S-1/A 1 ds1a.htm AMENDMENT #3 TO FORM S-1 Prepared by R.R. Donnelley Financial -- Amendment #3 to Form S-1
Table of Contents
 
As Filed with the Securities and Exchange Commission on June 27, 2002
Registration No. 333-87590
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
 
 
MTC Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
  
8711
  
02-0593816
(State or Other Jurisdiction of Incorporation or Organization)
  
(Primary Standard Industrial Classification Code Number)
  
(I.R.S. Employer
Identification Number)
 
 
4032 Linden Avenue
Dayton, Ohio 45432
Telephone: (937) 252-9199
 
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
David S. Gutridge
Chief Financial Officer
MTC Technologies, Inc.
4032 Linden Avenue
Dayton, Ohio 45432
Telephone: (937) 252-9199
 
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
Copies to:
 
Christopher M. Kelly, Esq.
Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
  
Craig E. Chason, Esq.
John M. McDonald, Esq.
Shaw Pittman LLP
2300 N Street, N.W.
Washington, D.C. 20037
 
 
Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement that is filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JUNE 27, 2002
 
5,000,000 Shares
 
LOGO
 
Common Stock
 
 
We are offering 2,500,000 shares of our common stock and Rajesh K. Soin, the Chairman of our Board of Directors and sole stockholder, is offering 2,500,000 shares of our common stock through a syndicate of underwriters. The underwriters also have an option to purchase up to an additional 375,000 shares of common stock from us and an additional 375,000 shares from Mr. Soin solely to cover over-allotments. We will not receive any of the proceeds from the sale of shares by Mr. Soin.
 
This is our initial public offering. The initial public offering price of our common stock is expected to be between $15.00 and $17.00 per share. We have been approved to list our common stock on The Nasdaq National Market under the symbol “MTCT.”
 
Investing in our common stock involves risks. See “ Risk Factors” beginning on page 7.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
    
Per share
     
Total
Public offering price
   
$
            
     
$
    
Underwriting discount
   
$
 
     
$
 
Proceeds to us (before expenses)
   
$
 
     
$
 
Proceeds to selling stockholder (before expenses)
   
$
 
     
$
 
 
The underwriters expect to deliver the shares of common stock to purchasers on or about            , 2002.
 
Legg Mason Wood Walker
Incorporated
 
Raymond James
 
Jefferies/Quarterdeck, LLC
 
BB&T Capital Markets
 
 
The date of this prospectus is            , 2002.

Table of Contents
 
 
 
 
 
LOGOSM
    “Linking Imagination and Innovation” ®

Table of Contents
 
 
TABLE OF CONTENTS
 
 
 
Through and including         , 2002, which is the 25th day 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 is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments.
 
You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. In this prospectus, unless the context indicates otherwise, the “Company,” “we,” “us” and “our” refer to MTC Technologies, Inc. and its wholly owned subsidiary Modern Technologies Corp.

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This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. We urge you to read this entire prospectus carefully, including the “Risk Factors” section and our consolidated financial statements and the notes to those statements.
 
MTC Technologies, Inc.
 
We provide sophisticated systems engineering, information technology, intelligence operations and program management services focusing primarily on U.S. defense, intelligence and civilian federal government agencies. For the year ended December 31, 2001 and the three months ended March 31, 2002, over 80% of our revenue was derived from our customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands. Having served the military and defense communities since our founding in 1984, we believe we are strategically positioned to assist the federal government as it increases its focus on modernizing defense capabilities and maintaining national security.
 
We develop and implement innovative, real-world solutions to complex engineering, technical and management problems. We combine a comprehensive knowledge of our customers’ business processes with the practical application of advanced engineering and information technology tools, techniques and methods to create value-added solutions for our customers. Approximately 70% of our personnel are located at our customers’ facilities. In the three months ended March 31, 2002, we provided approximately 78% of our services directly to our customers as a prime contractor, delivering many mission-critical services. Serving as a prime contractor in close proximity to our customers has allowed us to maintain long-standing relationships that have been important to our growth. We have provided services to the U.S. Air Force since our founding, the U.S. Army for 13 years and NASA for seven years.
 
From 2000 to 2001, our revenue grew approximately 22%. We believe we are well positioned to continue our internal revenue growth by leveraging our existing customer relationships and diverse contract vehicles, including General Service Administration (GSA) schedules and Blanket Purchase Agreements (BPAs). We believe our contract base to be well diversified with over 135 active contracts, representing over 440 task orders as of March 31, 2002. In July 2001, we were one of six awardees of the U.S. Air Force’s Flexible Acquisition and Sustainment Tool (FAST) program with a ceiling of $7.4 billion. Under the FAST program, we expect to have the opportunity to compete for several hundred million dollars in task orders each year over the seven-year contract life as the U.S. Air Force maintains and modernizes aircraft and defense systems. As of March 31, 2002, we had an estimated total backlog of $258 million, of which $91 million was funded.
 
Our management team has substantial experience providing specialized services to the Department of Defense, intelligence community and other federal government agencies. Most of our senior executives have served in high-level positions in the armed forces or intelligence community and maintain significant contacts with these organizations. Our chief executive officer has served as a senior executive of two public companies and has 11 years of public company experience in the defense industry. Our management team is supported by a high-quality staff of approximately 1,000 people, of whom more than 60% hold government security clearances, including approximately 15% with Top Secret clearance or higher, allowing us to work with our customers in highly classified environments.

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Market Opportunity
 
The federal government is the largest purchaser of services and solutions in the U.S. with a total annual budget for 2003 of $2.1 trillion. The discretionary budget for defense and non-defense items accounts for $773 billion, representing more than one-third of the total budget. The defense budget for 2003 is $379 billion including a $10 billion emergency fund and is expected to grow to $442 billion by 2007. Budgets for civilian agencies that we support, such as NASA, are included in the non-defense portion. Information technology continues to be a focus area across all organizations in the federal government. The independent market research firm, INPUT, predicts that information technology spending will grow from $37.1 billion in 2002 to $63.3 billion in 2007. There are several key factors that we believe will continue to drive the growth of the federal government market in the defense industry:
 
 
•
 
increased spending on national defense, intelligence and homeland security as a result of the recent terrorist incidents in the U.S.;
 
 
•
 
ongoing modernization of information technology and communication infrastructures;
 
 
•
 
increased reliance of government customers on outsourced technology services;
 
 
•
 
increased emphasis on defense system sustainment and modernization; and
 
 
•
 
continued evolution of federal government procurement practices.
 
Our Competitive Advantages
 
We believe we are well positioned to meet the rapidly evolving needs of the U.S. defense, intelligence and civilian federal government agencies because we possess important business strengths, including the following:
 
Ability to Leverage the Breadth and Depth of Our Capabilities through Our Diverse Contract Vehicles. Our broad array of technical and program management capabilities and diverse contract vehicles afford us opportunities to expand our business with existing customers and to develop relationships with new customers. We have the domain expertise in our customers’ systems and infrastructures that allows us to provide total systems solutions. In addition, our customers are able to access our services efficiently and rapidly through our diverse contract vehicles, eliminating the time-consuming prequalification process necessary if these contract vehicles were not already in place.
 
Responsive Bidding Practices. Our flexible management structure, culture and bid tracking system allow us to respond quickly to new business opportunities. While our infrastructure allows us to be sophisticated and organized in our bidding practices, our flat organizational structure promotes timely and rapid decisions. We empower our employees with the authority to identify, assess, pursue and respond to new business opportunities. Our tracking system incorporates a web-based system that is accessible to potential subcontractors and coordinates the dissemination of information and the collection of proposals on a real-time basis. In light of recent federal procurement reform, we believe that our ability to respond quickly to bids provides us a competitive advantage.
 
Highly Qualified Staff with Security Clearances. We emphasize hiring and retaining an experienced and skilled staff that is augmented with former high-ranking government personnel. Of our professional staff, over one-third possess advanced degrees. Over 60% of our employees have government security clearances, with approximately 15% holding Top Secret security clearances or higher. Moreover, many of our staff are specialists in certain key areas, including Special Operations Forces, Signals Intelligence, Measurement and Signatures Intelligence and Imagery Intelligence, as well as a number of highly sensitive and mission-critical programs.
 

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Experienced and Disciplined Management Team. All of our senior managers have 20 or more years of combined military and industry experience and 73% are former senior military officers or intelligence officers, providing the experience and leadership capabilities needed to continue our impressive growth. Moreover, our key operational managers average more than nine years of tenure with us. All of our senior managers benefit from a sophisticated internal training program that provides them with the financial and management skills to complete projects on time while minimizing costs, resulting in maximized margins. Our training methodology and processes have formed the foundation for our ISO program and were instrumental in us achieving ISO certification in 2002.
 
Strong Customer Relationships. We have a successful track record of fulfilling our customers’ needs, as demonstrated by our long-term relationships with many of our largest customers. We have supported technical services programs for the U.S. Air Force for over 17 years and similar programs for the U.S. Army for 13 years. In addition, we have supported the intelligence community for eight years and provided business and highly technical modeling and simulation support to NASA for seven years.
 
Our Business Strategy
 
Our objective is to profitably grow our business using the following strategies:
 
Grow Business with Our Existing Customers. Many of our customers have increasing requirements and responsibilities due to the government’s emphasis on defense and national security. As a result, our customers continue to outsource more of their existing activities, while introducing new program areas that we believe we can support. Our diverse capabilities allow us to provide a wide variety of services to our existing customers as they expand their activities. We believe our high level of customer satisfaction and deep knowledge of our customers’ business processes enhance our position to provide these additional services.
 
Expand Our Customer Base. We intend to build on our long-term customer relationships, broad skill base, diverse contract vehicles and industry reputation to expand our customer base to new customers. We intend to focus on those areas that we believe provide opportunities for growth and where we can provide high value-added services. Our large contract portfolio allows us to rapidly respond and provide support to new customers. For example, we were one of six awardees of the $7.4 billion FAST program. We believe our past performance and industry reputation with previous U.S. Air Force customers were major factors in our award of the FAST program, and we expect that these factors will continue to be important as we expand into new customer areas.
 
Pursue Strategic Acquisitions. We plan to enhance our internal growth by selectively pursuing strategic acquisitions of businesses that can broaden our domain expertise and service offerings and allow us to establish relationships in new program areas. We intend to be highly selective in our acquisition program and will focus on acquiring businesses that provide value-added services and solutions for the defense and intelligence communities. We also will consider opportunities that would enable us to leverage our reputation and experienced management team in areas of high growth potential.
 
 

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The Offering
 
Common stock offered by us
   
2,500,000 shares
Common stock offered by Mr. Soin, the selling stockholder
   
2,500,000 shares
Common stock to be outstanding immediately after this offering
   
12,387,482 shares
Use of proceeds
   
We expect to use the net proceeds from this offering (i) to repay certain indebtedness and (ii) for working capital and general corporate purposes, including potential acquisitions of complementary businesses. See “Use of Proceeds” on page 19.
Over-allotment option
   
We and our selling stockholder have granted the underwriters an option to purchase up to an additional 750,000 shares of common stock solely
to cover over-allotments. If this over-allotment option is exercised in full, we will sell to the underwriters an additional 375,000 shares, and the selling stockholder will sell to the underwriters an additional 375,000 shares.
Proposed Nasdaq symbol
   
MTCT
 
Unless we specifically state otherwise, the information contained in this prospectus:
 
 
•
 
is based on the assumption that the underwriters will not exercise the over-allotment option granted to them by us and our selling stockholder;
 
 
•
 
gives effect to a 2,471.8707-for-1 split of our common stock;
 
 
•
 
excludes 415,273 shares of common stock subject to outstanding and immediately exercisable stock options that have been granted to three members of our management team; and
 
 
•
 
excludes 474,599 shares of common stock reserved for issuance under our 2002 Equity and Performance Incentive Plan, of which 71,000 shares will be subject to options granted to employees immediately prior to the offering, none of which will be immediately exercisable.
 
Risk Factors
 
See “Risk Factors” beginning on page 7 for a discussion of material risks that prospective purchasers of our common stock should consider.

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Summary Consolidated Financial Data
 
The tables below set forth summary consolidated financial data for the years ended December 31, 1999, 2000 and 2001 and for the quarters ended March 31, 2001 and 2002.
 
Prospective investors should read this summary consolidated financial data in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.
 
    
Year ended December 31,
     
Three months ended March 31,
  
    
1999
     
2000
     
2001
     
2001
     
2002
  
    
(in thousands, except share and per share data)
  
Income statement data:
                                             
Revenue
   
$
70,319
 
   
$
75,961
 
   
$
92,590
 
   
$
20,630
 
   
$
23,857
 
Cost of revenue
   
 
59,069
 
   
 
61,866
 
   
 
75,248
 
   
 
17,031
 
   
 
19,782
 
    
  
  
  
  
Gross profit
   
 
11,250
 
   
 
14,095
 
   
 
17,342
 
   
 
3,599
 
   
 
4,075
 
General and administrative expenses excluding amortization of goodwill and other intangibles, management fees to related party and stock compensation expense
  
 
5,435
 
   
 
4,965
 
   
 
5,074
 
   
 
1,233
 
   
 
1,596
 
Amortization of goodwill and other intangibles (1)
   
 
—  
 
   
 
471
 
   
 
1,086
 
   
 
353
 
   
 
—  
 
Management fees to related party (2)
   
 
1,015
 
   
 
2,549
 
   
 
2,395
 
   
 
469
 
   
 
500
 
Stock compensation expense (3)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
5,215
 
    
  
  
  
  
Operating income (loss)
  
 
4,800
 
   
 
6,110
 
   
 
8,787
 
   
 
1,544
 
   
 
(3,236
)
Net interest expense
   
 
425
 
   
 
618
 
   
 
570
 
   
 
217
 
   
 
168
 
    
  
  
  
  
Income (loss) from continuing operations
   
 
4,375
 
   
 
5,492
 
   
 
8,217
 
   
 
1,327
 
   
 
(3,404
)
Loss from discontinued operations (4)
   
 
(2,877
)
   
 
(1,182
)
   
 
(453
)
   
 
(209
)
   
 
—  
 
    
  
  
  
  
Net income (loss)
   
$
1,498
 
   
$
4,310
 
   
$
7,764
 
   
$
1,118
 
   
$
(3,404
)
    
  
  
  
  
Basic and diluted earnings (loss) per common share:
                                             
Income (loss) from continuing operations
   
$
0.27
 
   
$
0.56
 
   
$
0.83
 
   
$
0.13
 
   
$
(0.34
)
Pro forma income (loss) from continuing operations
                     
$
0.49
 
            
$
(0.17
)
Weighted average shares outstanding
   
 
16,479,961
 
   
 
9,887,482
 
   
 
9,887,482
 
   
 
9,887,482
 
   
 
9,887,482
 
Weighted average shares used in computing pro forma income (loss) from continuing operations per share
                     
 
11,243,540
 
            
 
11,133,888
 
    
March 31, 2002
  
    
Actual
     
Pro forma
  
    
(in thousands)
  
Balance sheet data:
                  
Working capital
   
$
7,209
 
   
$
2,809
 
Total assets
   
 
28,844
 
   
 
31,244
 
Long-term obligations
   
 
15,010
 
   
 
15,010
 
Stockholder’s equity (deficiency in net assets)
   
 
(4,259
)
   
 
(8,659
)
(1)
 
We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, and discontinued the amortization of goodwill as of that date. In addition, intangibles were completely amortized in 2001 and future periods will have no further charge for their amortization.
(2)
 
The management fees to a related party were paid to a wholly owned affiliate of our sole stockholder. The nature of the services received from the affiliate included our sole stockholder’s services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. These fees will no longer be incurred after March 31, 2002. Although the management fees have been eliminated, we anticipate that a portion of these costs will be replaced on an annual recurring basis, including:
 
Ÿ
 
our sole stockholder now serves as Chairman of our board of directors for an annual fee of $150,000;
 
Ÿ
 
Our President has assumed the role of Chief Executive Officer, and we have entered into a retention agreement with him that increases his base compensation, effective July 1, 2002, from $250,000 to $500,000. In addition, we will pay the new Chief Executive Officer a $750,000 one-time cash payment based on services performed, or to be performed, by the Chief Executive Officer during the second, third and fourth quarters of fiscal year 2002. The additional compensation will be recorded in three equal installments of $250,000 in each of the quarters ended June 30, September 30, and December 31, 2002.
 
Ÿ
 
we have hired a Chief Financial Officer with a base compensation of $250,000;
 
Ÿ
 
in addition to their base salaries, our Chief Executive Officer and Chief Financial Officer may be entitled to discretionary, performance-based bonuses as may be determined from time to time by our board of directors; and
 
Ÿ
 
we intend to refer legal matters to outside legal counsel, the costs of which are currently not determinable.
(3)
 
In March 2002, the sole stockholder made a binding commitment to award $5.2 million in stock-based compensation to our President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer to reward the executives for their major contributions to the past profitability, growth and financial strength of the Company. Stock option agreements to purchase 415,273 shares of the Company’s common stock at $4.19 per share were entered into with the executives on May 3, 2002 to satisfy the $5.2 million stock compensation award. The options had an intrinsic value of $5.2 million based upon the difference between the estimated fair value of our common stock of $16.75 per share and the exercise price. For more information, please see Note O to our consolidated financial statements on Page F-17.
(4)
 
We have decided to exit certain lines of business so that we can continue to enhance our core competencies. For more information on our discontinued operations, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations” on page 28 and Note I to our consolidated financial statements on page F-14.

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Transactions Prior to the Offering
 
Revocation of S Corporation Status
 
We are revoking our S corporation status in connection with the offering. In connection with that revocation, we distributed $3.4 million to our sole stockholder, representing substantially all of our S corporation earnings through the date of revocation of our S corporation status. See “S Corporation Status” on page 20.
 
Stock Split
 
Our holding company structure was established on May 3, 2002. We completed a 2,471.8707-for-1 stock split on June 11, 2002. For purposes of this prospectus, unless stated otherwise, “common stock” means our common stock after giving effect to the stock split. See “Description of Capital Stock” on page 62.
 
Divestitures
 
To focus on our core competencies, we have divested several of our ancillary businesses. Those businesses have been distributed to our sole stockholder. See “Related Party Transactions—Nonrecurring Transactions—Business Dispositions” on page 59.
 
 
Immediately following the closing of this offering, Rajesh K. Soin, our Chairman and sole stockholder, will beneficially own approximately 59.6% of our issued and outstanding common stock. As a result, Mr. Soin will be able to control the outcome of all matters that our stockholders vote upon, including the election of directors, amendments to our certificate of incorporation and mergers or other business combinations.
 
 
We were incorporated in Delaware in April 2002 to hold all of the capital stock of Modern Technologies Corp., which was incorporated in 1985. Our principal executive offices are located at 4032 Linden Avenue, Dayton, Ohio 45432. Our telephone number at that address is (937) 252-9199. Our website is www.modtechcorp.com. The information on our website is not a part of this prospectus.
 
MTC® is a registered trademark of our subsidiary.
 

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You should carefully consider the risks described below and all other information contained in this prospectus before purchasing our common stock. Some of the following risks relate principally to the industry in which we operate and to our business. Other risks relate principally to the securities markets and ownership of our stock. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, may also impair our operations or results. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned, and our financial condition and operating results could be seriously harmed. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.
 
RISKS RELATED TO OUR BUSINESS
 
We are dependent on contracts with the U.S. federal government for substantially all of our revenue.
 
 
For the year ended December 31, 2001 and for the three months ended March 31, 2002, we derived approximately 93% and 89%, respectively, of our revenue from federal government contracts, either as a prime contractor or a subcontractor. We expect that federal government contracts will continue to be the primary source of our revenue for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, or any significant agency in the intelligence community or Department of Defense, or if our reputation or relationship with government agencies were impaired or the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition or operating results would be materially harmed. We could be debarred or suspended for, among other things, actions or omissions that are deemed by the government to be so serious or compelling that they affect our contractual responsibilities. For example, we could be disbarred for commission of a fraud or criminal offense in connection with obtaining, attempting to obtain or performing a contract, or for embezzlement, fraud, forgery, falsification or other causes identified in Subpart 9.4 of the Federal Acquisition Regulations. In addition, changes in federal government contracting policies could directly affect our financial performance. Among the factors that could materially adversely affect our federal government contracting business are:
 
 
•
 
budgetary constraints affecting federal government spending generally, or defense and intelligence spending in particular, and annual changes in fiscal policies or available funding;
 
 
•
 
changes in federal government programs, priorities, procurement policies or requirements;
 
 
•
 
new legislation, regulations or government union pressures, on the nature and amount of services the government may obtain from private contractors;
 
 
•
 
federal governmental shutdowns (such as occurred during the government’s 1996 fiscal year) and other potential delays in the government appropriations process; and
 
 
•
 
delays in the payment of our invoices by government payment offices due to problems with, or upgrades to, government information systems, or for other reasons.
 
These or other factors could cause federal governmental agencies, or prime contractors where we are acting as a subcontractor, to reduce their purchases under contracts, to exercise their right to terminate contracts or to not exercise options to renew contracts, any of which could have a material adverse effect on our financial condition and operating results.
 
Our FAST program is likely to affect our operating results.
 
The FAST program is a multiple award, Indefinite Delivery Indefinite Quantity (IDIQ) contract with a $7.4 billion ceiling supporting the U.S. Air Force over a seven-year period. Although the FAST program accounted for a negligible percentage of our revenue in 2001, we are expanding our operations and incurring substantial

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costs in anticipation of tasks being awarded to us under the FAST program. If the FAST program is terminated, or if we fail to be awarded tasks as anticipated, our revenue growth could suffer. In addition, although we believe the FAST program presents an opportunity for significant growth, program management is generally less profitable than our other activities. In the event that the FAST program or other similar programs become a significant part of our business, our operating margins as a percentage of total revenue could be diminished.
 
We face competition, including under the FAST program, from other firms, some of which have substantially greater resources, industry presence and name recognition.
 
We operate in highly competitive markets and generally encounter intense competition to win contracts. We compete with many other firms, ranging from small specialized firms to large diversified firms, some of which have substantially greater financial, management and marketing resources than we do. For example, under the FAST program, we regularly compete for task orders with companies that have annual operating revenues exceeding $20 billion. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as geographic presence, price and the availability of key professional personnel. As part of our competitive strategy, we plan to expand our geographic coverage and customer base by selectively pursuing strategic acquisitions of other service providers. We envision pursuing acquisitions of companies valued between $10 million and $100 million. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results.
 
If our subcontractors fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.
 
Our performance of government contracts may involve the issuance of subcontracts to other companies upon which we rely to perform all or a portion of the work we are obligated to deliver to our customers. There is a risk that we may have disputes with subcontractors concerning a number of issues, including the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, or our decision not to extend existing task orders or issue new task orders under a subcontract. A failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as a prime contractor. As we expand into the program management area under the FAST program, our exposure to this risk will increase as a result of our reliance on subcontractors that provide specialized products. In extreme cases, subcontractor performance deficiencies could result in the government terminating our contract for default. A default termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders.
 
We may lose money on some contracts if we miscalculate the resources we need to perform under them.
 
We enter into three types of federal government contracts for our services: time-and-materials, fixed-price and cost-plus. For the three months ended March 31, 2002, we derived 70%, 19% and 11% of our revenue from time-and-materials, fixed-price and cost-plus contracts, respectively. For 2001, these percentages of revenue were 72%, 16% and 12%, respectively.
 
Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of performance, which may result in a reduced profit or a loss on the contract for us. Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time-and-materials contracts because we assume the risk of performing those contracts at negotiated hourly rates. Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns and receive the benefit of cost savings. Under cost-plus contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based.

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To the extent that the actual costs incurred in performing a cost-plus contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs.
 
Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract. Although we believe that we have recorded adequate provisions in our consolidated financial statements for losses on our contracts, our contract loss provisions may not be adequate to cover all actual losses that we may incur in the future.
 
Our quarterly operating results may vary widely.
 
Our quarterly revenue and operating results may fluctuate significantly in the future. A number of factors cause our revenue, cash flow and operating results to vary from quarter to quarter, including:
 
 
•
 
fluctuations in revenue earned on fixed-price contracts and contracts with a performance-based fee structure;
 
 
•
 
commencement, completion or termination of contracts during any particular quarter;
 
 
•
 
timing of spending activities by the federal government;
 
 
•
 
variable purchasing patterns under government GSA schedules, BPAs and IDIQ contracts;
 
 
•
 
changes in Presidential administrations, Congressional majorities and other senior federal government officials that affect the funding of programs;
 
 
•
 
changes in policy or budgetary measures that adversely affect government contracts in general;
 
 
•
 
the nature and cost of hardware requirements for our program management services, particularly in light of our expected expansion of these services under the FAST program; and
 
 
•
 
scheduling of holidays and vacations, which reduce revenue without a significant reduction in costs.
 
Changes in the volume of services provided under existing contracts and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire, are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and Executive approval in a timely manner.
 
Our senior management is important to our customer relationships.
 
We believe that our success depends in large part on the continued contributions of Michael W. Solley, our Chief Executive Officer, and other members of our senior management. We rely on our executive officers and senior managers to generate business and execute programs successfully. In addition, the relationships and reputations that members of our management team have established and maintain with government and military personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. While we have entered into a retention agreement with Mr. Solley, that agreement does not prevent him from terminating his employment. The loss of Mr. Solley or any other senior manager could impair our ability to identify and secure new contracts and otherwise to manage our business successfully.
 
Failure to maintain strong relationships with other contractors or subcontractors could result in a decline in our revenue.
 
For calendar year 2001 and for the three months ended March 31, 2002, we derived 38% and 22%, respectively, of our revenue from contracts in which we acted as a subcontractor to other contractors or from

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teaming activities in which we and other contractors have formed to bid on and execute particular contracts or programs. We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Our business, prospects, financial condition or operating results could be adversely affected if other contractors eliminate or reduce their subcontracts or teaming relationships with us, either because they choose to establish relationships with our competitors or because they choose to directly offer services that compete with our business, or if the government terminates or reduces these other contractors’ programs or does not award them new contracts. Consolidation in the industry may result in increased cost and lack of availability of subcontractors, which could adversely affect our business, prospects, financial condition or operating results.
 
We must recruit and retain skilled employees to succeed in our labor-intensive business.
 
We believe that an integral part of our success is our ability to provide our customers with skilled employees who have advanced information technology and engineering technical services skills and who work well with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be negatively impacted. We obtain some of our contracts on the strength of certain personnel the customer considers key to our successful performance under the contract. If we are unable to provide these key personnel or acceptable substitutions, the customer may not fund the contract.
 
If we fail to manage our growth, including the expansion of our program management activities under the FAST program, our revenue and earnings could be adversely impacted.
 
Our business strategy is to continue to expand our operations, including the expansion of our program management activities under the FAST program. This strategy may strain our management, operational and financial resources. If we make mistakes in deploying our financial or operational resources or fail to hire the additional qualified personnel necessary to support higher levels of business, our revenue and earnings could be adversely affected.
 
Covenants in our credit facility may restrict our financial and operating flexibility, including our ability to pursue strategic acquisitions.
 
Our credit facility contains covenants that limit or restrict our ability, among other things, to borrow money outside of the amounts committed under our credit facility; to make acquisitions; to dispose of our assets outside the ordinary course of business; to use borrowings for particular purposes; to create or hold subsidiaries; to transfer equity interests in subsidiaries; to extend credit or become a guarantor; to encumber our property or assets; to invest more than a limited amount in fixed assets or improvements; to modify the terms of any indebtedness owed to our selling stockholder; to change our accounting policies or the nature of our business; to amend or commit a default or grant a waiver under any material agreement; to permit ourselves to be a party to any material labor dispute or become subject to an adverse obligation, such as a judgment or decree; to merge or consolidate; and to pay dividends if we are, or after payment of the proposed dividends would be, in default under the credit facility. It also requires us to maintain specified financial standards relating to the net book value of our receivables, our tangible net worth, our fixed charge coverage and the ratio of our funded indebtedness to our adjusted earnings; to maintain adequate records and provide financial statements and other information to the banks; to pay taxes; to maintain insurance; to preserve our corporate existence and maintain our fixed assets; to comply with laws and orders; and to remain qualified to do business where needed. In addition, the ratio of our funded indebtedness to our adjusted earnings can affect the interest rates we pay, even if we satisfy the minimum required standard. Our ability to satisfy these standards can be affected by events beyond our control, and we cannot assure you that we will satisfy them. In addition, the ratio of our funded indebtedness to our adjusted earnings can affect the interest rates we pay, even if we satisfy the minimum required standard. As a result of our divestitures of our ancillary businesses during 2001 and the stock compensation awards granted to certain executives during 2002, we were in violation of a number of covenants in our credit agreement. Our lenders have

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waived these violations through December 31, 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” on page 32.
 
Future defaults under our credit facility could allow our lenders to declare all amounts outstanding to be immediately due and payable. We have pledged most of our personal property to secure the debt under our credit facility. If the lenders declare amounts outstanding under the credit facility to be due, the lenders could proceed against those assets. Any event of default, therefore, could have a material adverse effect on our business if the creditors do not waive the default and decide to exercise these rights.
 
From time to time, we may require consents or waivers from our lenders to permit actions that are prohibited by our credit facility. For example, the implementation of our holding company structure required the consent of our lenders. If, in the future, our lenders refuse to provide waivers of our credit facility’s restrictive covenants and/or financial standards, then we may be in default under our credit facility, and we may be prohibited from undertaking actions that are necessary to maintain and expand our business.
 
We may undertake acquisitions that could increase our costs or liabilities or be disruptive.
 
While we have limited acquisition experience, one of our business strategies is to selectively pursue acquisitions of companies in targeted geographic areas that provide services to specific governmental agencies. We may not be able to locate suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. Even if we identify an appropriate acquisition candidate, we may not be able to negotiate satisfactory terms for the acquisition, finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management’s attention from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. Further, our decision to acquire a company may not be driven by cost efficiencies, synergies or increasing revenue. For example, we may seek to acquire one or more of our subcontractors because we do not want to risk losing our relationship with the subcontractor if it is acquired by one of our competitors. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of ownership.
 
RISKS RELATED TO GOVERNMENT CONTRACTING
 
Federal government spending priorities may change in a manner adverse to our business.
 
Our business depends upon continued federal government expenditures on intelligence, defense and other programs that we support. The overall U.S. defense budget declined from time to time in the late 1980s and the early 1990s. While spending authorizations for intelligence and defense-related programs by the government have increased in recent years, and in particular after the September 11, 2001 terrorist attacks, future levels of expenditures and authorizations for those programs may decrease, remain constant or shift to programs in areas where we do not currently provide services. A significant decline in government expenditures, or a shift of expenditures away from programs that we support, could adversely affect our business, prospects, financial condition or operating results.
 
Our federal government contracts may be terminated by the government at any time, and if we do not replace them, our operating results may be adversely affected.
 
We derive most of our revenue from federal government contracts that typically span one or more base years and one or more option years. The option periods may cover more than half of the contract’s potential

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duration. Federal 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 for its convenience, as well as for our default. A decision by a government agency not to exercise option periods or to terminate contracts could result in significant revenue shortfalls.
 
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. We cannot recover anticipated profit on terminated work. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source.
 
Federal government contracts contain other provisions that may be unfavorable to contractors.
 
Federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts. As described above, these allow the government to terminate a contract for convenience or decline to exercise an option to renew. They also permit the government to do the following:
 
 
•
 
reduce or modify contracts or subcontracts;
 
 
•
 
cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
 
 
•
 
claim rights in products and systems produced by us; and
 
 
•
 
suspend or debar us from doing business with the federal government.
 
We must comply with complex procurement laws and regulations.
 
We must comply with and are affected by laws and regulations relating to the formation, administration and performance of federal government contracts, which affect how we do business with our customers and may impose added costs on our business. Among the most significant regulations are:
 
 
•
 
the Federal Acquisition Regulations, and agency regulations supplemental to 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 and Cost Principles, 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.
 
Moreover, we are subject to industrial security regulations of the Department of Defense and other federal agencies that are designed to safeguard against foreigners’ access to classified information. If we were to come under foreign ownership, control or influence, our federal government customers could terminate or decide not to renew our contracts, and it could impair our ability to obtain new contracts.
 
Our contracts are subject to audits and cost adjustments by the federal government.
 
The federal government audits and reviews our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. Like most large government contractors, our

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direct and indirect contract costs are audited and reviewed on a continual basis. Although audits have been completed on our incurred contract costs through 1999, audits for costs incurred or work performed after 1999 remain ongoing and, for much of our work in recent years, have not yet commenced. In addition, non-audit reviews by the government may still be conducted on all our government contracts. An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our revenue because any costs found to be improperly allocated to a specific contract will not be reimbursed, and revenue we have already recognized may need to be refunded. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of claims and profits, suspension of payments, treble damages, statutory penalties, fines and suspension or debarment from doing business with federal government agencies, which could materially adversely affect our business, prospects, financial condition or operating results. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us.
 
Restrictions on or other changes to the federal government’s use of service contracts may harm our operating results.
 
We derive a significant amount of revenue from service contracts with the federal government. The government may face restrictions from new legislation, regulations or government union pressures on the nature and amount of services the government may obtain from private contractors. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the government’s ability to use private service contractors. Although this proposal was not enacted, it or similar legislation could be proposed at any time. Any reduction in the government’s use of private contractors to provide services would adversely impact our business.
 
Our participation in the competitive bidding process, from which we derive significant revenue, presents a number of risks.
 
We derive significant revenue from federal government contracts that were awarded through a competitive bidding process. Most of the business that we expect to seek in the foreseeable future likely will be awarded through competitive bidding. Competitive bidding presents a number of risks, including the:
 
 
•
 
need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns;
 
 
•
 
substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us;
 
 
•
 
need to accurately estimate the resources and cost structure that will be required to service any contract we are awarded; and
 
 
•
 
expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction or modification of the awarded contract.
 
In addition, pricing pressures may arise from increased competition and therefore reduce our operating margins.
If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, our business and prospects will be adversely affected.

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We may not receive the full amount authorized under contracts that we have entered into and may not accurately estimate our backlog and GSA schedule value.
 
The maximum contract value specified under a government contract that we enter into is not necessarily indicative of revenue that we will realize under that contract. For example, we derive some of our revenue from government contracts in which we are not the sole provider, meaning that the government could turn to other companies to fulfill the contract, and from IDIQ contracts, which specify a maximum but only a token minimum amount of goods or services that may be provided under the contract. In addition, Congress often appropriates funds for a particular program on a yearly basis, even though the contract may call for performance that is expected to take a number of years. As a result, contracts typically are only partially-funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and until Congress makes subsequent appropriations and the procuring agency allocates funding to the contract. As described above, most of our existing contracts are subject to modification and termination at the federal government’s discretion. Moreover, there can be no assurance that any contract included in our estimated contract value that generates revenue will be profitable. Nevertheless, we look at these contract values, including values based on the assumed exercise of options relating to these contracts, in estimating the amount of our backlog. Because we may not receive the full amount we expect under a contract, our backlog may not accurately estimate our revenue. Also, in recent years we have been deriving an increasing percentage of our revenue under GSA schedules. GSA schedules are procurement vehicles under which government agencies may, but are not required to, purchase professional services or products. We have developed a method of calculating GSA schedule value that we use to evaluate estimates for the revenue we may receive under our GSA schedules. We believe our method of determining GSA schedule value is based on reasonable estimates and assumptions. However, there can be no assurance that our methodology accurately estimates GSA schedules value. Estimates of future revenue included in backlog and GSA schedule value are not necessarily precise and the receipt and timing of any of this revenue is subject to various contingencies, many of which are beyond our control. For a discussion of these contingencies see “Business—Backlog” on page 48. We may never realize the revenue on programs included in backlog and GSA schedule value.
 
Security breaches in classified government systems could adversely affect our business.
 
Many of the programs we support and systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on critical classified systems for federal government customers. Losses that we could incur from such a security breach could exceed the policy limits that we have for errors and omissions insurance, which generally do not exceed $1 million per task order awarded.
 
Our business is dependent upon obtaining and maintaining required security clearances.
 
Many of our federal government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with federal government requirements. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us, the customer whose work requires cleared employees could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and perform work with employees who hold specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts.
 
Our employees may engage in misconduct or other improper activities.
 
We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include intentional failures to comply with federal government procurement regulations and failing to

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disclose unauthorized activities to us. Employee misconduct could also involve the improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses.
 
RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING
 
Our stock price may be extremely volatile, and you may not be able to resell your shares at or above the initial public offering price.
 
Prior to this offering, there has been no public market for shares of our common stock. An active public trading market for our common stock may not develop or, if it develops, may not be maintained after this offering. We and the representatives of the underwriters will negotiate to determine the initial public offering price. The initial public offering price may not be related to the price at which the common stock will trade following this offering. Moreover, the price of our common stock after this offering may fluctuate widely, depending upon many factors, including:
 
 
•
 
our perceived prospects;
 
 
•
 
the prospects of the information technology and government contracting industries in general;
 
 
•
 
differences between our actual financial and operating results and those expected by investors and analysts;
 
 
•
 
changes in analysts’ recommendations or projections;
 
 
•
 
changes in general valuations for information technology and technical services companies; and
 
 
•
 
changes in general economic or market conditions and broad market fluctuations.
 
In addition, the terrorist attacks of September 11, 2001 and subsequent bioterrorism concerns have contributed to an economic slowdown and to instability in the U.S. and other global financial equity markets. The armed hostilities that were initiated as a result of these attacks and future responses by the federal government may lead to further acts of terrorism in the United States or elsewhere, and such developments would likely cause further instability in financial markets. All of these factors may increase the volatility of, or decrease, our stock price and could have a material adverse effect on your investment in our common stock. As a result, our common stock may trade at prices significantly below the initial public offering price, and you could lose all or part of your investment in the event you choose to sell your shares.
 
You will experience immediate and substantial dilution.
 
The initial public offering price per share will significantly exceed the current net tangible book value per share of our stock that was outstanding prior to this offering. As a result, investors purchasing common stock in this offering at $16.00 per share, the mid-point of the estimated price range set forth on the cover of this prospectus, will experience immediate and substantial dilution in the amount of $13.93 per share. In addition, we have issued options to acquire common stock at prices below the initial public offering price. The exercise of these employee stock options will result in further dilution to new investors.
 
Mr. Soin, our founder and Chairman, will continue to control the Company.
 
Upon completion of this offering, Mr. Soin, our selling stockholder, will own or control approximately 59.6% of the voting power and outstanding shares of the common stock. Accordingly, Mr. Soin will control the vote on all matters submitted to a vote of the holders of our common stock. For more information on voting rights, see “Description of Capital Stock—Common Stock” on page 62. As long as Mr. Soin beneficially owns a majority of the voting power of our common stock, he will have the ability, without the consent of our public stockholders, to elect all members of our board of directors and to control our management and affairs. Mr.

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Soin’s voting control may have the effect of preventing or discouraging transactions involving an actual or a potential change in control of the Company, regardless of whether a premium is offered over then-current market prices. Mr. Soin will be able to cause or prevent a change in control of the Company.
 
In the past, we have done business with entities that are controlled by or otherwise related to Mr. Soin. Some of these relationships will continue after this offering. See “Related Party Transactions” on page 58.
 
The interests of Mr. Soin may conflict with the interests of other holders of our common stock.
 
We have contracts with entities that are owned or controlled by, or otherwise affiliated with, Mr. Soin, our founder and Chairman, the terms of which were not negotiated at arm’s length.
 
We currently lease three of our properties, including our headquarters, from BC Real Properties, LLC, which is controlled by Mr. Soin. We will also enter into a sharing agreement with our sole stockholder’s family limited partnership. This agreement will govern the use of aircraft that we will jointly own with our sole stockholder’s family limited partnership. From time to time, we enter into subcontracting relationships with other government contractors that are affiliated with Mr. Soin. While we believe that the terms and conditions of these agreements with entities owned or controlled by, or otherwise affiliated with, Mr. Soin reflect or will reflect prevailing market conditions, we cannot assure you that they are or will be as favorable to us as the terms and conditions that might be negotiated by independent parties on an arm’s-length basis. For more information, see “Related Party Transactions” on page 58.
 
A substantial number of shares of our common stock will be eligible for sale by Mr. Soin and three of our executive officers in the near future, which could affect the market price of our common stock price.
 
A substantial number of shares of our common stock will be eligible for sale by Mr. Soin and three of our executive officers in the near future. After this offering, we will have 12,387,482 shares of common stock outstanding. Of these shares, Mr. Soin will own 7,387,482 shares, or approximately 59.6%. We have also granted options to purchase up to an aggregate of 415,273 shares of common stock to three of our executive officers. These options are immediately exercisable and have an exercise price of $4.19 per share.
 
We cannot predict the effect that any future sales of shares of our common stock by Mr. Soin or these executive officers, or the availability of such shares for sale, will have on the market price of our common stock. We believe that sales of substantial numbers of shares of our common stock by Mr. Soin or these executive officers, or the perception that such sales could occur, could depress or otherwise adversely affect the market price of our common stock.
 
In conjunction with this offering, Mr. Soin and these executive officers will enter into lock-up agreements with the underwriters and us pursuant to which they will agree not to sell, pledge or otherwise dispose of their shares, without the prior written consent of Legg Mason Wood Walker, Incorporated, for a period after the date of this prospectus of 270 days in the case of Mr. Soin and 180 days in the case of the executive officers. After these lock-up agreements expire, Mr. Soin’s shares and the shares issued upon exercise of these options will be eligible for sale in the public market. Legg Mason Wood Walker, Incorporated, on behalf of the underwriters, may release Mr. Soin and the three executive officers from their lock-up agreements at any time and without notice, which would allow for earlier sale of shares in the public market.
 
Under a registration rights agreement, beginning 270 days following the effective date of the registration statement of which this prospectus is a part, Mr. Soin will have “demand” registration rights as well as “piggyback” registration rights in connection with future offerings of our common stock. “Demand” registration rights will allow Mr. Soin to cause the Company to file a registration statement registering all or some of his shares. “Piggyback” registration rights will require us to provide notice to Mr. Soin if we propose to register any of our securities under the Securities Act and grant him the right to include his shares in our registration

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statement. If Mr. Soin exercises these registration rights, he will be able to sell his shares included on a registration statement without the volume restriction and manner of sale requirements imposed on affiliates under Rule 144 of the Securities Act.
 
Provisions in our charter documents could make a merger, tender offer or proxy contest difficult.
 
Our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of the Company that stockholders may consider favorable. In addition, provisions in our certificate of incorporation and bylaws and in the Delaware corporate law may make it difficult for stockholders to change the composition of the board of directors in any one year and thus may make it difficult to change the composition of management. Our certificate of incorporation and bylaws:
 
 
•
 
authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
 
 
•
 
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of the stock to elect some directors;
 
 
•
 
stagger our board of directors, making it more difficult to elect a majority of the directors on our board and preventing our directors from being removed without cause;
 
 
•
 
limit who may call special meetings of stockholders;
 
 
•
 
prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;
 
 
•
 
establish advance notice requirements for nominating candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
 
 
•
 
require that vacancies on our board of directors, including newly-created directorships, be filled only by a majority vote of directors then in office.
 
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting the Company from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder. For more information, see “Description of Capital Stock” on page 62.
 
We will have broad discretion over the use of proceeds from this offering.
 
We intend to use the net proceeds from this offering to repay our outstanding borrowings and for working capital and other general corporate purposes, including potential acquisitions of complementary businesses. We will have broad discretion with respect to the use of these funds and the determination of the timing of expenditures. We cannot assure you that we will use these funds in a manner that you would approve of or that the allocations will be in the best interests of all of our stockholders.

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FORWARD-LOOKING STATEMENTS
 
This prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. We have attempted to identify forward-looking statements by using such words as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “should” or “will” or other similar expressions. These forward-looking statements, which are subject to risks and uncertainties, and assumptions about us, may include, among other things, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry, including potential growth opportunities, the effects of future regulation and the effects of competition. These statements are only predictions based on our current expectations and projections about future events. Because these forward-looking statements involve risks and uncertainties, you should be aware that there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by these forward-looking statements. Some of these important factors are outlined under “Risk Factors” and elsewhere in this prospectus.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievement. Further, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We disclaim any obligation to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. You should not place undue reliance on forward-looking statements contained in this prospectus.

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USE OF PROCEEDS
 
We estimate the net proceeds to us of this offering to be approximately $35.8 million, based on an assumed offering price of $16.00 per share, the mid-point of the estimated price range set forth on the cover of this prospectus, after deducting the estimated expenses related to this offering and the portion of the underwriting discount payable by us. We intend to use the net proceeds we receive to pay off all of the principal and accrued interest then outstanding under our credit facility. On March 31, 2002, that amount was approximately $16.1 million, approximately $4.8 million of which was under a term loan and approximately $11.3 million of which was under revolving loans. Our term loan matures on October 1, 2005 and incurs interest at either the prime rate or the London Interbank Offering Rate plus a margin. As of March 31, 2002, interest on the term loan was based on the prime rate with a margin of 0.5%. Our revolving loans mature on January 2, 2004 and accrue interest at either the prime rate or the London Interbank Offering Rate, at our election, plus a margin based upon our debt to earnings ratio. As of March 31, 2002, interest on our revolving loans was based on the prime rate plus 0.25%. Both margins are based on the ratio of our funded indebtedness to our adjusted earnings. The weighted average interest rate applicable to all borrowings under our credit facility was 5.1% on March 31, 2002. We incurred the indebtedness under our credit facility in December 2001 and used the net proceeds of this indebtedness to pay off our prior credit facility, which was similar to the revolving portion of our present facility, and to fund working capital.
 
We may use some or all of the remainder of our net proceeds from this offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes, including all or a portion of the costs of any acquisitions of complementary businesses we decide to selectively pursue in the future. We have no present commitments, agreements or understandings to acquire any business. Pending final use, we may invest the net proceeds of this offering in short-term, investment grade, interest-bearing securities or guaranteed obligations of the United States or its agencies.
 
We will not receive any proceeds from the sale of the shares by our sole stockholder in this offering.
 
DIVIDEND POLICY
 
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Our existing credit facility prohibits us from paying a dividend if, after it is paid, we will be in default under our credit agreement. In addition, the terms of any future credit agreement may prevent us from paying any dividends or making any distributions or payments with respect to our capital stock.
 
All of our assets consist of the stock of our subsidiary. We will have to rely upon dividends and other payments from our subsidiary to generate the funds necessary to make dividend payments, if any, on our common stock. Our subsidiary, however, is legally distinct from us and has no obligation to pay amounts to us. The ability of our subsidiary to make dividend and other payments to us is subject to, among other things, the availability of funds, the terms of our subsidiary’s indebtedness and applicable state laws.

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S CORPORATION STATUS
 
Since the incorporation of our subsidiary in 1985, we have been treated for federal and certain state income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code and comparable state laws. As a result, our earnings have been taxed for federal and, in the case of certain states, state income tax purposes directly to our stockholders rather than to us. In connection with this offering, we are revoking our status as an S corporation and will be taxed as a C corporation. As a result of the revocation of our S corporation status, we will record a net deferred tax asset and corresponding income tax benefit effective upon the revocation date. The amount of the deferred tax asset would have been approximately $2.4 million if the revocation date had been March 31, 2002. The actual amount will be determined after giving effect to our operating results through the revocation date.
 
In connection with the revocation of our S corporation tax status, we made a distribution to our sole stockholder, in the amount of $3.4 million, representing payment of undistributed S corporation earnings at and through the date of revocation, and entered into a tax indemnification agreement with him. Although we believe that we have met the requirements for an S corporation, the agreement provides for, among other things, the sole stockholder to indemnify us for any additional federal and state income taxes, including interest and penalties, incurred by us if for any reason we are deemed to be a C corporation during any period in which we reported our taxable income as an S corporation. The tax indemnification obligation of our sole stockholder is limited to the aggregate amount of all distributions made to him by us to pay taxes during any time that we were reporting our taxable income as an S corporation but are deemed to be a C corporation. The agreement also provides for payment by our sole stockholder to us and by us to our sole stockholder to adjust for any increases or decreases in tax liability arising from a tax audit that affects our tax liability and results in a corresponding adjustment to the tax liability of our sole stockholder. The amount of any payment cannot exceed the amount of refund received by us or our sole stockholder attributable to the adjustment in tax liability.

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CAPITALIZATION
 
The following table sets forth our capitalization as of March 31, 2002:
 
 
•
 
on an actual basis; and
 
 
•
 
on a pro forma, as adjusted basis to reflect our sale of 2,500,000 shares of common stock at an assumed initial public offering price of $16.00 per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, the distribution payable to our sole stockholder of $6.8 million which represents a $3.4 million distribution to our stockholder in April 2002 and our distribution of approximately $3.4 million of undistributed S corporation earnings in connection with the revocation of our S corporation status and the repayment of approximately $16.1 million of long-term debt.
 
You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
    
March 31, 2002
  
    
(in thousands, except share and per share data)
(unaudited)
  
    
Actual
     
Pro forma as adjusted
  
Current portion of long-term debt
   
$
            1,050
 
   
$
—  
 
Long-term debt
                  
Term loan
   
 
3,700
 
   
 
—  
 
Revolving loan
   
 
11,310
 
   
 
—  
 
Stockholders’ equity (deficit)
                  
Common stock, $.001 par value; 50,000,000 shares authorized, 9,887,482 shares issued and outstanding, actual; and 50,000,000 shares authorized, 12,387,482 shares issued and outstanding, pro forma as adjusted
   
 
—  
 
   
 
3
 
Paid-in capital
   
 
6,409
 
   
 
37,755
 
Retained earnings (deficit)
   
 
(10,668
)
   
 
(10,617
)
    
  
Total stockholders’ equity
   
 
(4,259
)
   
 
27,141
 
    
  
Total capitalization
   
$
11,801
 
   
$
27,141
 
    
  
 
The information regarding the number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 2002 and does not include 71,000 shares that may be issued pursuant to options that will be granted under our 2002 Equity and Performance Incentive Plan, which we adopted subject to completion of this offering, or 415,273 shares that may be purchased by three of our executive officers pursuant to options currently outstanding.

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DILUTION
 
Our net tangible book value as of March 31, 2002 was approximately $(5.8) million, or $(0.59) per share of common stock. Net tangible book value per share is determined by dividing the amount of our total tangible assets less our total liabilities by the number of shares of common stock outstanding.
 
After giving effect to (1) our sale of 2,500,000 shares of common stock at an assumed initial public offering price of $16.00 per share, less underwriting discounts and commissions and estimated offering expenses payable by us, (2) distributions to our sole stockholder in connection with the revocation of our S corporation status of approximately $6.8 million and (3) the recognition of deferred income taxes of $2.4 million as a result of the revocation of our S corporation status, our adjusted net tangible book value as of March 31, 2002 would have been $25.6 million, or $2.07 per share. This amount represents an immediate increase in net tangible book value to our sole stockholder of $2.66 per share and an immediate dilution to new investors of $13.93 per share. The following table illustrates this per share dilution:
 
Assumed initial public offering price per share
            
$
16.00
Net tangible book value per share at March 31, 2002
   
$
(0.59
)
       
Increase per share attributable to new investors
   
$
2.66
 
       
As adjusted net tangible book value per share after this offering
            
$
2.07
Dilution per share to new investors
            
$
13.93
             
 
If the underwriters’ over-allotment option is exercised in full, our as adjusted net tangible book value at March 31, 2002 would have been approximately $ 2.44 per share, representing an immediate increase in net tangible book value of $3.03 per share to our sole stockholder and an immediate dilution in net tangible book value of $13.56 per share to new investors.
 
The calculations in the tables set forth above do not reflect further dilution that may occur from the exercise of outstanding stock options. As of the date of this prospectus, there were outstanding stock options to purchase an aggregate of 415,273 shares of common stock at an exercise price of $4.19 per share. Assuming all outstanding stock options were exercised, dilution to new investors would have been $13.85.
 
The following table summarizes, on a pro forma basis, as of March 31, 2002, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our sole stockholder and by new investors. The table assumes that the initial public offering price will be $16.00 per share.
 
    
Shares purchased
       
Total consideration
       
Average price per share
    
Number
   
Percent
       
Amount
   
Percent
       
Sole stockholder
   
    9,887,482
   
77.3
%
     
$
4,000
   
—
%
     
$
—  
Optionholders(1)
   
415,273
   
3.2
 
     
 
1,739,994
   
4.2
 
     
 
4.19
New investors
   
2,500,000
   
19.5
 
     
 
40,000,000
   
95.8
 
     
 
16.00
    
  
    
  
    
Total
   
12,802,755
   
100.0
%
     
$
41,743,994
   
100.0
%
     
$
3.29
    
  
    
  
    
(1)
 
Assumes the exercise of all stock option awards at an exercise price of $4.19.
 

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SELECTED CONSOLIDATED FINANCIAL DATA
 
The tables below set forth selected consolidated financial data for the years ended September 30, 1997 and 1998, the three months ended December 31, 1998, the years ended December 31, 1999, 2000 and 2001 and for the three months ended March 31, 2001 and 2002. We derived the selected consolidated financial data as of September 30, 1997 and 1998 and December 31, 1999, 2000 and 2001 and for the years then ended and as of December 31, 1998 and for the three months then ended from our audited consolidated financial statements. We derived the selected consolidated financial data as of March 31, 2001 and 2002 and for the periods then ended from our unaudited financial statements. We have prepared our unaudited financial statements on the same basis as our audited consolidated financial statements. In the opinion of management, our unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information. Our results of operations for the three months ended March 31, 2002 are not necessarily indicative of our operating results for 2002 or any other future period.
 
We have been an S corporation for income tax purposes, and as a consequence, we paid no federal income tax and paid only certain state income taxes. Pro forma net income per share data set forth below assumes that we were a C corporation during the periods and gives effect to the reduction in interest expense, net of the related tax effect, associated with the repayment of debt as described in Note B to the consolidated financial statements.
 
Prospective investors should read this selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.
 
   
Year ended
September 30,
     
Three months ended December 31, 
    
Year ended
December 31,
    
Three months
ended
March 31,
  
          
   
1997
    
1998
     
1998
    
1999
    
2000
    
2001
    
2001
    
2002
  
   
(in thousands, except share and per share data)
  
Income statement data:
                                                                 
Revenue
  
$
74,849
 
  
$
73,340
 
   
$
16,811
 
  
$
70,319
 
  
$
75,961
 
  
$
92,590
 
  
$
20,630
 
  
$
23,857
 
Cost of revenue
  
 
60,484
 
  
 
61,239
 
   
 
14,429
 
  
 
59,069
 
  
 
61,866
 
  
 
75,248
 
  
 
17,031
 
  
 
19,782
 
   
 
  
 
 
 
 
 
Gross profit
  
 
14,365
 
  
 
12,101
 
   
 
2,382
 
  
 
11,250
 
  
 
14,095
 
  
 
17,342
 
  
 
3,599
 
  
 
4,075
 
General and administrative expenses excluding amortization of goodwill and other intangibles, management fees to related party and stock compensation expense
 
 
4,717
 
  
 
4,878
 
   
 
1,645
 
  
 
5,435
 
  
 
4,965
 
  
 
5,074
 
  
 
1,233
 
  
 
1,596
 
Amortization of goodwill and other intangibles (1)
  
 
    —  
 
  
 
—  
 
   
 
—  
 
  
 
—  
 
  
 
471
 
  
 
1,086
 
  
 
353
 
  
 
—  
 
Management fees to related party (2)
  
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
1,015
 
  
 
2,549
 
  
 
2,395
 
  
 
469
 
  
 
500
 
Stock compensation expense (3)
  
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
5,215
 
   
 
  
 
 
 
 
 
Operating income (loss)
 
 
9,648
 
  
 
7,223
 
   
 
737
 
  
 
4,800
 
  
 
6,110
 
  
 
8,787
 
  
 
1,544
 
  
 
(3,236
)
Net interest expense (income)
  
 
411
 
  
 
97
 
   
 
(91
)
  
 
425
 
  
 
618
 
  
 
570
 
  
 
217
 
  
 
168
 
   
 
  
 
 
 
 
 
Income (loss) from continuing operations
  
 
9,237
 
  
 
7,126
 
   
 
828
 
  
 
4,375
 
  
 
5,492
 
  
 
8,217
 
  
 
1,327
 
  
 
(3,404
)
Loss from discontinued operations (4)
  
 
(4,790
)
  
 
(2,968
)
   
 
(1,144
)
  
 
(2,877
)
  
 
(1,182
)
  
 
(453
)
  
 
(209
)
  
 
—  
 
   
 
  
 
 
 
 
 
Net income (loss)
 
$
4,447
 
  
$
  4,158
 
   
$
(316
)
  
$
  1,498
 
  
$
  4,310
 
  
$
  7,764
 
  
$
1,118
 
  
$
(3,404
)
   
 
  
 
 
 
 
 
                                                                  
Basic and diluted earnings (loss) per common share:
                                                                 
Income (loss) from continuing operations
  
$
0.52
 
  
$
0.40
 
   
$
0.05
 
  
$
0.27
 
  
$
0.56
 
  
$
0.83
 
  
$
0.13
 
  
$
(0.34
)
Pro forma income (loss) from continuing operations
                                           
$
0.49
 
          
$
(0.17
)
Weighted average shares outstanding
  
 
17,797,468
 
  
 
17,797,468
 
   
 
17,797,468
 
  
 
16,479,961
 
  
 
9,887,482
 
  
 
9,887,482
 
  
 
9,887,482
 
  
 
9,887,482
 
Weighted average shares used in computing pro forma income (loss) from continuing operations per share
                                           
 
11,243,540
 
          
 
11,133,888
 

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Table of Contents
 
   
September 30,
  
December 31,
     
March 31,
         
           
Pro forma March 31,
  
   
1997
  
1998
  
1998
  
1999
  
2000
  
2001
     
2002
     
2002
  
   
(in thousands)
  
Balance sheet data:
                                                        
Working capital
  
$
6,925
  
$
8,190
  
$
11,070
  
$
7,865
  
$
11,311
  
$
10,115
 
   
$
7,209
 
   
$
2,809
 
Total assets
  
 
30,135
  
 
29,707
  
 
29,363
  
 
29,864
  
 
41,003
  
 
25,734
 
   
 
28,844
 
   
 
31,244
 
Long-term obligations
  
 
20,724
  
 
18,092
  
 
9,822
  
 
15,262
  
 
18,418
  
 
13,075
 
   
 
15,010
 
   
 
15,010
 
Stockholder’s equity (deficiency in net assets)
  
 
9,411
  
 
11,614
  
 
10,352
  
 
4,461
  
 
10,193
  
 
(121
)
   
 
(4,259
)
   
 
(8,659
)
(1)
 
We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, and discontinued the amortization of goodwill as of that date. In addition, intangibles were completely amortized in 2001, and future periods will have no further charge for their amortization.
 
(2)
 
The management fees to a related party were paid to a wholly owned affiliate of our sole stockholder. The nature of the services received from the affiliate included our sole stockholder’s services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. These fees will no longer be incurred after March 31, 2002. Although the management fees have been eliminated, we anticipate that a portion of these costs will be replaced on an annual recurring basis, including:
 
 
Ÿ
 
our sole stockholder now serves as Chairman of our board of directors for an annual fee of $150,000;
 
 
Ÿ
 
Our President has assumed the role of Chief Executive Officer, and we have entered into a retention agreement with him that increases his base compensation, effective July 1, 2002, from $250,000 to $500,000. In addition, we will pay the new Chief Executive Officer a $750,000 one-time cash payment based on services performed, or to be performed, by the Chief Executive Officer during the second, third and fourth quarters of fiscal year 2002. The additional compensation will be recorded in three equal installments of $250,000 in each of the quarters ended June 30, September 30, and December 31, 2002.
 
 
Ÿ
 
we have hired a Chief Financial Officer with a base compensation of $250,000;
 
 
Ÿ
 
in addition to their base salaries, our Chief Executive Officer and Chief Financial Officer may be entitled to discretionary, performance based bonuses as may be determined from time to time by our board of directors; and
 
 
Ÿ
 
we intend to refer legal matters to outside legal counsel, the costs of which are currently not determinable.
 
(3)
 
In March 2002, the sole stockholder made a binding commitment to award $5.2 million in stock-based compensation to our President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer to reward the executives for their major contributions to the past profitability, growth and financial strength of the Company. Stock option agreements to purchase 415,273 shares of the Company’s common stock at $4.19 per share were entered into with the executives on May 3, 2002 to satisfy the $5.2 million stock compensation award. The options had an intrinsic value of $5.2 million based upon the difference between the estimated fair value of our common stock of $16.75 per share and the exercise price. For more information, please see Note O to our consolidated financial statements on Page F-17.
 
(4)
 
We have decided to exit certain lines of business so that we can continue to enhance our core competencies. For more information on our discontinued operations, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations” on page 28 and Note I to our consolidated financial statements on page F-14.

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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in “Risk Factors,” as well as those discussed elsewhere. See “Risk Factors” and “Forward-Looking Statements.”
 
Overview
 
We provide sophisticated systems engineering, information technology, intelligence operations and program management services focusing primarily on U.S. defense, intelligence and civilian federal government agencies. For the year ended December 31, 2001 and the three months ended March 31, 2002, over 80% of our revenue was derived from our customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands.
 
We report operating results and financial data as a single segment and believe our contract base is well diversified with over 135 active contracts, including task orders on GSA contracts, as of March 31, 2002. While approximately 22% of our 2001 revenue was under one contract vehicle, the Aeronautical Systems Center BPA, or ASC/BPA, which expires in August 2005, some of that work was previously performed on GSA schedules and may, if necessary, be converted to GSA vehicles or other contracts we have. No other task order, including individual contracts under our GSA vehicles, accounted for more than 8.5% of revenue for 2001 or the three months ended March 31, 2002.
 
In July 2001, we were one of six awardees of the FAST program with a ceiling of $7.4 billion. Under the FAST program, we expect to have the opportunity to compete for several hundred million dollars in task orders each year over the next six years as the Air Force maintains and modernizes aircraft and defense systems. As of May 24, 2002, we had been awarded 16 task orders worth more than $70 million. Although we believe the FAST program presents an opportunity for significant additional growth and expansion of our services, we expect that many of the task orders we may be awarded under the FAST program will be for program management services, which historically have been less profitable than our other activities. We are currently supporting the FAST program by utilizing resources that are also allocated to other programs, and by hiring additional personnel. We expect to hire sufficient additional personnel so that in the future we will no longer need to use other program resources. In the event that the FAST program or other similar programs become a significant part of our business, our operating margins as a percentage of total revenue could be diminished.
 
While we have derived substantially all of our revenue from internal growth, we acquired certain assets of a division of RJO Enterprises, Inc., related to its operations in the government information technology business, for approximately $4 million, in August 2000. The division acquired had revenue of less than $9 million in 2000. If we had not acquired RJO, approximately $6 million in 2001 revenue would have been recognized under a subcontract to us. The acquisition was accounted for using the purchase method of accounting. RJO Enterprises was a complementary business that was to be our subcontractor under the ASC/BPA. After deciding to sell substantially all of its assets, RJO approached us regarding a potential transaction due to the strong working relationship between its key managers and our employees. We decided to pursue the acquisition based on the synergistic benefits of incorporating RJO’s experienced employees into the Company and based on our desire to preserve the availability of RJO’s complementary services.
 
Our federal government contracts, which comprised about 93% of our revenue in 2001, are subject to government audits of our direct and indirect costs. The majority of these incurred cost audits have been

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completed through December 31, 1999. We do not anticipate any material adjustment to our financial statements in subsequent periods for audits not yet completed. For more information, see the risk factor on page 12 related to audits and cost adjustments by the federal government.
 
In 2001 and the three months ended March 31, 2002, we provided approximately 62% and 78%, respectively, of our services directly to our customers as a prime contractor and the balance indirectly as a subcontractor. These services consist primarily of the work of our employees, and to a lesser extent, the work of subcontractors. We typically provide our services under contracts with a base term, often of three years, and option terms, typically two to four additional one-year terms or more, which the customer can exercise on an annual basis. We also have contracts with fixed terms, some extending as long as five years. Although we occasionally obtain government contracts in which the contracting agency obligates funding for the full term of the contract, most of our government contracts receive incremental funding, which subjects us to the risks associated with the government’s annual appropriations process.
 
Included in related party general and administrative expenses prior to March 31, 2002, were management fees. The management fees were paid to a wholly owned affiliate of our sole stockholder. The nature of services received from the affiliate included our sole stockholder's services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. These fees will no longer be incurred after March 31, 2002. Although the management fees have been eliminated, we anticipate that a portion of these costs will be replaced on a recurring basis and that, by virtue of being a public company, we will incur certain general and administrative costs not previously incurred, including:
 
 
•
 
Our sole stockholder now serves as Chairman of our board of directors for an annual fee of $150,000.
 
 
•
 
Our President has assumed the role of Chief Executive Officer, and we have entered into a retention agreement with him that increases his base compensation, effective July 1, 2002, from $250,000 to $500,000. In addition, we will pay the new Chief Executive Officer a $750,000 one-time cash payment based on services performed, or to be performed, by the Chief Executive Officer during the second, third and fourth quarters of fiscal year 2002. The additional compensation will be recorded in three equal installments of $250,000 in each of the quarters ended June 30, September 30, and December 31, 2002.
 
 
•
 
We have hired a Chief Financial Officer with annual base compensation of $250,000.
 
 
•
 
In addition to their base salaries, our Chief Executive Officer and Chief Financial Officer may be entitled to discretionary, performance-based bonuses as may be determined from time to time by our board of directors.
 
 
•
 
Director fees of $15,000 will be paid to each outside director.
 
 
•
 
Insurance premiums for directors & officers insurance of $551,000.
 
 
•
 
We intend to refer legal matters to outside legal counsel, the costs of which are currently not determinable.
 
In addition to the expenses set forth above, there will be other expenses associated with being a public company, the amount of which cannot be estimated at this time.
 
Contract Types.    When contracting with our government customers, we enter into one of three basic types of contracts: time-and-materials, fixed-price and cost-plus.
 
 
•
 
Time-and-materials contracts. Under a time-and-materials contact, we receive a fixed hourly rate for each direct labor hour worked, plus reimbursement for our allowable direct costs. To the extent that our actual labor costs vary significantly from the negotiated rates under a time-and-materials contact, we can either make more money than we originally anticipated or lose money on the contract.

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Table of Contents
 
 
•
 
Fixed-price contracts. Under fixed-price contracts, we agree to perform specified work for a firm fixed price. If our actual costs exceed our estimate of the costs to perform the contract, we may generate less profit or incur a loss. The majority of our fixed-price contract work is under a fixed-price level-of-effort contract, which represents a similar level of risk to our time-and-materials contracts, under which we agree to perform certain units of work for a fixed price per unit. We generally do not undertake high-risk work, such as software development, under fixed-price contracts.
 
 
•
 
Cost-plus contracts. Under cost-plus contracts, we are reimbursed for allowable costs and receive a supplemental fee, which represents our profit. Cost-plus fixed fee contracts specify the contract fee in dollars or as a percentage of anticipated costs. Cost-plus incentive fee and cost-plus award fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule and performance.
 
The following table provides information about the percentage of revenue attributable to each of these types of contracts for the periods indicated:
 
    
Year ended December 31,
     
Three months ended March 31,
  
    
1999
     
2000
     
2001
     
2001
     
2002
  
Time-and-materials
   
57
%
   
62
%
   
72
%
   
71
%
   
70
%
Fixed-price
   
25
 
   
23
 
   
16
 
   
17
 
   
19
 
Cost-plus
   
18
 
   
15
 
   
12
 
   
12
 
   
11
 
    
  
  
  
  
Total
   
100
%
   
100
%
   
100
%
   
100
%
   
100
%
    
  
  
  
  
 
Critical Accounting Policies
 
Revenue Recognition.    Our critical accounting policies primarily relate to revenue recognition and related cost estimation. We recognize revenue on time-and-materials contracts to the extent of billable rates times hours delivered plus the costs of any allowable expenses incurred. We recognize revenue on fixed-price contracts under the percentage-of-completion method based on costs incurred in relation to total estimated costs. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned. We consider performance-based fees, including award fees, under any contract type to be earned only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists (including when waiting for formal funding authorization under federal government contracts), services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured.
 
Contract revenue recognition inherently involves estimation. From time to time, circumstances develop that require us to revise our total estimated costs or revenue expected. In most cases, these changes relate to changes in the contractual scope of our work, and do not significantly impact the expected profit rate on a contract. We record the cumulative effects of any revisions to our estimated total costs and revenue in the period in which the circumstances become known.
 
Cost of Revenue.    Cost of revenue primarily consists of the direct costs for providing our services to customers, which primarily includes the salaries and wages, plus associated fringe benefits, of our employees directly serving customers, plus the occupancy and other infrastructure costs necessary to support those employees. Cost of revenue also includes the cost of subcontractors and outside consultants, third-party materials, such as hardware and software, that we purchase and provide to the customer as part of the contract, depreciation and any other direct costs, such as travel expenses, incurred to support contract efforts.

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General and Administrative Expenses.    General and administrative expenses include the salaries and wages, plus associated fringe benefits, of our employees not performing work directly for customers. Among the functions included in these expenses are contracts, administration, business development, accounting, human resources, information systems support, and executive and senior management. General and administrative expenses also include depreciation and amortization, occupancy and travel expenses for employees performing general and administrative functions. For the period ended March 31, 2002, it also includes non-recurring, non-cash stock compensation expense.
 
Included in related party general and administrative expenses prior to March 31, 2002, were management fees. The management fees were paid to a wholly owned affiliate of our sole stockholder. The nature of services received from the affiliate included our sole stockholder's services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. These fees will no longer be incurred after March 31, 2002. Although the management fees have been eliminated, we anticipate that a portion of these costs will be replaced on a recurring basis and that, by virtue of being a public company, we will incur certain general and administrative costs not previously incurred, including:
 
 
•
 
Our sole stockholder now serves as Chairman of our board of directors for an annual fee of $150,000.
 
 
•
 
Our President has assumed the role of Chief Executive Officer, and we have entered into a retention agreement with him that increases his base compensation, effective July 1, 2002, from $250,000 to $500,000. In addition, we will pay the new Chief Executive Officer a $750,000 one-time cash payment based on services performed, or to be performed, by the Chief Executive Officer during the second, third and fourth quarters of fiscal year 2002. The additional compensation will be recorded in three equal installments of $250,000 in each of the quarters ended June 30, September 30, and December 31, 2002.
 
 
•
 
We have hired a Chief Financial Officer with annual base compensation of $250,000.
 
 
•
 
In addition to their base salaries, our Chief Executive Officer and Chief Financial Officer may be entitled to discretionary, performance-based bonuses as may be determined from time to time by our board of directors.
 
 
•
 
Director fees of $15,000 will be paid to each outside director.
 
 
•
 
Insurance premiums for directors & officers insurance of $551,000.
 
 
•
 
We intend to refer legal matters to outside legal counsel, the costs of which are currently not determinable.
 
In addition to the expenses set forth above, there will be other expenses associated with being a public company, the amount of which cannot be estimated at this time.
 
Net Interest Expense.    Net interest expense is primarily related to interest expense accrued under any outstanding borrowings and interest income generated by our investments.
 
Discontinued Operations
 
In anticipation of this offering, we disposed of or discontinued substantially all of our operations that were not related to our core business. Accordingly, effective December 31, 2001, we distributed our wholly owned subsidiaries, MTC Manufacturing, Inc. (a manufacturer of steel and aluminum products with sales of approximately $4 million in 2001) and Freund Laws, Inc. (a non-operating company whose sole function was ownership of a partnership interest in a dormant business), and our majority interest in a real estate partnership, BC Golf Limited Partnership, to our stockholder. During 1999, we distributed our wholly owned subsidiary, IBS LLC (a provider of commercial e-business solutions), to a former shareholder, and we ceased the operations of our majority owned subsidiary, Wrightpoint, Inc. (a provider of computer hardware and services). The

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distributions of these entities and ceased operations of Wrightpoint, Inc. have been recorded as discontinued operations. The operating results of these entities for the years ended December 31, 1999, 2000 and 2001 were:
 
    
Year ended December 31,
 
    
1999
     
2000
     
2001
  
    
(in thousands)
  
Revenue
   
$
5,948
 
   
$
2,804
 
   
$
5,831
 
Costs and expenses
   
 
8,825
 
   
 
3,986
 
   
 
6,284
 
    
  
  
Net loss
   
$
(2,877
)
   
$
(1,182
)
   
$
(453
)
    
  
  
 
The net assets of these subsidiaries were as follows:
 
      
December 31,
2000
      
(in thousands)
Assets
     
$
8,216
Liabilities
     
 
4,641
      
Net assets
     
$
3,575
      
 
Results of Operations
 
The following table sets forth, for each period indicated, the percentage of items in the statement of income in relation to revenue:
 
    
Year ended December 31,
       
Three months
ended March 31,
  
    
1999
       
2000
       
2001
       
2001
       
2002
  
Revenue
   
100.0
%
     
100.0
%
     
100.0
%
     
100.0
%
     
100.0
%
Cost of revenue
   
84.0
 
     
81.4
 
     
81.3
 
     
82.6
 
     
82.9
 
    
    
    
    
    
Gross profit
  
16.0
 
     
18.6
 
     
18.7
 
     
17.4
 
     
17.1
 
General and administrative expenses excluding stock compensation expense
   
9.2
 
     
10.5
 
     
9.2
 
     
10.0
 
     
8.8
 
Stock compensation expense
  
—  
 
     
—  
 
     
—  
 
     
—  
 
     
21.9
 
    
    
    
    
    
Operating income (loss)
   
6.8
 
     
8.1
 
     
9.5
 
     
7.4
 
     
(13.6
)
Net interest expense
   
0.6
 
     
0.8
 
     
0.6
 
     
1.0
 
     
0.7
 
    
    
    
    
    
Income (loss) from continuing operations
   
6.2
 
     
7.3
 
     
8.9
 
     
6.4
 
     
(14.3
)
Loss from discontinued operations
   
(4.1
)
     
(1.6
)
     
(0.5
)
     
(1.0
)
     
—  
 
    
    
    
    
    
Net income (loss)
   
2.1
%
     
5.7
%
     
8.4
%
     
5.4
%
     
(14.3
)%
    
    
    
    
    
 
Income tax expense. We have operated as an S corporation and have not been subject to federal or certain state income taxes in any of the periods presented. For the periods ended on the date indicated above, after giving effect to the revocation of our S corporation status, we estimate our effective income tax rate would have been approximately 40%.
 
Comparison of Three Months Ended March 31, 2002 and Three Months Ended March 31, 2001
 
Revenue: Revenue for the three months ended March 31, 2002 increased 15.6%, or $3.2 million, to $23.9 million as compared to the same period in 2001. This increase resulted primarily from $2.8 million in revenue from new contracts, such as Secretary of the Air Force Technical and Analytical Support and U.S.

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Marine Corps Infrastructure, and revenue from task orders issued under the FAST program. The balance was generated primarily through additional task orders under existing contracts.
 
Cost of revenue: Cost of revenue for the three months ended March 31, 2002 increased 16.2%, or $2.8 million, to $19.8 million as compared to the same period in 2001. This increase primarily relates to increased revenue but also reflects a $0.2 million increase in overhead expenses in excess of the rate of revenue growth. These increased costs were primarily due to adding additional operating staff to manage the substantial increase expected in tasks to be subcontracted under our recently awarded FAST program. We expect overhead as a percentage of revenue to approach historic percentages during the second half of 2002 as a result of anticipated revenue growth over the second half of 2002.
 
General and administrative expenses: General and administrative expenses for the three months ended March 31, 2002 increased 255.8%, or $5.2 million, to $7.3 million as compared to the same period in 2001. General and administrative expenses increased as a percentage of revenue from 10.0% in 2001 to 30.6% in 2002. This increase in expenses reflects a $5.2 million non-recurring, non-cash stock compensation expense, a $0.4 million reduction in amortization of goodwill and intangibles, offset by a net $0.4 million increase in other expenses. The $0.4 million reduction in amortization expense is the result of full amortization of intangibles in 2001, and our January 1, 2002 discontinuance of amortization of goodwill as a result of adopting SFAS No. 142, Goodwill and Other Intangible Assets. The increase in other expenses primarily consisted of a one-time $0.3 million increase in professional fees related to our exploration of various strategic financial options (that ultimately resulted in our decision to pursue this offering) and a $0.1 million increase in depreciation expense relating to our acquisition of Cost Point financial software in 2001. Without the $5.2 million stock compensation expense in 2002, general and administrative expenses would have only increased 2.0%, or less than $0.1 million, as compared to the same period in 2001. Included in related party general and administrative expenses in the three months ended March 31, 2002 and 2001 were management fees of $500,000 and $469,000, respectively.
 
Stock compensation expense: In March 2002, our sole stockholder made a binding commitment to award $5.2 million in stock-based compensation to three key members of our senior management, Michael Solley, President and Chief Executive Officer, David Gutridge, Chief Financial Officer, and Benjamin Crane, Chief Operating Officer, to reward the executives for their major contributions to the past profitability, growth and financial strength of the Company. The award in March was to be settled either by delivery to the recipients of a fixed number of fully vested shares or of a number of fully vested options with an intrinsic value of $5.2 million (the difference between the exercise price and the estimated fair value of the shares of $16.75 per share). We recorded the $5.2 million obligation associated with this stock compensation award in the consolidated financial statements for the period ended March 31, 2002.
 
In April 2002, to achieve certain tax benefits for the executives, our sole stockholder decided to issue stock options to satisfy the $5.2 million stock compensation award. Stock option agreements to purchase 415,273 shares of the Company’s common stock at $4.19 per share were entered into with the executives. These options were formalized on May 3, 2002, when stock option agreements were signed by the grantees, which established the measurement date. The options were immediately exercisable after that date. Mr. Solley was awarded an option to purchase up to 346,061 shares. Mr. Gutridge and Mr. Crane each were awarded options to purchase up to 34,606 shares. These options have a ten-year life from their date of grant.
 
Operating income: Operating income for the three months ended March 31, 2002 decreased $4.8 million from $1.5 million to $(3.2) million as compared to the same period in 2001. This loss was caused entirely by the accrual of the non-recurring, non-cash compensation expense of $5.2 million for stock options. Without this expense, operating income would have increased 28.2%, or $0.4 million, to approximately $2.0 million, primarily as a result of our increased revenue.
 
Net interest expense: Net interest expense for the three months ended March 31, 2002 decreased 22.6%, or less than $0.1 million, to $0.2 million as compared to the same period in 2001. Net interest expense declined as a result of slightly lower average borrowings and lower interest rates.

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Comparison of Year Ended December 31, 2001 and Year Ended December 31, 2000
 
Revenue: Revenue for the year ended December 31, 2001 increased 21.9%, or $16.6 million, to $92.6 million as compared to the same period in 2000. This increase was primarily the result of task orders won under the ASC/BPA, which we were awarded in 2001, and additional task orders under various GSA vehicles.
 
Cost of revenue: Cost of revenue for the year ended December 31, 2001 increased 21.6%, or $13.4 million, to $75.2 million as compared to the same period in 2000. This increase was primarily due to increases in direct costs to fulfill services performed under additional task orders and contracts.
 
General and administrative expenses: General and administrative expenses for the year ended December 31, 2001 increased 7.1%, or $0.6 million, to $8.6 million as compared to the same period in 2000. The increase in expenses primarily reflects a $0.6 million increase in amortization of goodwill and other intangibles. Non-amortization expenses included in general and administrative expenses declined from 9.9% of revenue to 8.0% of revenue. Total general and administrative expenses decreased from 10.5% of revenue in 2000 to 9.2% of revenue in 2001. Included in related party general and administrative expenses for the years ended December 31, 2001 and 2000 were management fees of $2,395,000 and $2,549,000, respectively. The amounts in 2001 reflected a decrease in compensation expense and fringe benefits to our sole stockholder and an increase in airplane expenses.
 
Operating income: Operating income for the year ended December 31, 2001 increased 43.8%, or $2.7 million, to $8.8 million as compared to the same period in 2000. This increase primarily results from increased revenue and the fact that general and administrative expenses declined as a percentage of revenue.
 
Net interest expense: Net interest expense for the year ended December 31, 2001 declined 7.8%, or less than $0.1 million, to $0.6 million as compared to the same period in 2000. This decline reflects a modest increase in average bank borrowings that was mitigated by declining interest rates.
 
Comparison of Year Ended December 31, 2000 and Year Ended December 31, 1999
 
Revenue: Revenue for the year ended December 31, 2000 increased 8.0%, or $5.6 million, to $76.0 million as compared to the same period in 1999. Growth was primarily due to expanding relationships with existing customers and the scope of existing contracts, while eliminating certain less profitable contracts.
 
Cost of revenue: Cost of revenue for the year ended December 31, 2000 increased 4.7%, or $2.8 million, to $61.9 million as compared to the same period in 1999. This increase was primarily a result of increased revenue. The rate of increase was less than the rate of increase in revenue as the Company was able to leverage overhead expenses better as revenue grew.
 
General and administrative expenses: General and administrative expenses for the year ended December 31, 2000 increased 23.8%, or $1.5 million, to $8.0 million as compared to the same period in 1999. The primary causes for the increase were: $0.5 million in goodwill amortization related to the RJO acquisition in September 2000; $1.5 million increase in management fees to a related party; $0.1 million increase in other general and administrative expenses due to inflation and adding services to support the growth of our business. These increases were partially offset by a $0.8 million decrease from 1999 to 2000 in the write-off of certain investments and other non-operating expenses incurred. General and administrative expenses increased as a percentage of revenue from 9.2% in 1999 to 10.5% in 2000. Included in related party general and administrative expenses for the years ended December 31, 2000 and 1999 were management fees of $2,549,000 and $1,015,000, respectively. The majority of the increase from 1999 to 2000 resulted from an increase in compensation expense and related fringe benefits to our sole stockholder. The remainder of the increase related primarily to compensation and fringe benefit increases of in-house counsel, aircraft maintenance charges and professional fees.

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Operating income: Operating income for the year ended December 31, 2000 increased 27.3%, or $1.3 million, to $6.1 million as compared to the same period in 1999. Operating income grew at a higher rate than revenue due, in part, to a decrease in pass-through sales of equipment and an increase in higher margin services revenue. This increase was partially offset by higher general and administrative expenses.
 
Net interest expense: Net interest expense for the year ended December 31, 2000 increased 45.4%, or $0.2 million, to $0.6 million as compared to the same period in 1999, primarily reflecting increased borrowings under our line of credit.
 
Effects of Inflation
 
In 2001, we conducted approximately 72% of our business under time-and-materials contracts, where labor rates are often fixed for several years or adjusted by modest increases. We generally have been able to price these contracts in a manner to accommodate the rates of inflation experienced in recent years. Also in 2001, we conducted about 12% of our business under cost-plus contracts, which automatically adjust revenue to cover costs increased by inflation. We conducted the remaining 16% of our business under fixed-price contracts, which generally have not been adversely affected by inflation.
 
Liquidity and Capital Resources
 
Historically, our positive cash flow from operations and our available credit facility have provided adequate liquidity to fund our operational needs (and our one acquisition) as well as the operational needs of a number of unrelated businesses that have been disposed of or discontinued.
 
As of March 31, 2002, we had cash and cash equivalents of $60,000. We maintain minimal cash balances and have all available cash credited daily against our borrowings under our line of credit. Cash needs are automatically drawn on the line of credit as checks clear our bank accounts. Our working capital was $7.2 million at March 31, 2002, $10.1 million at December 31, 2001 and $11.3 million at December 31, 2000. Our working capital decreased $2.9 million in the first quarter of 2002, primarily as a result of a $5.3 million increase in current liabilities, partially offset by increased accounts receivable of $2.5 million. The primary reason for the increase in current liabilities is the accrual of the non-recurring, non-cash compensation expense of $5.2 million for stock options. The $1.2 million decrease in working capital from the year ended 2000 to the year ended 2001 is primarily due to a reduction in accounts receivable. The reduction was mostly attributable to one customer delaying payments in 2000 to the first quarter of 2001.
 
Our operating activities used cash of $0.6 million for the three months ended March 31, 2002 and contributed $2.5 million for the three months ended March 31, 2001. In 2002, the operating cash usage was primarily a result of a $2.5 million increase in accounts receivable, which was offset by approximately $2.0 million generated from operating income (after adding back $5.3 million in non-cash expenses of depreciation and a non-recurring compensation expense for stock options). In the first quarter of 2001, cash was primarily generated by net income adjusted for the addback of depreciation and amortization expense, and loss on discontinued operations.
 
Our operating activities provided cash of $10.4 million for the year ended December 31, 2001 and $3.5 million for the year ended December 31, 2000. The $6.9 million increase in cash provided by operating activities was due to growth in net income of approximately $3.5 million, adjusted for non-cash items and discontinued operations, combined with a net change in working capital provided by operations of approximately $3.4 million.
 
Our investing activities used cash of $0.7 million in the three months ended March 31, 2002 compared with $20,000 in the same period of 2001. The primary difference in cash used in investing activities was an increase in advances to affiliates. No further advances to affiliates have been or will be made subsequent to March 31, 2002, and all balances at that date have been paid in full.

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Our investing activities used cash of $0.8 million in the year ended December 31, 2001 compared with $6.6 million in the same period of 2000. The net cash used in 2001 was primarily attributable to increases in advances to affiliates. In 2000, the primary use of cash in investing activities was the $3.9 million acquisition of substantially all the assets of a division of RJO Enterprises, Inc. and an increase in advances to affiliates of $2.5 million. The balance of receivables resulting from advances to affiliates was distributed to our sole shareholder at December 31, 2001.
 
During the three months ended March 31, 2002, cash provided from financing activities was $1.3 million representing capital contributions of $2.0 million by our sole shareholder and net bank borrowings of $2.0 million, offset by distributions of $2.7 million to our sole shareholder. This compares to net reductions in borrowings of $2.7 million in the first quarter of 2001 and only $0.2 million in distributions to our sole shareholder for a use of cash for financing activities of $2.9 million in that quarter.
 
During the first quarter of 2001, discontinued operations provided $0.4 million in cash. With all discontinued operations and their net assets distributed from the Company by the end of 2001, the first quarter of 2002 had no use or provision of cash from discontinued operations.
 
During the year ended December 31, 2001, we used $9.3 million in cash for financing activities as compared to $4.6 million in cash provided by financing activities in the same period in 2000. In 2000, cash from financing activities was provided by net borrowings of $3.2 million in addition to our sole shareholder making capital contributions of $4.1 million to finance the buyout of a former shareholder. We also distributed $2.6 million to our sole shareholder in 2000. During the year ended December 31, 2001, we repaid $4.8 million of debt and distributed $4.5 million to our sole shareholder.
 
At March 31, 2002, we had a five-year term note of $4.8 million bearing interest at prime rate plus 0.5% and a long-term revolving line of credit of $15.0 million bearing interest at prime rate plus 0.25%, of which $11.3 million was outstanding on that date. National City Bank and The Provident Bank are the equal co-lenders for the term note and the line of credit. The credit facility is secured by substantially all of our assets. The term loan requires quarterly principal payments of $250,000, increasing annually such that the entire loan is paid off on October 1, 2005. The revolving line of credit requires no principal payments and is designed to be a three-year “evergreen” agreement with a new year being added to the term of the agreement at the option of the banks at the end of each year. Currently the line matures on January 2, 2004.
 
Our credit facility contains covenants that limit or restrict our ability, among other things, to borrow money outside of the amounts committed under our credit facility; to make acquisitions; to dispose of our assets outside the ordinary course of business; to use borrowings for particular purposes; to create or hold subsidiaries; to transfer equity interests in subsidiaries; to extend credit or become a guarantor; to encumber our property or assets; to invest more than a limited amount in fixed assets or improvements; to modify the terms of any indebtedness owed to our selling stockholder; to change our accounting policies or the nature of our business; to amend or commit a default or grant a waiver under any material agreement; to permit ourselves to be a party to any material labor dispute or become subject to an adverse obligation, such as a judgment or decree; to merge or consolidate; and to pay dividends if we are, or after payment of the proposed dividends would be, in default under the credit facility. It also requires us to maintain specified financial standards relating to the net book value of our receivables, our tangible net worth, our fixed charge coverage and the ratio of our funded indebtedness to our adjusted earnings; to maintain adequate records and provide financial statements and other information to the banks; to pay taxes; to maintain insurance; to preserve our corporate existence and maintain our fixed assets; to comply with laws and orders; and to remain qualified to do business where needed. In addition, the ratio of our funded indebtedness to our adjusted earnings can affect the interest rates we pay, even if we satisfy the minimum required standard.
 
We were in violation of the covenants in the agreement governing the credit facility with respect to tangible net worth, adjusted fixed charge coverage, equity transactions and dividends at December 31, 2001 and were also in violation of certain of these covenants at March 31, 2002. We have obtained a waiver of these violations from

33

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the lenders through December 31, 2002. All of the covenant violations at December 31, 2001 were caused by distributions to our sole stockholder or his affiliates and the covenant violations at March 31, 2002 were caused by stock compensation associated with grants of stock options to certain executives during 2002. We also obtained a waiver to permit the formation of our holding company structure. Upon the consummation of the offering, we will be in compliance with all of these covenants.
Management believes that the proceeds from this offering, together with cash generated by operations and amounts available under our credit facility, will be sufficient to fund our working capital requirements, debt service obligations and capital expenditures for the foreseeable future.
 
Our ability to generate cash from operations depends to a significant extent on winning new contracts and re-competed contracts from our customers in competitive bidding processes. If a significant portion of our government contracts were terminated or if our win rate on new contracts or re-competed contracts were to decline significantly, our operating cash flow would decrease, which would adversely affect our liquidity and capital resources.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit agreement and our term loan. These borrowings bear interest at variable rates. Based upon our borrowings under these two facilities in 2001, a hypothetical 10% increase in interest rates would have increased interest expense by about $70,000 and would have decreased our annual cash flow by a comparable amount.
 
Recent Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141) and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment and that intangible assets other than goodwill be amortized over their useful lives. This statement requires that goodwill be tested for impairment initially as of January 1, 2002, and thereafter at least annually. SFAS No. 142 was effective January 1, 2002. We have performed the first step of the goodwill impairment test and have concluded that goodwill is not impaired. The table below shows the effect on net income had SFAS No. 142 been adopted in prior periods:
 
    
December 31,
   
March 31,
2001
    
1999
   
2000
   
2001
   
Net income
   
$
1,498
   
$
4,310
   
$
7,764
   
$
1,118
Goodwill amortization
   
 
—  
   
 
38
   
 
114
   
 
28
    
  
  
  
Adjusted net income
   
$
1,498
   
$
4,348
   
$
7,878
   
$
1,146
    
  
  
  
Basic and diluted earnings per common share:
                            
Net income
   
$
0.09
   
$
0.26
   
$
0.47
   
$
0.07
Goodwill amortization
   
$
—  
   
$
—  
   
$
0.01
   
$
—  
    
  
  
  
Adjusted net income
   
$
0.09
   
$
0.26
   
$
0.48
   
$
0.07
    
  
  
  
 
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS 144 supercedes Financial Accounting

34

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Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and amends Accounting Principles Board Opinion No. 30, Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. We have determined that the adoption of SFAS No. 144 will have no impact on our financial position and results of operations.
 
In November 2001, the Emerging Issues Task Force, or EITF, issued EITF 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. EITF 01-14 requires that companies report reimbursements received for out-of-pocket expenses incurred as revenue, rather than as a reduction of expense. The provisions of EITF 01-14 are effective for financial statements issued for fiscal years beginning after December 15, 2001. As we have historically accounted for reimbursements of out-of-pocket expenses in the manner prescribed by EITF 01-14, we do not expect the adoption of the provisions of EITF 01-14 to have an impact on our financial position or results of operations.
 
Quarterly Results of Operations
 
Our results of operations, particularly our revenue, gross profit and cash flow may vary significantly from quarter to quarter depending on a number of factors, including the progress of contract performance, revenue earned on contracts, the number of billable days in a quarter, the timing of customer orders, changes in the scope of contracts and billing of other direct and subcontract costs, the commencement and completion of contracts we have been awarded and general economic conditions. For example, revenue in the first quarter of 2001 was lower than revenue in the fourth quarter of 2000 due to fewer billable days in the first quarter and the inclusion in the fourth quarter’s revenue of larger than usual amount of subcontract costs and revenue. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.
 
The federal government’s fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the fourth quarter of the year. In addition, a change in Presidential administrations, Congressional majorities or in other senior federal government officials may negatively affect the rate at which the federal government purchases technology and engineering services. The federal government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the federal government’s fiscal year end would serve to increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are not as profitable as our normal service offerings. Further, many of our subcontractors have calendar year ends and sometimes submit large billings at the end of the calendar year that can cause a spike in our revenue and expenses related to subcontracts. This will also generally decrease our profit margins as subcontracts have much lower margins than our direct work.
 
As a result of the above factors, period-to-period comparisons of our revenue and operating results may not be meaningful. Potential investors should not rely on these comparisons as indicators of future performance as no assurances can be given that quarterly results will not fluctuate, causing a material adverse effect on our operating results and financial condition.

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For the quarter ended
  
    
Mar. 31, 2000
     
June 30, 2000
     
Sept. 30, 2000
   
Dec. 31, 2000
     
Mar. 31, 2001
     
June 30, 2001
     
Sept. 30, 2001
     
Dec. 31, 2001
   
Mar. 31, 2002
  
    
(in thousands)
  
Income statement data:
                                                                             
Revenue
   
$
16,556
 
   
$
18,161
 
   
$
18,056
   
$
23,188
 
   
$
20,630
 
   
$
24,225
 
   
$
22,919
 
   
$
24,816
   
$
23,857
 
Cost of revenue
   
 
13,471
 
   
 
14,807
 
   
 
14,494
   
 
19,094
 
   
 
17,031
 
   
 
19,406
 
   
 
18,780
 
   
 
20,031
   
 
19,782
 
    
  
  
  
  
  
  
  
  
Gross profit
   
 
3,085
 
   
 
3,354
 
   
 
3,562
   
 
4,094
 
   
 
3,599
 
   
 
4,819
 
   
 
4,139
 
   
 
4,785
   
 
4,075
 
General and administrative expenses excluding stock compensation expense
   
 
1,539
 
   
 
1,664
 
   
 
1,899
   
 
2,883
 
   
 
2,055
 
   
 
1,991
 
   
 
2,191
 
   
 
2,318
   
 
2,096
 
Stock compensation expense
  
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
5,215
 
    
  
  
  
  
  
  
  
  
Operating income (loss)
  
 
1,546
 
   
 
1,690
 
   
 
1,663
   
 
1,211
 
   
 
1,544
 
   
 
2,828
 
   
 
1,948
 
   
 
2,467
   
 
(3,236
)
Net interest expense
   
 
105
 
   
 
157
 
   
 
170
   
 
186
 
   
 
217
 
   
 
164
 
   
 
121