of creditors; (iv) any Borrower files or is the subject of any insolvency proceeding or petition in bankruptcy, which in the case of an involuntary bankruptcy, remains undismissed for sixty (60) days; (v) any Borrower shall become insolvent or at any time fail generally to pay its debts as such debts become due; or (vi) any governmental agency or bankruptcy court or other court of competent jurisdiction shall assume custody or control of the whole or any material part of the assets of any Borrower; (g) if any property or assets of any Borrower (including, without limitation, any deposit accounts) having a value, individually or in the aggregate, in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) are levied upon, attached or subject to any other enforcement proceeding, which is not fully bonded or stayed within thirty (30) days of such levy, attachment or other enforcement proceeding; (h) if, except as otherwise expressly permitted pursuant to this Agreement, any Borrower shall dissolve, merge or consolidate with another entity, or reorganize, in each case without the prior written consent of the Agent; (i) if any obligation of any Borrower for the payment of borrowed money, which involves amounts in excess of Fifty Thousand and No/100 Dollars ($50,000.00), whether now existing or hereafter created, incurred or arising, becomes or is 51 declared to be due and payable prior to the expressed maturity thereof, whether such obligation is owed to the Agent, any Lender or any other person or entity; (j) if (i) there shall be a default under any Material Contract; (ii) a notice of termination shall have been issued under any Material Contract or Government Contract; or (iii) a cure notice issued under any Material Contract or Government Contract shall remain uncured beyond (x) the expiration of the time period available to the Borrower pursuant to such Material Contract, Government Contract and/or such cure notice (as the case may be), to cure the noticed default, or (y) the date on which the other contracting party is entitled to exercise its rights and remedies under the Material Contract or Government Contract as a consequence of such default; (k) if (i) any Borrower is debarred or suspended from contracting with any part of the Government; (ii) a notice of debarment or suspension shall have been issued to any Borrower; or (iii) a notice of termination for default or the actual termination for default of any Material Contract or Government Contract shall have been issued to or received by any Borrower; or (iv) a Government investigation or inquiry relating to any Borrower and involving fraud, deception or willful misconduct shall have been commenced in connection with any Government Contract or any Borrower's activities; (l) if either the Agent or the Required Lenders are not satisfied in their reasonable discretion, with the results of any field audit conducted by the Agent or its agents; (m) if any Borrower is in default under any Commercial Contract involving amounts in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00); (n) if either the Agent or the Required Lenders believe in good faith there is a material adverse change in the business, assets, properties, prospects, condition (financial or otherwise) of the Borrowers, taken as a whole, or any of the Principal Borrowers; (o) if the Borrower is in default under the Subordinated Notes, the Securities Purchase Agreement, the Subordination Agreement, the Shareholders Agreement or the Merger Agreement or a default by any party (other than the Agent) shall occur under the Subordination Agreement; and/or (p) if, except as otherwise expressly permitted pursuant to this Agreement, any change in majority ownership or control of any Borrower's business or operations shall occur. Section 9.2 Remedies. Upon the occurrence of any Event of Default, the -------- Agent, acting on behalf of the Lender(s), may exercise any or all of the following remedies: 52 (a) Withhold disbursement of all or any part of the Loan proceeds until such time that such Event of Default is cured to the satisfaction of the Agent and no other Event of Default exists; (b) Subject to the expiration of the applicable notice and cure period set forth in subsection (c) below, terminate the obligation of the Lender(s) to make further disbursements of the Loan proceeds; (c) Declare all principal, interest and other sums owing on the Obligations to be immediately due and payable without demand, protest, notice of protest, notice of default, presentment for payment or further notice of any kind; provided, however, that payments of amounts hereunder shall not be accelerated by reason of (i) a default in the payment of any sum due and payable hereunder or pursuant to any other Loan Document (a "Payment Default"), unless such Payment Default remains uncured for five (5) Business Days (with no notice of default being required); and (ii) a default other than a Payment Default (a "Non-Payment Default"), unless such Non-Payment Default remains uncured for twenty (20) days following notice thereof from the Agent to the Borrower. Notwithstanding the foregoing, no notice of a Non-Payment Default shall be required prior to acceleration or prior to the Agent or any Lender exercising any other right or remedy under this Agreement or any other Loan Document, if (i) the Agent in good faith believes that any such delay would adversely affect the Agent's security or the Agent's lien priority or (ii) the default is a violation of Section 6.3(c) or Section 6.15 of this Agreement; (d) Without notice, offset and apply against all or any part of the Obligations then owing by any Borrower to the Agent or any Lender, any and all money, credits, stocks, bonds or other securities or property of any Borrower of any kind or nature whatsoever on deposit with, held by or in the possession of the Agent or any Lender in any capacity whatsoever, including, without limitation, any deposits with the Agent or any Lender or any of its affiliates, to the credit of or for the account of any Borrower. Notwithstanding any applicable state law to the contrary (and without limiting the Agent's right, for the convenience of the Borrowers, to charge any Borrower's account(s) for any principal, interest or other sums payable pursuant to this Agreement, the Notes or any other Loan Document when due), the Agent and/or any Lender is authorized at any time to charge the Obligations against any Borrower's account(s), without regard to the origin of deposits to the account or beneficial ownership of the funds; (e) Exercise all rights, powers and remedies of a secured party under the Uniform Commercial Code in effect in the Commonwealth of Virginia, any other jurisdiction in which the Collateral is located and/or any other applicable law(s), including, without limitation, the right to (i) require the Borrowers to assemble the Collateral (to the extent that it is movable) and make it available to the Agent at a place to be designated by the Agent, and (ii) enter upon any Borrower's premises, peaceably by the Agent's own means or with legal process, and take possession of, render unusable or dispose of the 53 Collateral on such premises; each Borrower hereby agreeing not to resist or interfere with any such action. The Agent agrees to give the Borrower written notice of the time and place of any public sale of the Collateral or any part thereof, and the time after which any private sale or any other intended disposition of the Collateral is to be made, and such notice will be mailed, postage prepaid, to the principal place of business of the Borrower, at least ten (10) days before the time of any such sale or disposition, unless any Applicable Law permits a shorter notice period. Each Borrower acknowledges and agrees that the ten (10) day notice period (or shorter notice period permitted by Applicable Law) is commercially reasonable. Each Borrower hereby authorizes and appoints the Agent and its successors and assigns to (x) sell the Collateral, and (y) declare that such Borrower assents to the passage of a decree by a court of proper jurisdiction for the sale of the Collateral. Any such sale pursuant to (x) or (y) above is to be made in accordance with the applicable provisions of the laws and rules of procedure of the Commonwealth of Virginia or other applicable law; and/or (f) Proceed to enforce such other and additional rights and remedies as the Agent and/or any Lender may have hereunder, and/or under any of the other Loan Documents, or as may be provided by applicable law. It is expressly understood and agreed that the Agent and/or any Lender may exercise its respective rights under this Agreement or under any other Loan Document without exercising the rights or affecting the security afforded by any other Loan Document, and it is further understood and agreed that the Agent may proceed against all or any portion of the Collateral in such order and at such times as the Agent, in its sole discretion, sees fit; and each Borrower hereby expressly waives, to the extent permitted by law, all benefit of valuation, appraisement, marshaling of assets and all exemptions under the laws of the Commonwealth of Virginia and/or any other state, district or territory of the United States. Furthermore, if any Borrower shall default in the performance when due of any of the provisions of this Agreement, the Agent, without notice to or demand upon the Borrower (and without any grace or cure period) and without waiving or releasing any of the Obligations or any default hereunder, under the Notes or under any other Loan Document, may (but shall be under no obligation to) perform the same for such Borrower's account, and any monies expended in so doing shall be chargeable to the Borrowers with interest, at the Default Rate, until the Event of Default is cured, and added to the indebtedness secured by the Collateral. All sums paid or advanced by the Agent or any Lender in connection with the foregoing or otherwise in connection with the Loan, and all court costs and expenses of collection, including without limitation, reasonable attorneys' fees and expenses (and fees and expenses resulting from the taking, holding or disposition of the Collateral) incurred in connection therewith shall be paid by the Borrowers upon demand and shall become a part of the Obligations secured by the Collateral. The Borrowers agree to bear the expense of each lien search, property and judgment report or other form of Collateral ownership 54 investigation as the Agent in its discretion, shall deem necessary or desirable to assure or further assure to the Agent its interests in the Collateral. Notwithstanding anything to the contrary set forth in this Agreement or any other Loan Document, in the event that any Collateral proceeds shall have been received by the Agent to pay any of the Obligations, such proceeds shall be applied first to the Obligations relating to, arising from or incurred in connection with the transactions contemplated by this Agreement in accordance with the terms and provisions of this Agreement, and then to any other Obligations of any Borrower. ARTICLE 10 ---------- THE AGENT; AGENCY ----------------- Section 10.1 Appointment. Each Lender hereby irrevocably appoints First ----------- Union to act as the Agent for each such Lender pursuant to the provisions of this Agreement and the other Loan Documents, and irrevocably authorizes the Agent to take such action, and exercise such powers and perform such duties as are expressly delegated to or required of the Agent by the terms hereof or thereof, or are reasonably incidental thereto, including without limitation, executing documents on behalf of the Lender(s), as agent. First Union agrees to act as Agent on behalf of the Lender(s) on the terms and conditions set forth in this Agreement and the other Loan Documents, subject to its right to resign as provided in Section 10.10 of this Agreement. Each Lender agrees that the rights and remedies granted to the Agent under this Agreement and the other Loan Documents shall be exercised exclusively by the Agent, and that no Lender shall have the right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. Section 10.2 General Nature of the Agent's Duties. Notwithstanding ------------------------------------ anything to the contrary elsewhere in this Agreement or any other Loan Document: (a) The Agent shall have no duties or responsibilities other than those expressly set forth in this Agreement and the other Loan Documents, and no implied duties or responsibilities on the part of the Agent shall be read into this Agreement or any other Loan Document or shall otherwise exist. (b) The duties and responsibilities of the Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Agent shall not have a fiduciary relationship in respect of any Lender, except with respect to funds or collateral it receives on behalf of any Lender. (c) The Agent is and shall be solely the agent of the Lender(s). The Agent does not assume, and shall not at any time be deemed to have, any relationship of 55 agency or trust with or for, or any other duty or responsibility to, any Borrower or any other person. (d) The Agent shall be under no obligation to take any action hereunder or under any other Loan Document if the Agent believes in good faith that taking such action may conflict with any applicable law, or any provision of this Agreement or any other Loan Document, or may require the Agent to qualify to do business in any jurisdiction where it is not then so qualified. Section 10.3 Exercise of Powers. ------------------ (a) The Agent shall have the authority to take any action of the type specified in this Agreement or any other Loan Document as being within the Agent's rights, powers or discretion, as it determines in its sole discretion, except as provided in subsection (b) below, and except as provided in any other Loan Document which expressly requires the direction or consent of (i) the Required Lenders; or (ii) all of the Lenders, in either of which circumstances the Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction or consent shall be binding on all of the Lenders. (b) Except as otherwise expressly provided in this Agreement, without the consent or approval of the Required Lenders, the Agent shall not, in any material respect, amend, modify, grant consents or waive terms or provisions of this Agreement or any other Loan Document (each, an "Amendment" and collectively, "Amendments"), or declare an Event of Default, provide formal written notice of an Event of Default to the Borrowers or exercise any rights or remedies against any Borrower. Each Lender agrees that its decision to consent to or reject any request by the Agent for any Amendment or for permission to declare an Event of Default, provide formal notice thereof to the Borrowers and/or exercise any rights or remedies arising by virtue of such default, shall be made as soon as reasonably practicable after the Agent has provided all information reasonably necessary to act on any such request, but in all events within fifteen (15) Business Days of the receipt of such information; provided, however, that in an emergency situation, the Agent may require the Lenders to respond within such shorter time period as may be specified by the Agent in writing, but in no event less than five (5) Business Days from the receipt of such information. Unless otherwise provided herein, the Agent shall exercise any and all rights and responsibilities on behalf of the Lenders in connection with an Event of Default. Additionally, the consent or approval of all of the Lenders shall be required for the Agent to (a) extend the final maturity of the Loan or any Note, reduce the interest rate payable on or extend the time of payment for any installment of principal, interest or fees payable in connection with the Loan, or issue Letters of Credit (i) having an expiration date beyond the Revolving Facility Maturity Date, except as otherwise expressly provided in this Agreement, or (ii) causing the aggregate outstanding amount of all such Letters of Credit issued to exceed Five Million Dollars ($5,000,000); (b) change the Percentage of the Commitment Amount of any Lender, (c) release all or a substantial portion of the 56 Collateral, except in accordance with the provisions of any applicable Loan Document, (d) amend the definition of the Required Lenders or Maximum Borrowing Base, expand the definitions of Eligible Billed Government Accounts Receivable, Eligible Billed Commercial Accounts Receivable and/or Eligible Unbilled Government Costs, or limit the definition of Ineligible Receivables, (e) consent to the assignment or transfer by any Borrower of any of its rights or obligations hereunder, (f) amend, modify or waive any provisions of this Section 10.3, (g) change the manner of application by the Agent of payments made under the Loan Documents, or (h) change the method of calculation used in connection with the computation of interest, commissions or fees. Each Lender agrees that its decision to approve or reject any request for an amendment or waiver with respect to this Agreement shall be made as soon as reasonably practicable after the Lender has received all information deemed by the Agent to be necessary to act on any such request. Notwithstanding anything to the contrary set forth in this Article 10, (i) if at any time the vote of all of the Lenders shall be required under this Agreement, then the vote of all of the Lenders (other than Mass Mutual, acting in its capacity as a Note "B" Holder) shall be necessary, except for any reduction to the interest rate payable under the Term Facility "B" Note, any extension of the Term Facility "B" Maturity Date or any change to the manner in which Mandatory Payments are to be applied to the Facilities (as set forth in Section 1.5 of this Agreement), in which event the vote of all of the Lenders (including Mass Mutual, acting in its capacity as a Note "B" Holder) shall be required; and (ii) with respect to matters requiring the vote of the Required Lenders, so long as Mass Mutual and First Union are not the only Lender parties hereto and the Percentage of Mass Mutual (acting in its capacity as a Note "B" Holder) and First Union (acting in its capacity as a Lender) equals or exceeds, in the aggregate, fifty-one percent (51%) of the aggregate Commitment Amount, such Percentages shall not be included in the calculation of the required fifty-one percent (51%) of the aggregate Commitment Amount unless one (1) of the other Lenders (excluding any Lender which is a subsidiary or affiliate of, or related to, Mass Mutual or First Union) votes in the same manner as Mass Mutual or First Union. Section 10.4 General Exculpatory Provisions. Notwithstanding anything to ------------------------------ the contrary elsewhere in this Agreement or any other Loan Document: (a) The Agent, in its capacity as Agent (but not as a Lender), shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Loan Document, unless the same constitutes gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. (b) The Agent, in its capacity as the Agent (but not a Lender), shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Loan Document, (ii) any recital, representation, warranty, document, certificate, report or statement in this Agreement or any other Loan Document, (iii) any failure of any Borrower or any Lender to perform any of their respective obligations under this Agreement or any other Loan Document, (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now 57 or hereafter, of any lien or encumbrance or other direct or indirect security afforded or purported to be afforded by any of the Loan Documents, or otherwise from time to time, or (v) caring for, protecting, insuring or paying any taxes, charges or assessments with respect to any Collateral. (c) The Agent shall be under no obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of any Borrower, (ii) the business, operations, condition (financial or otherwise) or prospects of any Borrower, or (iii) except to the extent as may be set forth in Section 10.5(f) of this Agreement, the existence of any Event of Default. (d) The Agent shall be under no obligation, either initially or on a continuing basis, to provide any Lender with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Loan Document to be furnished by the Agent to such Lender; it being understood and agreed that the Agent shall promptly deliver to each Lender copies of any and all notices, documents, instruments and agreements deemed by the Agent, in its reasonable discretion, to be material to the transactions contemplated by this Agreement (including, without limitation, copies of any and all field audit results and requests for the issuance of any Letter(s) of Credit). Section 10.5 Administration by the Agent. --------------------------- (a) The Agent may rely upon any notice or other communication of any nature (written or oral, including telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Agent shall have no duty to verify the identity or authority of any person giving such notice or other communication. (b) The Agent may consult with legal counsel (including in-house counsel for the Agent), independent public accountants and any other experts selected by the Agent from time to time, and the Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Agent in accordance with the requirements of this Agreement or any other Loan Document. Whenever the Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Borrower or any Lender, such matter may (in the Agent's discretion) be established by a certificate of such Borrower or such Lender, as the case may be, and the Agent may conclusively rely upon such certificate. 58 (d) The Agent may fail or refuse to take any action unless it shall be indemnified to its reasonable satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of every kind and nature which may be imposed on, incurred by or asserted against the Agent by reason of taking or continuing to take any such action; provided that no Lender shall be obligated to indemnify the Agent for any portion of such amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements resulting solely from the gross negligence or willful misconduct of the Agent, as finally determined by a court of competent jurisdiction. (e) The Agent may perform any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. (f) In the event that any Lender becomes aware (other than by written notice from the Agent) that an Event of Default exists, such Lender shall promptly provide written notice thereof to the Agent, as provided hereinbelow. The Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default (other than a default in the payment of regularly scheduled principal or interest), unless the Agent has received from a Lender or any Borrower a written notice referring to this Agreement, describing the Event of Default, and stating that such notice is a "notice of default." If the Agent receives such a notice from any Lender or Borrower, the Agent shall give prompt notice thereof to each Lender. (g) Except in emergency situations requiring immediate audits, as determined by the Agent, the Agent shall provide three (3) Business Days prior notice to the Lender(s) of any field audit scheduled to be performed by the Agent pursuant to Section 1.6 of this Agreement. The Lender(s) shall be entitled to (i) receive copies of field audits performed by the Agent, and (ii) accompany the Agent to any field audit, provided that the Agent may, in its discretion, limit the number of Lenders attending any such field audit. Section 10.6 Lenders Not Relying on the Agent or Other Lenders. Each ------------------------------------------------- Lender acknowledges as follows: (a) Neither the Agent nor any other Lender has made any representations or warranties to it, and no act taken hereafter by the Agent or any other Lender shall be deemed to constitute any representation or warranty by the Agent or such other Lender to it. (b) It has, independently and without reliance upon the Agent or any other Lender, and based upon such documents and information as it has deemed 59 appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Loan Documents. (c) It will, independently and without reliance upon the Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to authorize the Agent to take or not take action under or in connection with this Agreement and the other Loan Documents. Section 10.7 Indemnification. Each Lender agrees to reimburse and --------------- indemnify the Agent and the Agent's directors, officers, employees and agents (to the extent not reimbursed by any Borrower, and without limitation of the obligation of the Borrowers to do so), ratably in accordance with each Lender's Percentage, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs and disbursements of every kind or nature (including the reasonable fees and disbursements of counsel for the Agent or such other person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such other person shall be designated a party thereto) that may at any time be imposed on, reasonably incurred by or asserted against the Agent or such other person as a result of this Agreement, any other Loan Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part, directly or indirectly, with the proceeds of the Loan; provided that no Lender shall be -------- obligated to indemnify the Agent or such other person for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting solely from the gross negligence or willful misconduct of the person seeking indemnity, as finally determined by a court of competent jurisdiction. Section 10.8 The Agent in its Individual Capacity. With respect to its ------------------------------------ commitments and the Obligations owing to it, First Union shall have the same rights and powers under this Agreement and each other Loan Document as any other Lender, and may exercise the same as though it was not the Agent. The terms "Lender," "holders of Notes" and like terms shall include First Union in its individual capacity. First Union and its affiliates may make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of and engage in any other business with any Borrower and any stockholder, subsidiary or affiliate of any Borrower, as though First Union was not the Agent hereunder, and without liability to account to any other Lender with respect to the same. Section 10.9 Holders of Notes. The Agent may deem and treat any Lender ---------------- which is the payee of a Note as the owner and holder of such Note for all purposes hereof unless and until written notice evidencing such transfer shall have been filed with the Agent; it being understood and agreed that any such transfer must comply with the requirements of Section 12.10(b) of this Agreement. Any authority, direction or consent of any person who at the time of giving such authority, direction or consent was a Lender 60 shall be conclusive and binding on each present and subsequent holder, transferee or assignee of any Note or Notes payable to such Lender or issued in exchange therefor. Section 10.10 Successor Agent. The Agent may resign at any time by giving --------------- fifteen (15) days prior written notice thereof to the Lender(s) and the Borrower, subject to appointment of a successor Agent (and such appointees acceptance of appointment) as below provided in this Section 10.10. Upon any such resignation, the Required Lenders shall appoint another Lender as the successor Agent; provided that such Lender is a commercial bank or trust company organized under the laws of the United States of America or any State thereof and has a combined capital and surplus of at least $1,000,000,000. In such event, the Agent's resignation shall not be effective until the successor Agent shall have accepted its appointment. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all of the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Loan Documents, but the provisions of this Agreement shall continue to inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If for any reason, at any time, there is no Agent hereunder, then during such period, the Required Lenders shall have the right to exercise the Agent's rights and perform its duties hereunder, except that (i) all notices or other communications required or permitted to be given to the Agent shall be given to each Lender, and (ii) with respect to the absence of the Agent, all payments to be made to the Agent shall be made directly to the Lender for whose account such payment is made (or to the Borrowers, if applicable). Section 10.11 Additional Agents. If the Agent shall from time to time deem ----------------- it necessary or advisable to engage other agents for its own protection in the performance of its duties hereunder or in the interests of the Lenders, then the Agent and the Borrowers shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Agent, to constitute another commercial bank or trust company, or one or more other persons approved by the Agent, to act as co-Agent or a separate agent with respect to any part of the Collateral, with such powers as may be provided in such supplemental agreement, and with the power to vest in such bank, trust company or other person (as such co-Agent or separate agent, as the case may be), any properties, rights, powers, privileges and duties of such Agent under this Agreement or any other Loan Document. Section 10.12 Calculations. The Agent shall not be liable for any ------------ calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Lender to whom payment was due but not made shall be to recover from the Lenders any payment in excess of the amount to which they are determined to be entitled, with interest thereon at the Federal Funds Rate, or, if the amount due was not 61 paid by the Borrowers, to recover such amount from the Borrowers, with interest thereon at the rate provided in the applicable Note. Section 10.13 Funding by Agent. ---------------- (a) Except as otherwise expressly provided in this Agreement, the Agent alone be entitled to make all advances in connection with the Loan and shall receive all payments and other receipts relating to the Loan; it being understood, however, that the Agent has reserved the right not to advance any amounts to the Borrowers which the Agent has not received from the Lender(s). The Agent will notify each Lender of the date and amount of any requested advance, and if such notification is received by 1:00 p.m. Washington, D.C. time on any given Business Day, the Lender(s) shall provide the required funds to the Agent no later than the close of business on such Business Day. Once per week, or within such shorter time frame as may be requested by the Agent, the Agent and each Lender shall pay to each other such amounts (the "Equalization Payments") as may be necessary to cause each Lender to own its applicable Percentage of the Loan and otherwise implement the terms and provisions of this Agreement; it being understood that (i) each Lender shall be entitled to receive interest on amounts advanced by it only from the date of such Lender's advance of funds; (ii) payments made by the Borrowers and received by the Agent shall be promptly distributed to the Lenders in accordance with the terms of this Agreement; and (iii) LIBOR advances and payments of amounts outstanding on a LIBOR basis shall be made by and between the Agent and the applicable Lenders on a same day basis, provided that the applicable Request for Advance, LIBOR Election Form and Certification and/or payment of amounts outstanding on a LIBOR basis shall have been received by the Agent on or before 1:00 p.m. Washington, D.C. time on any given Business Day. The obligation of the Agent and each Lender to make Equalization Payments shall not be affected by a bankruptcy filing by any Borrower, the occurrence of any Event of Default or any other act, occurrence or event whatsoever, whether the same occurs, before, on or after the date on which an Equalization Payment is required to be made. All Equalization Payments shall be made by 1:00 p.m. Washington, D.C. time on the date such payment is required. (b) Unless the Agent shall have been notified in writing by any Lender no later than the close of business on the Business Day before the Business Day on which an advance requested by the Borrowers is to be made, that such Lender will not make its ratable share of such advance, the Agent may assume that such Lender will make its ratable share of the advance, and in reliance upon such assumption the Agent may (but in no circumstances shall be required to) make available to the Borrowers a corresponding amount. If and to the extent that any Lender fails to make such payment to the Agent when required, such Lender shall pay such amount on demand (or, if such Lender fails to pay such amount on demand, the Borrowers shall arrange for the repayment of such amount to the Agent), together with interest for the Agent's own account for each day from and including the date of the Agent's payment, to and including the date of repayment to the Agent (before and after judgment). Interest (a) if paid by such Lender 62 (i) for each day from and including the date of the Agent's payment to and including the second Business Day thereafter, shall accrue at the Federal Funds Rate for such day, and (ii) for each day thereafter, shall accrue at the rate or rates per annum payable under the Notes; and (b) if paid by the Borrowers, shall accrue at the rate or rates per annum payable under the Notes. All payments to the Agent under this Section shall be made to the Agent at its office set forth in the preamble of this Agreement (or as otherwise directed by the Agent), in dollars, in immediately available funds, without set-off, withholding, counterclaim or other deduction of any nature. (c) All borrowings under this Agreement shall be incurred from the Lenders pro rata on the basis of their respective Percentages of the applicable Facility (except to the extent advanced (i) as a Swing Line Loan, or (ii) by the Agent on behalf of any Lender as provided in subsection (a) or (b) above). It is understood that no Lender shall be responsible for any other Lender's failure to meet its obligation to make advances hereunder, and that each Lender shall be obligated to make advances required to be made by it hereunder regardless of the failure of any other Lender to make its advances hereunder. (d) Each payment and prepayment received by the Agent for the account of the Lenders shall be distributed first to the Swing Line Lender for application to any Swing Line Outstandings, and then to each Lender entitled to share in such payment, ratably in accordance with each Lender's Percentage; provided, however, that (i) any payment or prepayment made with respect to amounts outstanding under any Term Facility shall not be distributed first to the Swing Line Lender for application to any Swing Line Outstandings; (ii) any payment received by the Agent after the Acceleration Date shall be distributed first to the Swing Line Lender for application to any Swing Line Outstandings, and then to each Lender entitled to share in such payment, ratably based on the aggregate outstanding principal amount of the Loans funded by such Lender, together with any and all accrued and unpaid interest thereon, and (iii) any Lender who shall be in default of its obligations set forth in this Agreement or any other Loan Document or who has failed to fund its Percentage of any advance under the Loan shall not be entitled to share in any such payment(s) until such time as such default has been cured or such failure to fund, together with interest thereon (as provided in subsection (b) above), has been paid to the Agent in accordance with the terms and conditions of this Agreement or cured (as the case may be). Payments from the Agent to the Lenders shall be made by wire transfer in accordance with written instructions provided to the Agent by the Lenders from time to time. Unless the Agent shall have received notice from the Borrowers prior to the date on which any payment is due to the Lenders hereunder that the Borrowers will not make such payment in full, the Agent may assume that the Borrowers have made such payment in full on such date and the Agent, in reliance upon such assumption, may cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrowers shall not have made such payment in full to the Agent, each Lender shall repay to the Agent upon its demand therefor such amount distributed to such Lender, together with interest thereon at the overnight Federal Funds Rate for each 63 day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent. (e) If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) in excess of such Lender's Percentage of payments, such Lender shall forthwith purchase from the other Lender(s) such participations in the Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of the other Lender(s); provided, however, if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from the other Lender(s) shall be rescinded and each other Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (1) the amount of such Lender's required repayment, to (2) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount recovered. The Borrowers agree that any Lender purchasing a participation from another Lender pursuant to this Section 10.13(e), to the fullest extent permitted by law, may exercise all of its rights of payment with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation. Section 10.14 Benefit of Article. The provisions of this Article 10 are ------------------ solely for the benefit of the Lenders. The Borrowers shall have no rights under (or rights to require any Lender's compliance with) any of the provisions of this Article 10; it being understood that the provisions of this Article 10 are not in limitation of any right, power, duty, obligation or liability which the Agent would have to or against any Borrower. ARTICLE 11 ---------- CERTAIN ADDITIONAL RIGHTS AND OBLIGATIONS REGARDING THE COLLATERAL ------------------------------------ Section 11.1 Power of Attorney. Each Borrower hereby irrevocably appoints ----------------- the Agent as its agent and attorney-in-fact, with power of substitution, having full power and authority, in its own name, in the name of any Borrower or otherwise (but at the cost and expense of the Borrowers and without notice to the Borrowers), to (i) notify account debtors obligated on any of the Receivables to make payments thereon directly to the lockbox referenced in Section 11.2 (if the lockbox shall have been established as required pursuant to Section 11.2 of this Agreement), and to take control of the cash and non-cash proceeds of any such Receivables, which right the Agent may exercise at any time whether or not any Borrower is then in default hereunder or was theretofore making collections thereon; (ii) charge against any bank account of any Borrower any item of payment credited to the Collateral Account which is dishonored by the drawee or the maker thereof; (iii) upon an Event of Default, compromise, extend or renew any of the Collateral constituting Receivables or deal with any of the Collateral as the Agent may deem 64 advisable; (iv) upon an Event of Default, release its interest in, make exchanges or substitutions for and/or surrender, all or any part of any Borrower's interest in all or any part of the Collateral; (v) upon an Event of Default, remove from any Borrower's place(s) of business all books, records, ledger sheets, correspondence, invoices and documents relating to or evidencing any of the Collateral, or without cost or expense to the Agent or any Lender, make such use of any Borrower's place(s) of business as may be reasonably necessary to administer, control and/or collect the Collateral; (vi) upon an Event of Default, repair, alter or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any Account Debtor; (vii) demand, collect receipt for and upon an Event of Default, give renewals, extensions, discharges and releases of all or any part of the Collateral; (viii) upon an Event of Default, institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, all or any part of the Collateral; (ix) upon an Event of Default, settle, renew, extend, compromise, compound, exchange or adjust claims with respect to all or any part of the Collateral or any legal proceedings brought with respect thereto; and (x) receive and open all mail addressed to any Borrower, and if an Event of Default exists hereunder, notify the Post Office authorities to change the address for the delivery of mail to any Borrower to such address as the Agent may designate; it being understood that the rights granted to the Agent in this clause (x), which are operative on the occurrence of an Event of Default, shall not in any way limit or impair the other rights provided to the Agent or any Lender in this Agreement or any other Loan Document, including, without limitation, their rights with respect to the Collateral Account and the below-referenced lockbox. Furthermore, each Borrower hereby irrevocably appoints the Agent as its agent and attorney-in-fact, with power of substitution, having full power and authority, in its own name, in the name of the Agent, in the name of such Borrower or otherwise (but at the cost and expense of the Borrowers and without notice to the Borrowers) and regardless of whether an Event of Default has occurred or any act, event or condition which with notice or the lapse of time, or both, would constitute an Event of Default has occurred, to (a) file financing statements and continuation statements covering the Collateral and execute the same on behalf of any Borrower; (b) charge against any banking account of any Borrower any item of payment credited to any Borrower's account which is dishonored by the drawee or maker thereof; and/or (iii) endorse the name of any Borrower upon any items of payment relating to the Collateral or upon any proof of claim in bankruptcy against any Account Debtor. Section 11.2 Lockbox. Each Borrower agrees that, upon the Agent's request ------- following the occurrence of an Event of Default which has continued unremedied beyond any applicable notice and/or cure period, the Borrowers shall establish and continually maintain on terms and conditions reasonably satisfactory to the Agent, one or more lockboxes (and, if required by the Agent, one or more blocked accounts) for the collection of Receivables. Each Borrower hereby authorizes the Agent to receive and collect any amount or amounts due or to become due on account of any Receivables following the occurrence of an Event of Default and, at its discretion, to apply the same to the repayment of the Notes. Except as otherwise may be approved by the Agent in writing, any checks or other remittances received by any Borrower in payment of the Receivables shall be held in 65 trust by such Borrower for the Agent and Lender(s). Each Borrower shall, in writing, within thirty (30) days from the date the Agent shall have requested that one or more lockboxes be established and maintained, direct all of its customers (other than certain customers as may be approved by the Agent in writing) to make payments directly to the Agent pursuant to the form of Payment Direction Letter attached as Exhibit 8 hereto, and shall include on all of its --------- invoices, a direction to its customer to make all payments directly to the lockbox designated by the Agent in writing. Section 11.3 Other Agreements. Except as may otherwise be expressly ---------------- permitted by the terms of this Agreement, and without limiting any other restrictions or provisions of this Agreement, each Borrower will (i) on demand, subject to any confidentiality and secrecy requirements imposed by any Government agency, make available in form reasonably acceptable to the Agent, shipping documents and delivery receipts evidencing the shipment of goods which gave rise to the sale or lease of inventory or of an account, contract right or chattel paper, completion certificates or other proof of the satisfactory performance of services which gave rise to the sale or lease of inventory or of an account, contract right or chattel paper, and each Borrower's copy of any written contract or order from which a sale or lease of inventory, an account, contract right or chattel paper arose; and (ii) when requested, advise the Agent when an Account Debtor returns or refuses to retain any goods, the sale or lease of which gave rise to an account, contract right or chattel paper, and of any delay in delivery or performance, or claims made in regard to any sale or lease of inventory, account, contract right or chattel paper. Upon reasonable notice, all such records will be available for examination by authorized agents of the Agent. It is expressly understood and agreed, however, that neither the Agent nor any Lender shall be required or obligated in any manner to make any inquiries as to the nature or sufficiency of any payment received by it or to present or file any claims or take any other action to collect or enforce a payment of any amounts which may have been assigned to it or to which it may be entitled hereunder at any time or times. ARTICLE 12 ---------- MISCELLANEOUS ------------- Section 12.1 Remedies Cumulative. Each right, power and remedy of the ------------------- Agent and/or Lender(s) provided for in this Agreement or in any other Loan Document or now or hereafter existing at law or in equity, by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Agreement or in any other Loan Document, or now or hereafter existing at law or in equity, by statute or otherwise, and the exercise or beginning of the exercise by the Agent and/or any Lender of any one or more of such rights, powers or remedies shall not 66 preclude the simultaneous or later exercise by the Agent and/or any Lender of any or all such other rights, powers or remedies. Section 12.2 Waiver. No failure or delay by the Agent or any Lender to ------ insist upon the strict performance of any term, condition, covenant or agreement set forth in this Agreement or any other Loan Document, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of such term, condition, covenant or agreement or of any such breach, or preclude the Agent or any Lender from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any of the Obligations, neither the Agent nor any Lender shall be deemed to have waived either the right to require prompt payment when due of all other Obligations, or the right to declare a default for failure to make payment of any such other Obligations. Section 12.3 Notices. Notices to any party shall be in writing and shall ------- be delivered personally or by first-class mail or nationally-recognized overnight delivery service addressed to the parties at the addresses set forth below or otherwise designated in writing: If to the Borrowers: AverStar, Inc. 23 Fourth Avenue Burlington, Massachusetts 01803 Attention: Michael Alexander Chief Executive Officer If to the Agent: First Union Commercial Corporation 1970 Chain Bridge Road, 9th Floor McLean, Virginia 22102 Attention: Mr. Jeffrey McGrath Director If to the Lender(s): First Union Commercial Corporation 1970 Chain Bridge Road, 9th Floor McLean, Virginia 22102 Attention: Mr. Jeffrey McGrath Director and to the other Lender parties hereto from time to time with a copy of all notices to the Agent and/or Lender to: Dickstein Shapiro Morin & Oshinsky LLP 2101 L Street, N.W. Washington, D.C. 20037 Attention: Matthew S. Bergman, Esq. 67 with a copy of all notices to the Borrowers to: Swidler Berlin Shereff Friedman, LLP 919 Third Avenue New York, New York 10022 Attention: Gerald Adler, Esq. Section 12.4 Entire Agreement. This Agreement and the other Loan ---------------- Documents constitute the entire agreement of the parties with respect to the Loan and supersede all prior agreements and understandings (except that the terms and provisions set forth in (i) the Commitment Letter and attached term sheet with respect to the right of First Union and/or First Union Capital Markets Corp., exercisable in connection with its syndication of the Loan, to alter or amend the Loan, including, but not limited to any change in structure, pricing, financial covenants or maturity of the Loan, and the Borrowers' agreement to develop an alternative structure with First Union and/or First Union Capital Markets Corp. that will permit syndication of the Loan to the satisfaction of First Union and/or First Union Capital Markets Corp., and (ii) the Fee Letter, shall in each case survive the execution and delivery of this Agreement). This Agreement and the other Loan Documents shall continue in full force and effect for so long as any Borrower shall be indebted hereunder or under any Note, and thereafter until the Agent shall have actually received written notice of the termination hereof from the Borrowers and all Obligations incurred or contracted before receipt of such notice shall have been fully paid. Section 12.5 Relationship of the Parties. This Agreement provides for the --------------------------- extension of financial accommodations by the Lender(s), in their capacity as lender, to each Borrower, in its capacity as a borrower, and for the payment of interest and repayment of the Obligations by the Borrowers. Certain provisions herein, such as those relating to compliance with the financial covenants, delivery to the Agent and/or Lender(s) of financial statements, and compliance with other affirmative and negative covenants are for the benefit of the Lender(s) to protect the interests of the Lender(s) in assuring repayment of the Obligations. Nothing contained in this Agreement shall be construed as permitting or obligating the Agent or any Lender to act as a financial or business advisor or consultant to any Borrower, as permitting or obligating the Agent or any Lender to control any Borrower or to conduct any Borrower's operations, as creating any fiduciary obligation on the part of the Agent or any Lender to any Borrower, or as creating any joint venture, agency or other relationship between the parties other than as explicitly and specifically stated in this Agreement. Each Borrower acknowledges that it has had the opportunity to obtain the advice of experienced counsel of its own choosing in connection with the negotiation and execution of this Agreement and to obtain the advice of such counsel with respect to all matters contained herein, including, without limitation, the provision in this Agreement for waiver of trial by jury. Each Borrower further acknowledges that it is experienced with respect to financial and credit matters and has made its own independent decision to request the Obligations and execute and deliver this Agreement. 68 Section 12.6 Waiver of Jury Trial; Punitive Damages. Each Borrower -------------------------------------- hereby (a) covenants and agrees not to elect a trial by jury of any issue triable by a jury, and (b) waives any right to trial by jury and any right to claim punitive damages, in each case, fully to the extent that any such right shall now or hereafter exist. This waiver of right to trial by jury and right to claim punitive damages is separately given by each Borrower, knowingly and voluntarily, and this waiver is intended to encompass individually each instance and each issue as to which the right to a jury trial or any claim of punitive damages would otherwise accrue. The Agent or any Lender is hereby authorized and requested to submit this Agreement to any court having jurisdiction over the subject matter and the parties hereto, so as to serve as conclusive evidence of the Borrower's herein contained waiver of the right to jury trial and any right to claim punitive damages. Further, each Borrower hereby certifies that no representative or agent of the Agent or any Lender (including counsel for the Agent and/or and Lender) has represented, expressly or otherwise, to the undersigned that the Agent or any Lender will not seek to enforce this provision waiving the right to a trial by jury or any right to claim punitive damages. Section 12.7 Submission to Jurisdiction; Service of Process; Venue. Any ----------------------------------------------------- judicial proceeding brought against any Borrower with respect to this Agreement or any other Loan Document may be brought in any court of competent jurisdiction in the Commonwealth of Virginia, and by execution and delivery of this Agreement, each party accepts for themselves and in connection with their properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid court, and irrevocably agree to be bound by any judgment rendered by such court in connection with this Agreement. Each Borrower irrevocably designates and appoints AverStar whose address is 23 Fourth Avenue, Burlington, Massachusetts 01803, as its agent to receive on its behalf service of all process in any such proceeding in any court in the Commonwealth of Virginia, such service being hereby acknowledged by each Borrower to be effective and binding on it in every respect. A copy of any such process so served shall be mailed by registered or certified mail to the Borrowers at the address to which notices are to be addressed in accordance with this Agreement, except that any failure to mail such copy shall not affect the validity of service of process. Each Borrower shall at all times maintain an agent for service of process pursuant to this provision. If any Borrower fails to appoint such an agent, or if such agent refuses to accept service, such Borrower hereby agrees that service upon it by mail shall constitute sufficient notice. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of the Agent or any Lender to bring proceedings against any Borrower in the courts of any other jurisdiction. Section 12.8 Changes in Capital Requirements. If after the date of this ------------------------------- Agreement any Lender shall determine that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by such Lender with any request or directive regarding capital adequacy of any authority, central bank or comparable agency, which adoption, change or compliance has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of such Lender's obligations hereunder to 69 a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy), then the interest rate on the Notes shall be increased to a rate which shall retain such Lender's original rate of return on such Lender's capital. Section 12.9 Captions. The paragraph headings of this Agreement are for -------- convenience of reference only, and in no way define, limit or describe the scope of this Agreement or the intent of any provision hereof. Section 12.10 Modification And Waiver. Neither this Agreement nor any ----------------------- term, condition, covenant or agreement hereof may be changed, waived, discharged or terminated orally, but that may be accomplished only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. Section 12.11 Transferability. --------------- (a) No Borrower shall assign any of its rights, interests or Obligations under this Agreement. (b) No Lender shall sell, assign or otherwise transfer its interests under this Agreement to any person or entity (other than an Eligible Assignee), without the prior written consent of the Agent and the Borrowers; it being understood and agreed that the Borrowers' consent shall not be (i) unreasonably withheld; or (ii) required if an Event of Default exists or any act, event or condition has occurred which with notice or the lapse of time, or both, would constitute an Event of Default. Furthermore, no sale, assignment or transfer shall be made by any Lender (other than First Union) unless (i) if the proposed assignee of the transferring Lender is not an affiliate of the transferring Lender, at least thirty (30) days' prior written notice of such sale, assignment or transfer shall have been issued by such transferring Lender to the Agent and the Borrowers, and such notice identifies the proposed assignee; (ii) if the proposed assignee of the transferring Lender is an affiliate of the transferring Lender, written notice of such sale, assignment or transfer shall have been issued by such transferring Lender to the Agent and the Borrowers simultaneously with such sale, assignment or transfer, and such notice identifies the proposed assignee; (iii) the dollar equivalent of the Percentage of the transferring Lender being assigned equals or exceeds Five Million and No/100 Dollars ($5,000,000.00); (iv) the Agent shall have received a duly executed Assignment and Acceptance agreement, in the form attached as Exhibit 9 hereto; and (v) if --------- the proposed assignee of the transferring Lender is not an affiliate of the transferring Lender, an assignment fee in the amount of Five Thousand and No/100 Dollars ($5,000.00) shall have been paid to the Agent. Section 12.12 Governing Law; Binding Effect. This Agreement shall be ----------------------------- governed by the laws of the Commonwealth of Virginia and be binding upon the Borrower 70 and inure to the benefit of the parties hereto and their respective personal representatives, successors and assigns. Section 12.13 Gender; Number. As used herein, the singular number shall -------------- include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Section 12.14 Materiality. Unless the context clearly indicates to the ----------- contrary, determinations regarding the materiality of any act, event, condition or circumstance shall be in the reasonable judgment of the Agent. Section 12.15 Counterparts. This Agreement may be executed in any number ------------ of counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. [Remainder of page intentionally left blank] 71 This Agreement is signed, sealed and delivered as of the date first above- written. ATTEST: Borrowers: --------- [Corporate Seal] AVERSTAR, INC., a Delaware corporation By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander -------------------------- ------------------------ Name: Nicholas A. Pettinella Name: Michael A. Alexander -------------------------- Title: Secretary Title: Chairman and CEO -------------------------- ATTEST: [Corporate Seal] COMPUTER BASED SYSTEMS, INC., a Virginia corporation By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander -------------------------- ------------------------ Name: Nicholas A. Pettinella Name: Michael B. Alexander -------------------------- Title: Asst. Secretary Title: President and Secretary -------------------------- ATTEST: [Corporate Seal] COMPUTING APPLICATIONS SOFTWARE TECHNOLOGY, INC., a California corporation By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander -------------------------- ------------------------ Name: Nicholas A. Pettinella Name: Michael A. Alexander -------------------------- Title: Secretary Title: Vice President -------------------------- ATTEST: [Corporate Seal] INTERMETRICS SECURITIES, INC., a Massachusetts corporation By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander -------------------------- ------------------------ Name: Nicholas A. Pettinella Name: Michael A. Alexander -------------------------- Title: V.P., CFO Treasurer Title: Vice President -------------------------- ATTEST: [Corporate Seal] INTERMETRICS INTERNATIONAL, INC., a Massachusetts corporation By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander -------------------------- ------------------------ Name: Nicholas A. Pettinella Name: Michael A. Alexander -------------------------- Title: V.P., CFO, Treasurer Title: Vice President -------------------------- 72 Agent: ----- FIRST UNION COMMERCIAL CORPORATION By: /s/ Jeff McGrath ------------------------ Name: Jeff McGrath Title: Director Lenders: ------- FIRST UNION COMMERCIAL CORPORATION By: /s/ Jeff McGrath ------------------------ Name: Jeff McGrath Title: Director STATE STREET BANK & TRUST COMPANY, N.A. By: ________________________ Name: Title: CRESTAR BANK By: ________________________ Name: Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: ________________________ Name: Title: 73 Agent: ----- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: Lenders: ------- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: STATE STREET BANK & TRUST COMPANY, N.A. By: Suzanne L.Dwyer --------------------------- Name: Suzanne L. Dwyer Title: Vice President CRESTAR BANK By: ___________________________ Name: Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: ___________________________ Name: Title: Agent: ----- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: Lenders: ------- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: STATE STREET BANK & TRUST COMPANY, N.A. By: ___________________________ Name: Title: CRESTAR BANK By: /s/ Timothy J. Duggan --------------------------- Name: Timothy J. Duggan Title: Vice President MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: ___________________________ Name: Title: Agent: ----- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: Lenders: ------- FIRST UNION COMMERCIAL CORPORATION By: ___________________________ Name: Title: STATE STREET BANK & TRUST COMPANY, N.A. By: ___________________________ Name: Title: CRESTAR BANK By: ___________________________ Name: Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ Michael P. Hermsen --------------------------- Name: Michael P. Hermsen Title: Managing Director EX-23.2A 7 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2(a) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated March 30, 1999, relating to AverStar, Inc., in the Registration Statement (Amendment No. 1 to Form S-1 No. 333-78517) and related Prospectus of AverStar, Inc. for the registration of 4.000,000 shares of its common stock. We also consent to the incorporation by reference therein of our report dated March 30, 1999 with respect to the financial statement schedule of AverStar, Inc. for the year ended February 28, 1997, the ten month period ended December 31, 1997 and the year ended December 31, 1998, included in the Registration Statement (Amendment No. 1 to Form S-1 No. 333-78517) filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Ernst & Young LLP Boston, Massachusetts July 15, 1999 EX-23.2B 8 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2(b) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated April 17, 1998, relating to Pacer Infotec, Inc. and Subsidiaries, in the Registration Statement (Amendment No. 1 to Form S-1 No. 333-78517) and related Prospectus of AverStar, Inc. for the registration of 4,000,000 shares of its common stock. Ernst & Young LLP Boston, Massachusetts July 15, 1999 EX-23.2C 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2(c) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated April 17, 1998, relating to Looking Glass Technologies, Inc., in the Registration Statement (Amendment No. 1 to Form S-1 No. 333-78517) and related Prospectus of AverStar, Inc. for the registration of 4,000,000 shares of its common stock. Ernst & Young, LLP Boston, Massachusetts July 15, 1999 EX-23.3 10 CONSENT OF GRANT THORNTON LLP EXHIBIT 23.3 Consent of Independent Certified Public Accountants We have issued our report dated April 18, 1997, accompanying the financial statements of Computer Based Systems, Inc. contained in Amendment No. 1 to the Registration Statement and Prospectus. We consent to the use of the aforementioned report in Amendment No. 1 to the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." /s/ Grant Thorton LLP Vienna, Virginia July 13, 1999 EX-23.4 11 CONSENT OF ARONSON, FETRIDGE, & WEIGLE Exhibit 23.4 Consent of Aronson & Fetridge & Weigle, _______________________________________ A Professional Corporation __________________________ We consent to the inclusion of our report dated March 12, 1999 on our audits of the financial statements of Computer Based Systems, Inc. as of and for each of the two years ended December 31, 1998 and 1997 included in Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-78517) of AverStar, Inc. We also consent to the inclusion in Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-78517) of AverStar, Inc. of the reference to Aronson, Fetridge & Weigle, a Professional Corporation, as experts in accounting and auditing. Aronson, Fetridge & Weigle (a professional corporation) /s/ Aronson, Fetridge & Weigle Rockville, Maryland July 13, 1999 EX-23.5 12 CONSENT OF INTERNATIONAL DATE CORP. EXHIBIT 23.5 INTERNATIONAL DATA CORPORATION ------------------------------ International Data Corporation 5 Speen Street Framingham, MA 01701 (508)-872-8200 References to International Data Corporation to be used in S-1 registration statement: - -------------------------------------------------------------------------------- International Data Corporation, or IDC, forecasts that the United States market for IT services will grow from an estimated $139 billion in 1998 to $207 billion in 2002. IDC forecasts that the IT systems services segment of the worldwide IT services market will grow at a compound annual growth rate of approximately 12% over this period. - -------------------------------------------------------------------------------- The Undersigned hereby consents to the references to the Undersigned included in the Registration statement on form S-1 and any amendment thereto. /s/ Alexa McCloughan - ---------------------------- Signed Alexa McCloughan - ---------------------------- Name Sr. Vice President 7/9/99 - ---------------------------- Title/Date EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,777 0 46,367 622 0 50,595 13,980 8,998 94,212 42,942 0 0 0 10,194 (12,242) 94,212 36,346 36,346 28,841 34,138 0 0 760 1,448 656 792 0 0 0 792 0.11 0.11
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