1
EXHIBIT 99(a)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SEMCOR, Inc.:
We have audited the accompanying balance sheets of SEMCOR, Inc. (a New Jersey
corporation), as of December 31, 1996 and 1997, and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SEMCOR, Inc., as of December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Washington, D.C.
August 28, 1998
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SEMCOR, Inc.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
ASSETS
DECEMBER 31, MARCH 31,
------------------------ 1998
1996 1997 -------------
-------- ------- (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,511 $ 397 $ 410
Cash - restricted (Note 2) 506 546 2
Contract receivables (Note 3) 20,846 20,152 20,572
Prepaid expenses and other current assets 384 772 636
-------- -------- --------
Total current assets 25,247 21,867 21,620
-------- -------- --------
PROPERTY AND EQUIPMENT, net (Note 4) 1,216 1,982 1,939
OTHER ASSETS:
Deposits 173 174 175
Goodwill, net (Note 6) 10 535 525
-------- -------- --------
Total other assets 183 709 700
-------- -------- --------
Total assets $26,646 $24,558 $24,259
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 161 $ 559 $ 1,623
Accrued expenses (Note 5) 16,427 12,268 13,058
Billings in excess of revenue 514 326 449
Line of credit (Note 8) 4,060 2,625 -
Deferred income tax liability (Note 2) 110 33 33
Related-party notes payable (Note 7) - 1,000 1,000
Short-term portion of capital lease obligation (Note 10) 180 719 795
-------- -------- --------
Total current liabilities 21,452 17,530 16,958
-------- -------- --------
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATION (Note 10) 62 610 258
-------- -------- --------
Total liabilities 21,514 18,140 17,216
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Common stock, 2,500 shares authorized without par value,
300 shares issued and 200 shares outstanding at $10
stated value 3 3 3
Paid-in capital 3 3 3
Retained earnings 7,206 8,492 9,117
-------- -------- --------
7,212 8,498 9,123
Less treasury stock at cost, 100 shares 2,080 2,080 2,080
-------- -------- --------
Total shareholders' equity 5,132 6,418 7,043
-------- -------- --------
Total liabilities and shareholders' equity $26,646 $24,558 $24,259
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
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SEMCOR, Inc.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(Unaudited)
REVENUES $71,899 $79,191 $92,826 $20,796 $24,460
DIRECT COSTS 50,112 54,768 63,947 14,269 16,677
INDIRECT, GENERAL, AND ADMINISTRATIVE COSTS 19,157 21,020 25,131 5,998 6,587
OWNER COMPENSATION 764 764 2,364 691 191
LITIGATION SETTLEMENT (Note 11) 898 5,047 - - -
-------- -------- -------- -------- --------
Income (loss) from operations 968 (2,408) 1,384 (162) 1,005
INTEREST EXPENSE (174) (178) (357) (90) (399)
INTEREST AND OTHER INCOME 248 192 182 21 19
-------- -------- -------- -------- --------
Income (loss) before taxes 1,042 (2,394) 1,209 (231) 625
BENEFIT FOR STATE INCOME TAXES 8 28 77 - -
-------- -------- -------- -------- --------
Net income (loss) $ 1,050 $(2,366) $ 1,286 $ (231) $ 625
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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SEMCOR, Inc.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997, AND THE
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- --------- ---------- ---------- -------
BALANCE, December 31, 1994 $3 $3 $8,522 $ - $8,528
Net income - - 1,050 - 1,050
---- ---- ------- -------- -------
BALANCE, December 31, 1995 3 3 9,572 - 9,578
Net loss - - (2,366) - (2,366)
Purchase of treasury stock - - - (2,080) (2,080)
---- ---- ------- -------- -------
BALANCE, December 31, 1996 3 3 7,206 (2,080) 5,132
Net income - - 1,286 - 1,286
---- ---- ------- -------- -------
BALANCE, December 31, 1997 3 3 8,492 (2,080) 6,418
Net income (unaudited) - - 625 - 625
---- ---- ------- -------- -------
BALANCE, March 31, 1998 (unaudited) $3 $3 $9,117 $(2,080) $7,043
==== ==== ======= ======== =======
The accompanying notes are an integral part of these statements.
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SEMCOR, Inc.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 1,050 $(2,366) $ 1,286 $ (231) $ 625
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 668 629 1,025 249 912
(Gain) loss on disposal of assets (12) - 8 8 -
(Increase) decrease in contract receivables (4,659) (833) 694 3,648 (420)
(Increase) decrease in prepaid expenses and other
current assets (53) (66) (388) (45) 136
(Increase) decrease in deposits (8) (11) (1) 5 (1)
(Decrease) increase in accounts payable (2,071) (371) 398 2,157 1,064
Increase (decrease) in accrued expenses 5,992 5,464 (4,159) (4,323) 790
Increase (decrease) in billings in excess of revenue 23 74 (188) (9) 123
(Decrease) increase in deferred income tax liability (8) (28) (77) - -
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 922 2,492 (1,402) 1,459 3,229
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (678) (759) (1,780) (700) (859)
Business acquisitions - (10) (550) - -
Proceeds from sale/leasebacks 225 137 1,568 66 444
Proceeds from disposal of assets 28 - 6 6 -
-------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities (425) (632) (756) (628) (415)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from line of credit - 4,060 5,543 550 540
Payment of line of credit - - (6,978) (4,610) (3,165)
Proceeds from related party notes payable - - 1,000 - -
Payment of capital lease obligation (311) (251) (481) (213) (720)
Purchase of treasury stock - (2,080) - - -
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (311) 1,729 (916) (4,273) (3,345)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 186 3,589 (3,074) (3,442) (531)
CASH AND CASH EQUIVALENTS, beginning 242 428 4,017 4,017 943
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, ending $ 428 $ 4,017 $ 943 $ 575 $ 412
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 83 $ 71 $ 254 $ 64 $ 354
======== ======== ======== ======== ========
Cash paid during the year for income taxes $ 6 $ 4 $ 17 $ - $ -
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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SEMCOR, Inc.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1998
(INFORMATION AS OF MARCH 31, 1998, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998, IS UNAUDITED)
1. ORGANIZATION:
SEMCOR, Inc. (the "Company"), was incorporated in the state of New Jersey in
1967. The Company provides support services to branches of the armed services
and private industry. These services include systems engineering, management,
technical support, and consulting, primarily for defense-related applications.
The Company maintains its headquarters in Mount Laurel, New Jersey, and has
offices in 24 states, primarily in the Mid-Atlantic region of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data as of March 31, 1998, and for the three months ended
March 31, 1997 and 1998, are unaudited and have been prepared by the Company. In
the opinion of management, the interim financial data include all normal,
recurring adjustments necessary for a fair presentation of interim period
results. The results of operations for the three months ending March 31, 1998,
are not necessarily indicative of the results to be expected at fiscal year end.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company provides services, primarily to the U.S. government, on a
contractual basis. Revenue on cost-plus-fixed-fee contracts is recognized to the
extent of costs incurred plus a proportionate amount of fees earned. Revenue on
time-and-materials contracts is recognized at contractual rates as labor hours
and direct expenses are incurred. Revenue on fixed-price contracts is recognized
on the percentage-of-completion method based on costs incurred in relation to
total estimated costs. Anticipated contract losses are recognized when they
become known and estimable.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents and contract
receivables. The Company maintains cash and cash equivalents in a high-credit
quality financial institution. The credit risk with respect to accounts
receivable is mitigated because the majority of the Company's contract
receivables are due from agencies of the U.S. government. For the years ended
December 31, 1995, 1996, and 1997, and for the three months ended March 31, 1997
and 1998, approximately $54,009,000, $65,509,000, $77,557,000, $17,036,000, and
$20,373,000, respectively, of the Company's revenues were derived from prime
contracts funded by the U.S. government, predominantly with the Department of
Defense. Government contracts can be terminated at any time by the government
without cause, are subject to a competitive rebidding process upon expiration,
require compliance with various contract procurement regulations, and are
subject to audit by the Defense Contract Audit Agency and other government
auditors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
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Restricted cash represents funds transferred to a trust for employer 401(k)
matching contributions.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Furniture and equipment are
depreciated over their estimated useful lives of five to seven years using an
accelerated method. Equipment under capital leases are depreciated using an
accelerated method over the shorter of the useful lives of the assets or the
lease terms. Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful lives of the assets or the lease terms.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including property and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows, without interest charges, will be less
than the carrying amount of the assets. The Company has determined that as of
December 31, 1996 and 1997, and March 31, 1998, there has been no impairment in
the carrying value of long-lived assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract that imposes an obligation to deliver cash or other
financial instruments to a second party. The carrying amounts of current assets
and current liabilities in the accompanying financial statements approximate
fair value due to the short maturity of these instruments.
INCOME TAXES
The Company has maintained "S" corporation status under subchapter S of the
Internal Revenue Code for income tax reporting to the federal government and in
all but two states in which the Company conducts business. As a result, in all
but two states, the shareholders separately account for their pro rata shares of
the Company's income, deductions, losses and credits.
In 1996, the Company recognized a net benefit for state income taxes of $28,000,
which consists of a benefit of $42,000, in connection with litigation settlement
accruals discussed in Note 11 below, and a provision of $14,000. In 1997, the
Company recognized a net income tax benefit of $77,000, which consists of an
income tax benefit of $99,000, due to conversion from "C" corporation to "S"
corporation status in one state, and a provision of $22,000. The effective and
statutory income tax rates used were approximately 9 percent.
The Company recorded a net current deferred tax liability of $110,000 and
$33,000 as of December 31, 1996 and 1997, respectively, and $33,000 as of
March 31, 1998. This liability is a result of expected future tax consequences
of temporary differences between carrying amounts and the tax basis of assets
and liabilities, primarily related to contract receivables reported for tax
purposes on a cash basis and the items recognized in connection with tax
benefits noted above.
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3. CONTRACT RECEIVABLES:
Contract receivables consist of the following:
DECEMBER 31, MARCH 31,
--------------------------- -----------
1996 1997 1998
-------- -------- -----------
(In thousands) (Unaudited)
U.S. government:
Amounts billed $ 9,793 $11,348 $11,931
Recoverable costs and accrued profit on progress
completed; not billed 10,665 8,288 8,341
-------- -------- --------
Subtotal 20,458 19,636 20,272
Commercial customers:
Amounts billed 861 1,192 939
Recoverable costs and accrued profit on progress
completed; not billed 99 286 323
-------- -------- --------
Subtotal 960 1,478 1,262
Allowance for doubtful accounts (572) (962) (962)
-------- -------- --------
Total $20,846 $20,152 $20,572
======== ======== ========
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31, MARCH 31,
--------------------------- -----------
1996 1997 1998
-------- -------- -----------
(In thousands) (Unaudited)
Furniture and equipment $3,261 $3,477 $3,958
Leasehold improvements 139 171 171
Equipment under capital leases 1,330 2,832 3,210
------- ------- -------
4,730 6,480 7,339
Less-Accumulated depreciation 3,514 4,498 5,400
------- ------- -------
Total property and equipment, net $1,216 $1,982 $1,939
======= ======= =======
Total accumulated depreciation on equipment under capital leases as of December
31, 1996 and 1997, and March 31, 1998, was approximately $1,162,000, $1,784,000,
and $2,614,000, respectively.
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5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
DECEMBER 31, MARCH 31,
--------------------------- -----------
1996 1997 1998
-------- -------- -----------
(In thousands) (Unaudited)
Accrued salaries, benefits, and related taxes $ 2,340 $ 3,234 $ 3,537
Accrued vacation 1,511 1,794 2,019
Accrued bonuses 2,359 2,461 2,930
Accrued subcontractor costs 3,063 1,326 1,000
Accrued litigation settlement and associated legal costs 6,921 3,189 3,086
Other 233 264 486
-------- -------- --------
Total accrued expenses $16,427 $12,268 $13,058
======== ======== ========
6. ACQUISITIONS:
In July 1996, the Company acquired Capitol Integration and Consulting, Inc., for
a total cash purchase price of $50,000. The acquisition was recorded under the
purchase method of accounting. The Company acquired certain assets with a fair
value of approximately $40,000; the remaining $10,000 was recorded as goodwill,
to be amortized over the estimated life of 15 years. As of December 31, 1996 and
1997, and March 31, 1998, the Company recorded $319, $638, and $159,
respectively, in amortization expense related to this goodwill. In June 1997,
the Company acquired the assets of Desktop Integration, Inc., for cash
consideration of $550,000. The acquisition was recorded under the purchase
method of accounting. The net assets received by the Company carried no fair
value; therefore, the Company recognized the purchase price of $550,000 as
goodwill. This amount is being amortized by the straight-line method over its
estimated useful life of 15 years. As of December 31, 1997, and March 31, 1998,
the Company recorded approximately $24,000, and $9,000, respectively, as
amortization expense.
The following unaudited pro forma summary presents information as if the
acquisitions had occurred at the beginning of each period presented. The pro
forma information does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future results of operations
of the combined companies.
(UNAUDITED)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)
Revenues $72,888 $80,414 $93,627
Net income (loss) $ 1,246 $(2,093) $ 1,494
7. RELATED-PARTY TRANSACTIONS:
NOTES PAYABLE
During 1997, the Company signed two promissory notes of equal value to two
shareholders for a total related-party loan payable of $1,000,000 as of December
31, 1997. The notes bore interest at 8 percent per annum compounded
semi-annually and were payable upon demand after June 11, 1998. Interest was
payable monthly in arrears on the first day of each month commencing January 1,
1998. During 1998, the Company paid all outstanding principal and interest.
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LEASE
The Company leased certain of its office space from Strawbridge Lake Associates
until March 1997. The partners of Strawbridge Lake Associates are also the
shareholders of the Company. Payments under this leasing arrangement were
approximately $113,000, $53,000, and $53,000 during 1995, 1996, and 1997,
respectively.
8. LINE OF CREDIT:
The Company had a line of credit arrangement with a commercial bank to borrow up
to $5,000,000 and $6,000,000 as of December 31, 1996 and 1997, respectively. The
borrowings were limited to 75 percent of the eligible receivables, defined as
any receivables less than 90 days past due from the date of invoice. The credit
facility was unsecured; however, the Company agreed not to pledge a security
interest in any asset to another lender during the term of the arrangement. The
line bore interest, payable monthly, at the bank's prime rate less 1/4 percent
(8 1/4 percent at December 31, 1996 and 1997, and March 31, 1998). The agreement
contained covenants requiring the Company to maintain certain financial ratios,
which included a minimum working capital threshold and a minimum current ratio.
In connection with the acquisition described in Note 13 below, the line of
credit arrangement was paid in full and canceled during 1998. As of December 31,
1996 and 1997, the Company was not in compliance with one of the financial
covenants. As such, the outstanding balances were classified as current. At
December 31, 1996 and 1997, and at March 31, 1998, the Company had $4,060,000,
$2,625,000, and $0, respectively, outstanding under this arrangement. For the
years ended December 31, 1995, 1996, and 1997, and for the three months ended
March 31, 1997 and 1998, interest expense under this line of credit was
approximately $0, $0, $12,000, $12,000, and $1,000, respectively.
9. RETIREMENT PLAN:
The Company maintains a discretionary, defined contribution 401(k) retirement
plan. The Company matches 50 percent of employee's contributions up to 6 percent
of the employee's annual compensation. Funding is accomplished through periodic
contributions to a trust fund. The Company's contribution expense for the years
ended December 31, 1995, 1996, and 1997, and for the three months ended March
31, 1997 and 1998, was $516,894, $641,465, $710,680, $161,413, and $229,573,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
LEASES
Beginning in 1992, the Company entered into a master leasing agreement in which
the Company sells computer and other equipment at original purchase price to a
leasing company and then leases the equipment back. There have been no gains or
losses associated with these sale/leasebacks. All leases have been accounted for
as capital leases. As of December 31, 1996 and 1997, and March 31, 1998, the
Company recorded approximately $242,000, $1,329,000, and $1,053,000,
respectively, for obligation under capital leases.
The Company also leases office equipment, automobiles, and real estate under
operating lease terms. Annual minimum lease payments as of December 31, 1997,
are as follows:
YEAR ENDED OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
- -------------- ----------- ---------
(In thousands)
1998 $2,280 $ 979
1999 1,614 589
2000 515 124
2001 357 -
2002 52 -
Less-Interest - (363)
------- -------
Total $4,818 $1,329
======= =======
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EMPLOYMENT AGREEMENTS
With respect to the acquisitions of Capitol Integration and Consulting, Inc., in
1996 and Desktop Integration, Inc., in 1997, the Company entered into employment
agreements with one former employee of each Company for three-year periods
beginning on the dates of acquisition. The agreements provide for performance
bonuses of $50,000 and $100,000, respectively. These bonuses are awarded on the
one-year anniversary dates of the agreements if the employees have remained
employed with the Company. As of December 31, 1996 and 1997, and March 31, 1998,
the Company accrued approximately $23,000, $58,000, and $70,000, respectively,
for the services rendered by these employees.
11. LITIGATION:
FORMER SHAREHOLDER
During 1990, a former shareholder filed suit against the Company and majority
shareholders alleging oppression and breach of fiduciary duties. In 1995, the
court ordered the Company to pay an initial judgment of $830,000 to the former
shareholder. In 1996, in compliance with a court judgment, the Company
purchased all of the former shareholder's stock for $2,080,000. In addition,
the judgment awarded the former shareholder approximately $973,000 in interest
and other charges and legal costs of approximately $482,000. As a result of
the litigation, the Company incurred legal costs of approximately $43,000 and
$196,000 in 1995 and 1996, respectively. The litigation is currently subject
to appeal. The Company has been indemnified by the majority shareholders for
any costs incurred in connection with this litigation after the date of
acquisition of the Company described in note 13 below.
GOVERNMENT CONTRACT SETTLEMENT
A former employee filed suit against the Company in a federal court in Virginia
alleging certain irregular billing practices relating to government contracts.
The Department of Justice intervened in the suit and filed an amended complaint
setting forth similar allegations. In 1998, a settlement was reached with the
Department of Justice for approximately $3.5 million payable over five years. In
June 1998, the Company settled its obligation by paying approximately $3.1
million, a discounted amount agreed to by both parties. The Company recorded an
accrual of approximately $3.2 million as of December 31, 1996, related to the
settlement and associated legal costs.
OTHER
From time to time, the company is subject to lawsuits arising from normal
business activities. Management believes that liability, if any,
resulting from such actions will not have a material adverse effect on
the Company's financial position or results of operations.
12. YEAR 2000 (UNAUDITED):
As of March 31, 1998, the Company had not developed a comprehensive Year 2000
compliance plan. Furthermore, the Company does not currently have any
information concerning the Year 2000 compliance status of its subcontractors,
customers, or vendors. In the event that any of the Company's significant
subcontractors, customers, or vendors do not successfully and timely achieve
Year 2000 compliance, the Company's business or operations could be adversely
affected.
13. SUBSEQUENT EVENTS:
In June 1998, Advanced Communication Systems, Inc., a Delaware corporation
("ACS"), acquired all of the outstanding shares of the Company pursuant to a
Stock Purchase Agreement negotiated with the Company's shareholders. The
preliminary purchase price of $38.0 million is subject to adjustment based on
net equity measurements. The purchase price consists of $37.0 million in cash
and $1.0 million in ACS common stock. In addition, ACS will pay the shareholders
up to $1.2 million for certain tax liabilities incurred as a result of the
acquisition. ACS may pay additional amounts to the shareholders based on the
achievement of certain financial goals by the Company for the 6-month period
ending December 31, 1998, and the 12-month period ending December 31, 1999.