As filed with
the Securities and Exchange Commission on June 20,
2011
Registration
No. 333-172118
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ADS TACTICAL, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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5091
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27-1083344
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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621 Lynnhaven Parkway, Suite 400
Virginia Beach, Virginia 23452
(757) 481-7758
(Address, including zip code, and
telephone number, including area code,
of registrants principal
executive offices)
Charles M. Salle
General Counsel
ADS Tactical, Inc.
621 Lynnhaven Parkway, Suite 400
Virginia Beach, Virginia 23452
(757) 481-7758
(Name, address, including zip code,
and telephone number, including area code, of agent for service)
Copies to:
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Kirk A. Davenport, Esq.
Ian D. Schuman, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, New York 10022
(212) 906-1200
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Richard Sandler, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
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. o
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. o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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CALCULATION
OF REGISTRATION FEE
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Title of Each Class of
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Proposed Maximum Aggregate
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Amount of Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee(2)(3)
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Common Stock, par value $0.01 per share
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$100,000,000
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$11,610
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(1)
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Includes shares of common stock
issuable upon exercise of the underwriters option to
purchase additional shares of common stock.
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(2)
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Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(o) under the Securities Act.
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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.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities, and we are not soliciting any
offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
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PROSPECTUS
(Subject to Completion)
Issued
June 20, 2011
Shares
Common Stock
This is an initial public offering of shares of common stock
by ADS Tactical, Inc. We are
offering shares
of our common stock in this offering and the selling
stockholders named in this prospectus are
offering shares
of our common stock. We will not receive any proceeds from the
sale of shares to be offered by the selling stockholders.
Prior to this offering, there has been no public market for
our common stock. It is currently estimated that the initial
public offering price per share of our common stock will be
between $ and
$ . We have applied to have our
common stock approved for listing on the New York Stock Exchange
under the symbol ADSI.
Investing in our common stock involves risks. See
Risk Factors beginning on page 12.
Price $ a Share
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Underwriting
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Proceeds to
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Price to
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Discounts and
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Proceeds to
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the Selling
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Public
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Commissions
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the Company
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Stockholders
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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The selling stockholders have granted the underwriters a
30-day
option to purchase up to an aggregate
of additional
shares of common stock on the same terms set forth above. If the
underwriters exercise the option in full, the total underwriting
discounts and commissions payable by us and the selling
stockholders will be $ , the total
proceeds, before expenses, to us will be
$ and the total proceeds, before
expenses, to the selling stockholders will be
$ . See the section of this
prospectus entitled Underwriters.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on
or
about ,
2011.
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J.P.
Morgan |
Morgan Stanley |
,
2011
OPERATIONAL EQUIPMENT & LOGISTICS SOLUTIONS |
TABLE OF
CONTENTS
We have not authorized anyone to provide any information other
than that contained in this prospectus or in any free writing
prospectus prepared by or on behalf of us or to which we have
referred you. We take no responsibility for, and can provide no
assurance as to the reliability of, any other information that
others may give you. We are offering to sell, and seeking offers
to buy, our common stock only in jurisdictions where offers and
sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any
sale of our common stock.
Until ,
2011 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
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MARKET
AND INDUSTRY INFORMATION
We obtained the industry and market data in this prospectus from
our own research and from information released by the Department
of Defense, including the Fiscal Year 2011 Budget Request and
annual budget press releases. While we believe that the
information released by the Department of Defense is reliable,
we have not independently verified the data contained therein.
In addition, while we believe that the results and estimates
from our internal research are reliable, such results and
estimates have not been verified by any independent source.
Moreover, the Department of Defense may, in the future, alter
the manner in which it gathers data regarding the markets in
which we operate our business. As a result, you should carefully
consider the inherent risks and uncertainties associated with
the industry and market data contained in this prospectus,
including those discussed under the heading Risk
Factors.
TRADEMARKS
AND TRADENAMES
We own or have rights to trademarks
and/or
tradenames that we use in connection with the operation of our
business. Certain trademarks
and/or
tradenames are subject to registrations or applications to
register with the United States Patent and Trademark Office,
while others are not subject to registration but protected by
common law rights. These registered and unregistered marks
include our company, product and website names and logos used
herein. Each trademark, tradename or service mark by any other
company appearing in this prospectus belongs to its owner and is
used under permission or license from its owner. Some of the
trademarks we own or have the right to use include ADS (words
and design), OFFICIAL GENIII ECWCS (words and design) and
WARRIOR EXPO. We also sell products under a number of licensed
brands, including COMBAT MEDICAL SYSTEMS. Solely for
convenience, trademarks, service marks and tradenames referred
to in this prospectus may appear without the
®,
tm or
SM
symbols, but such references are not intended to indicate, in
any way, that we will not assert to the fullest extent under
applicable law, our rights or the right of the applicable
licensor to these trademarks, service marks and tradenames.
NON-GAAP FINANCIAL
MEASURES
EBITDA, as presented in this prospectus, is a supplemental
measure of our performance that is not required by, or presented
in accordance with, generally accepted accounting principles in
the United States, or GAAP. We define EBITDA as net
income before interest expense, provision for income taxes and
depreciation and amortization. EBITDA should not be considered
as an alternative to net income as a measure of performance. We
believe that EBITDA is a useful financial metric to assess our
operating performance from period to period by excluding certain
items that we believe are not representative of our core
business, as well as for providing a comparison of our operating
performance to that of other companies in our industry. Because
EBITDA is not determined in accordance with U.S. GAAP and
is susceptible to varying calculations, EBITDA, as presented,
may not be comparable to other similarly titled measures
presented by other companies.
EBITDA has limitations as an analytical tool and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP.
Some of these limitations are:
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it does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
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it does not reflect changes in, or cash requirements for, our
working capital needs;
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it does not reflect the interest expense or cash requirements
necessary to service interest or principal payments on our debt;
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it does not reflect any cash income taxes that we may be
required to pay;
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it is not adjusted for all non-cash income or expense items that
are reflected in our statements of cash flows;
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assets are depreciated or amortized over differing estimated
useful lives and often have to be replaced in the future, and
EBITDA does not reflect any cash requirements for such
replacements; and
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other companies in our industry may calculate EBITDA measures
differently than we do, limiting its usefulness as a comparative
measure.
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PROSPECTUS
SUMMARY
This summary highlights important information regarding our
business and the offering contained elsewhere in this
prospectus. Please review this prospectus in its entirety,
including Risk Factors, Selected Consolidated
Financial and Other Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes, before you decide to invest. Unless otherwise
noted or as the context otherwise requires, the terms
company, ADS, we,
us and our refer to ADS Tactical, Inc.,
a Delaware corporation, our operating subsidiaries, including
Atlantic Diving Supply, Inc., MAR-VEL International, Inc. and
the consolidated variable interest entities. Unless otherwise
noted in this prospectus, any statements with respect to the
number of items we offer and the number of our customers,
vendors and preferred vendors are made as of March 31,
2011. Some of the statements in this prospectus constitute
forward-looking statements. See Forward-Looking
Statements.
ADS
Tactical, Inc.
Our
Company
We believe we are a leading provider of value-added logistics
and supply chain solutions specializing in tactical and
operational equipment, based on 2010 sales. We drive sales
between a fragmented base of vendors and a decentralized group
of customers by tailoring our solutions to meet their needs.
Most of our over 4,000 active customers (in the past
24 months) are within the Department of Defense and the
Department of Homeland Security. Our business model is adaptable
and scalable to serve other domestic and foreign government
agencies. Through our vendor network, we offer our customers
access to over 160,000 items, which we combine with our broad
suite of value-added supply chain management services. Our
flexible operating model allows us to maintain an asset-light,
low-inventory business. We believe our value proposition has
allowed us to drive the growth in demand for the products and
related services we offer while building upon the strength of
our market position, as evidenced by the compound annual growth
rate of our net sales, net income and EBITDA from 2006 to 2010
of 61%, 84% and 80%, respectively.
Our customers need the products we offer for ongoing training
and to be prepared for a variety of peacetime operations and
missions at home and abroad. The products we offer include
apparel, expeditionary equipment, optical equipment,
communications equipment, emergency medical supplies, lighting,
eyewear and other items from approximately 1,400 active
vendors (in the past 24 months) such as Camelbak, FLIR,
Hunter Defense Technologies, L-3 Communications, Oakley and
SureFire. Most of the products we distribute require regular
replacement due to wear and tear and technological advancements.
We combine the distribution of our products with our value-added
supply chain management services, which enable us to streamline
the procurement process for our customers by anticipating their
product needs, to achieve on-time and accurate delivery and to
provide in one place a selection of products to meet specific
tactical and operational requirements. Our value-added supply
chain management services include kitting and assembly, custom
sourcing, training, product research and development and quality
assurance and quality management systems.
We seek to be a critical partner to each of our customers and
vendors. Our value proposition is driven by the combination of
three key factors:
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Deep-Rooted Customer Relationships. By
utilizing our logistics solutions and access to our broad
portfolio of contractual procurement vehicles, our customers may
save time and money, which generates repeat business and fosters
deep relationships with our customers.
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Strategic Vendor Alliances. Our vendors are
able to leverage our experienced sales force, product knowledge,
customer relationships and access to contractual procurement
vehicles to drive demand for their products and reach a customer
base that may otherwise be difficult for them to access
independently.
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Broad Portfolio of Contractual Procurement
Vehicles. Our contractual procurement vehicles
provide multiple channels through which our customers can
purchase, and our vendors can sell, any of the over 160,000
items we offer without the need for time-consuming individual
contracts or open-market bid
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processes. Our contractual procurement vehicles give our vendors
access to customers they may not independently have and enable
the U.S. government to realize increased procurement
efficiencies.
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Our
Market Opportunity
We believe our addressable market is approximately
$100 billion, of which our current market share is
approximately 1%. Our primary customers include
U.S. government agencies whose funds come from, among other
sources, the Readiness & Support portion of the
Operation & Maintenance budget, which is allocated
from the larger Department of Defense base budget. According to
the Department of Defenses 2011 budget projections, from
2011 through 2015, the Operations & Maintenance
budgets share of the total Department of Defense base
budget is expected to increase, with an expected compound annual
growth rate of approximately 5%, compared to 3% for the
Department of Defense base budget. We believe the
Operation & Maintenance budget is stable and growing
because it funds ongoing military readiness and training and
thus is not driven by active and ongoing conflicts.
The need for our capabilities and services developed over the
last decade, as the U.S. government began to shift away
from standardized products and equipment built to government
specifications, towards readily available, commercial
off-the-shelf
products and equipment. In addition, over the same period, the
Department of Defenses focus has shifted away from
developing large-scale weapons platforms and towards equipping
personnel to engage in ground-based, irregular warfare against
asymmetric threats. Finally, the role of the U.S. military
is expanding beyond the scope of its traditional national
defense function. We believe that the following trends will
increase the demand for our tactical and operational equipment
and value-added supply chain management services:
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Continuous Commitment to Operational Readiness and Troop
Modernization. The U.S. Army has
transitioned to a model that rotates units between three levels
of deployment readinesspreparation,
eligible and available. As new units
rotate into each level of readiness, they are issued new and
modernized equipment.
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Broader Array of Mission
Objectives. Increasingly, the branches of the
U.S. military are called upon to undertake missions beyond
the scope of their traditional national defense functions, such
as assistance with disaster relief, border patrol and
nation-building.
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Need for Tightly Integrated and Specialized
Equipment. The Department of Defense is focused
on ensuring that each soldier is properly equipped with
state-of-the
art equipment. Consequently, the average
spend-per-soldier
has increased historically and is expected to continue to grow.
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Need for Increased Manpower to Counter Asymmetrical
Threats. The threat of simultaneous, irregular
conflicts requires significant numbers of trained and properly
equipped troops ready to deploy on short notice.
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Increasing Importance of Expeditionary Warfare
Units. The U.S. Army, the U.S. Air
Force and the U.S. Navy reorganized to increase the
effectiveness and availability of their expeditionary warfare
units, which are mobile and self-sufficient units that operate
away from established bases and are able to deploy quickly.
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Our
Competitive Strengths
The following competitive strengths differentiate us from our
competitors and are critical to our continued success:
Deep-Rooted Customer Relationships. We aim to
be a one-stop-shop for our customers tactical and
operational equipment needs by streamlining the procurement
process and providing value-added supply chain management
services. Many of our customers depend on us to manage their
procurement process and to introduce them to new products
best-suited to their particular needs. Our ability to establish,
sustain and grow these relationships would be difficult and
expensive to replicate.
Value-Added Supply Chain Solutions. We are
able to effectively manage and coordinate a fragmented supply
chain to provide complete and on-time delivery of products to
our customers at attractive prices. We
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provide efficient and compelling solutions to meet our
customers needs and requirements. By reducing complexities
and increasing efficiencies in their procurement processes, we
believe we are a critical partner to our customers.
Scalable Infrastructure. Our recent investment
in scalable infrastructure and operations gives us the capacity
to build upon our past performance with minimal future capital
expenditures. As a result of our asset-light operating model, we
generate significant free cash flow (calculated as cash flow
from operations minus capital expenditures) and have relatively
low capital expenditures and working capital requirements. For
example, for the year ended December 31, 2010,
approximately 51% of our net sales were from orders shipped
directly from the vendor.
Extensive Vendor Relationships and Preferred Vendor
Program. We are the primary avenue into the
government sales channel for many of our vendors as a result of
our familiarity with the complexities of government procurement
and our access to customers in U.S. government agencies. As
a result, new vendors seek to establish relationships with us,
allowing us to continue to expand the breadth of products we
offer. We are able to competitively bid on opportunities as a
result of the preferential terms and support we receive from our
preferred vendors.
Broad Portfolio of Contractual Procurement
Vehicles. Our access to a broad portfolio of
contractual procurement vehicles makes the sale and procurement
process easier and faster for both our customers and our
vendors. We use the term contractual procurement
vehicle to refer to a type of government contract that is
awarded to a limited number of suppliers, authorizing those
suppliers to compete for specific purchase orders from different
government entities. Obtaining the type of contractual
procurement vehicles used by our customers requires a
demonstrated track record of past performance, which makes our
portfolio of contractual procurement vehicles difficult to
replicate.
Experienced Sales Force. A substantial portion
of our sales personnel have extensive military experience. Their
comprehensive capabilities, including the valuable feedback
regarding products they provide to both customers and vendors
and their ability to identify suitable contractual procurement
vehicles, enhance our key relationships while ensuring superior
customer service.
Dedicated and Capable Management Team. With
substantial operational experience and functional knowledge, our
senior management team has successfully led the formation and
development of our business model and overseen significant
growth in our net sales and EBITDA.
Our
Growth Strategy
Further Penetrate our Primary Customer
Base. Our primary customer base is fragmented and
characterized by a decentralized procurement process. Our sales
force currently calls on only a small percentage of the
purchasing decision makers at both the program and unit levels
of the U.S. military. We expect to increase sales to our
existing customers and add new customers within our primary
customer base using the following key growth strategies:
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Continue to Expand our Sales Force. We intend
to expand the size of our sales force. In the first three months
of 2011, we increased the overall size of our sales force by
19 representatives, representing a 11% increase from 2010
fiscal year end. With additional sales representatives, we
believe we can replicate our prior unit-level successes in
currently underserved units.
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Expand our Product Offerings. We continue to
expand the breadth of our product offerings as we strive to meet
the constantly changing needs of our customers. Our sales force
continuously evaluates our customers needs in order to
design solutions to meet those requirements. We then work
directly with our vendor partners to increase the breadth and
quality of our available product lines specifically based on our
customers needs. This enables us to offer the latest and
best available commercial
off-the-shelf
products.
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Increase Demand for our Value-Added Supply Chain
Solutions. We intend to further develop and drive
demand for our customer-centric, value-added supply chain
solutions and to focus on expanding our kitting and assembly and
large integration programs. These solutions increase the
readiness and effectiveness of our customers, which we believe
will increase demand for the products and related services we
offer.
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Increase the Number, Size and Scope of our Contractual
Procurement Vehicles. In order to enhance the
flexibility, we will continue to compete strategically for new
contractual procurement vehicles. We are actively pursuing a
number of contractual procurement vehicles that are currently in
the development stage.
Add New Categories of Customers Outside of our Traditional
Markets. We believe that we are well positioned
to forge new relationships with potential customers who are not
yet material to our operations, including the Department of
Homeland Security and other federal agencies. Furthermore, we
believe there are opportunities to provide the products and
related services we offer in the
U.S.-assisted
equipping of allied foreign militaries and security services.
Pursue Selected Acquisitions. We may
supplement our organic growth by pursuing selected acquisitions
aimed at augmenting our contractual procurement vehicle
portfolio, broadening and diversifying our customer base,
expanding our product offerings and vendor network or increasing
our geographic presence.
Recent
Transactions
On March 25, 2011, in a transaction exempt from
registration under the Securities Act, we issued
$275.0 million of 11.00% senior secured notes due
2018, which we refer to as the senior secured notes.
Concurrently with the closing of the offering of the senior
secured notes, we amended and restated our senior secured
revolving credit facility to, among other things, permit the
offering of the senior secured notes and to permit distributions
to our stockholders. The proceeds from the offering of the
senior secured notes, along with amounts drawn from our senior
secured revolving credit facility, were used (1) to make a
distribution of $217.1 million to our stockholders,
(2) to repay our 2010 senior secured term loan facility,
which we refer to as our term loan facility,
(3) to pay cash bonuses, which we refer to as
transaction bonuses, to certain members of our
senior management in an amount not to exceed $9.0 million,
$6.6 million of which was paid upon consummation of the
offering of the senior secured notes and the remainder of which
will be paid upon the earlier of (x) the consummation of
this offering and (y) December 31, 2011, and
(4) to pay related transaction fees and expenses. In this
prospectus, we refer to the offering of the senior secured
notes, the repayment of our term loan facility, the distribution
to our stockholders, the amendment and restatement of our senior
secured revolving credit facility, the write-off of deferred
financing costs in connection with the repayment of our term
loan facility and the amendment and restatement of our senior
secured revolving credit facility, the payment of the
transaction bonuses and the payment of fees and expenses in
connection with the foregoing transactions collectively as the
refinancing transactions. See Description of
Certain Indebtedness.
Risk
Factors
An investment in our common stock involves substantial risks and
uncertainties. We are subject to a number of risks, including
risks that may prevent us from achieving our business objectives
or may adversely affect our business, results of operations and
financial condition. See Risk Factors beginning on
page 10 for a discussion of the material risks that prospective
purchasers should consider before investing in our common stock.
Some of the more significant risks relating to our business
include, among others:
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our business is dependent on maintaining our relationships with
our customers and developing relationships with new customers;
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we are a government contractor and rely on U.S. government
entities for substantially all of our sales;
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the Special Operational Equipment Tailored Logistics Support
Program, or Spec Ops TLS, contract representing
approximately 44% of our total net sales for the three months
ended March 31, 2011, is up for renewal in March 2012, and
the Generation III Extended Cold Weather Clothing System,
or GEN III, contract representing approximately 19%
of our total net sales for the three months ended March 31,
2011, is currently in the final year of its five-year term,
expiring on November 20, 2011;
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our business is dependent on maintaining our relationships with
key vendors and developing relationships with new vendors;
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we are dependent on the performance of our vendors in meeting
the needs of our customers;
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we are subject to extensive laws and regulations as a result of
our status as a government contractor and as a result of the
products we sell and the business we conduct abroad;
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we are dependent on receiving distributions from our
subsidiaries due to our status as a holding company;
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we are exempt from certain corporate governance requirements as
a result of our status as a controlled company
within the meaning of the New York Stock Exchange rules;
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upon completion of this offering, the selling stockholders will
continue to own a majority of our common stock and therefore
will continue to have significant influence over matters
submitted to a stockholder vote; and
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our substantial indebtedness could adversely affect our
financial flexibility and our competitive position.
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Additional
Information
We were originally incorporated in Virginia in 1997. We are
currently a subchapter S corporation under the rules and
regulations of the Internal Revenue Service. As a result, income
taxes attributable to our federal and state income are payable
by our stockholders. Distributions have been paid to
stockholders to fund their tax obligations related to their
ownership of ADS Tactical, Inc.
In connection with this offering, we will convert to a
subchapter C corporation. In connection with our conversion from
a subchapter S corporation to a subchapter C corporation,
we will record a tax benefit (estimated to be approximately
$500,000 as if the conversion occurred on December 31,
2010) to recognize deferred taxes.
Our principal executive offices are located at 621 Lynnhaven
Parkway, Suite 400, Virginia Beach, Virginia 23452. Our
telephone number is
(757) 481-7758.
Our website address is
http://www.adsinc.com.
Information on our website is not considered part of this
prospectus.
5
The
Offering
|
|
|
Issuer
|
|
ADS Tactical, Inc. |
|
Shares of common stock offered by us
|
|
shares. |
|
Shares of common stock offered by the selling stockholders
|
|
shares. |
|
Common stock to be outstanding after this offering
|
|
shares. |
|
|
|
Option to purchase additional shares
|
|
shares
offered by the selling stockholders. |
|
|
|
Use of proceeds
|
|
We estimate that the net proceeds to us from this offering,
after deducting underwriting discounts and estimated offering
expenses, will be approximately
$ , assuming the common
stock is offered at $ per share,
the midpoint of the range set forth on the cover page of this
prospectus. We intend to use the net proceeds from this offering
(1) to make a final distribution of
$ million to our existing
stockholders in connection with the termination of our S
corporation status, (2) to exercise our option to redeem up
to 35%, or approximately $96.3 million, of our outstanding
senior secured notes and (3) to the extent any proceeds
remain, to repay a portion of the amounts outstanding under our
senior secured revolving credit facility. We will not receive
any proceeds from the sale of shares of our common stock by the
selling stockholders. See Use of Proceeds. |
|
|
|
Risk factors
|
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock. |
|
|
|
Listing
|
|
We have applied to have our common stock listed on the New York
Stock Exchange under the trading symbol ADSI. |
Except as otherwise indicated, all information in this
prospectus:
|
|
|
|
|
excludes restricted stock unit and option grants expected to
occur concurrently with the consummation of this offering and
all shares reserved for future issuance pursuant to our 2011
Equity Incentive Award Plan;
|
|
|
|
|
|
gives effect to the filing of our amended and restated
certificate of incorporation, effecting
a -for-1
stock split with respect to our common stock, which will occur
prior to the effective date of the registration statement of
which this prospectus is a part; and
|
|
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase
additional shares from the selling stockholders in this
offering. See Principal and Selling Stockholders.
|
6
Summary
Consolidated Financial and Other Data
The following tables summarize the consolidated financial and
other data for our business, as well as certain pro forma
information that gives effect to our conversion from a
subchapter S corporation to a subchapter C corporation as
if it occurred on January 1 of each period. In addition,
certain pro forma, as adjusted information gives effect to the
refinancing transactions and the use of proceeds from this
offering. You should read this summary consolidated financial
and other data in conjunction with Use of Proceeds,
Capitalization, Selected Consolidated
Financial and Other Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes, all included elsewhere in this prospectus.
We derived the consolidated statements of operations data for
the years ended December 31, 2008, 2009 and 2010 from our
audited consolidated financial statements. Our audited
consolidated financial statements as of December 31, 2009
and 2010 and for the fiscal years ended December 31, 2008,
2009 and 2010 have been included elsewhere in this prospectus.
The unaudited condensed consolidated statements of operations
data for the three months ended March 31, 2010 and 2011,
and the unaudited condensed consolidated balance sheet data as
of March 31, 2011, have been derived from our unaudited
condensed consolidated financial statements included elsewhere
in this prospectus. We have prepared the unaudited information
on the same basis as the audited consolidated financial
statements and have included, in our opinion, all adjustments,
consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of the financial
information set forth in those statements. Our results of
operations for the three months ended March 31, 2011, are
not necessarily indicative of the results to be obtained for the
full fiscal year.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
660,535
|
|
|
$
|
932,177
|
|
|
$
|
1,330,840
|
|
|
$
|
292,283
|
|
|
$
|
343,917
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
572,992
|
|
|
|
809,117
|
|
|
|
1,166,391
|
|
|
|
258,853
|
|
|
|
302,691
|
|
Selling, general and administrative
|
|
|
44,323
|
|
|
|
60,897
|
|
|
|
80,945
|
|
|
|
15,568
|
|
|
|
28,121
|
|
Intangible asset impairment
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
43,220
|
|
|
|
59,167
|
|
|
|
83,504
|
|
|
|
17,862
|
|
|
|
13,105
|
|
Interest income
|
|
|
225
|
|
|
|
84
|
|
|
|
127
|
|
|
|
47
|
|
|
|
28
|
|
Interest expense
|
|
|
(1,481
|
)
|
|
|
(1,401
|
)
|
|
|
(5,388
|
)
|
|
|
(780
|
)
|
|
|
(2,342
|
)
|
Write-off of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
41,964
|
|
|
|
57,850
|
|
|
|
78,243
|
|
|
|
17,129
|
|
|
|
9,255
|
|
Net income attributable to common stockholders
|
|
$
|
42,010
|
|
|
$
|
57,709
|
|
|
$
|
77,282
|
|
|
$
|
16,737
|
|
|
$
|
9,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Data
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma provision for income taxes
|
|
$
|
16,594
|
|
|
$
|
22,795
|
|
|
$
|
30,913
|
|
|
$
|
6,611
|
|
|
$
|
3,554
|
|
Pro forma net income
|
|
|
25,370
|
|
|
|
35,055
|
|
|
|
47,330
|
|
|
|
10,518
|
|
|
|
5,701
|
|
Pro forma net income attributable to common stockholders
|
|
|
25,416
|
|
|
|
34,914
|
|
|
|
46,369
|
|
|
|
10,126
|
|
|
|
5,558
|
|
Pro forma net income per common share after giving effect to
stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding after giving
effect to stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma, As Adjusted Data
(unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income attributable to common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
15,893
|
|
|
$
|
35,291
|
|
|
$
|
31,742
|
|
|
$
|
12,510
|
|
|
$
|
31,817
|
|
Net cash used in investing activities
|
|
|
(14,888
|
)
|
|
|
(6,586
|
)
|
|
|
(2,947
|
)
|
|
|
(1,520
|
)
|
|
|
(1,226
|
)
|
Net cash provided by (used in) financing activities
|
|
|
492
|
|
|
|
(29,547
|
)
|
|
|
(27,340
|
)
|
|
|
(11,065
|
)
|
|
|
(31,463
|
)
|
Depreciation and amortization
|
|
|
2,049
|
|
|
|
2,140
|
|
|
|
974
|
|
|
|
249
|
|
|
|
469
|
|
Sales representatives at end of
period(3)
|
|
|
87
|
|
|
|
118
|
|
|
|
166
|
|
|
|
140
|
|
|
|
185
|
|
Capital expenditures
|
|
$
|
8,297
|
|
|
$
|
9,181
|
|
|
$
|
3,387
|
|
|
$
|
781
|
|
|
$
|
1,371
|
|
EBITDA(4)
|
|
|
45,269
|
|
|
|
61,307
|
|
|
|
84,478
|
|
|
|
18,111
|
|
|
|
13,574
|
|
8
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011
|
|
|
Actual
|
|
As
Adjusted(5)
|
|
|
(unaudited)
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,938
|
|
|
$
|
|
|
Working capital
|
|
|
53,957
|
|
|
|
|
|
Total debt
|
|
|
355,698
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(203,162
|
)
|
|
|
|
|
|
|
|
(1) |
|
We historically have been treated as a subchapter S corporation
for U.S. federal income tax purposes. As a result, our income
has not been subject to U.S. federal income taxes or state
income taxes in those states where S corporation status is
recognized. In general, the corporate income or loss of a
subchapter S corporation is allocated to its stockholders for
inclusion in their personal federal income tax returns and state
income tax returns in those states where S corporation status is
recognized. In connection with this offering, we will convert
from a subchapter S corporation to a subchapter C corporation.
Pro forma provision for income taxes reflects combined federal
and state income taxes on a pro forma basis, as if we had been
taxed as a subchapter C corporation, using an effective tax rate
of 39.5% for 2008 and 2009, and an effective tax rate of 40.0%
for 2010. The effective tax rates used for the three month
periods ended March 31, 2010 and 2011 were 39.5% and 39.0%,
respectively. |
|
|
|
|
|
Pro forma net income reflects historical net income before
income taxes less the pro forma provision for income taxes. Pro
forma net income does not give effect to the refinancing
transactions or the use of proceeds from this offering. |
|
|
|
(2) |
|
Pro forma, as adjusted data give effect to the following
transactions as if they had occurred on January 1, 2010:
(a) this offering and the use of proceeds therefrom,
(b) our conversion from a subchapter S corporation to
a subchapter C corporation, using an effective tax rate of
40.0% for the year ended December 31, 2010, and 39.0% for
the three months ended March 31, 2011 and (c) the
refinancing transactions. |
|
|
|
|
|
Pro forma, as adjusted net income for the year ended
December 31, 2010 and the three months ended March 31,
2011, does not include adjustments to historical amounts as
reflected for the write-off of deferred financing costs in
connection with the refinancing transactions, or the payment of
the cash bonuses in connection with the refinancing
transactions, and does not include adjustments for the write-off
of approximately $ million of
related deferred financing costs and 11% prepayment premium for
the optional redemption of 35% of our outstanding senior secured
notes as a result of the use of proceeds from this offering. |
|
|
|
|
|
The following is a reconciliation of historical net income to
pro forma, as adjusted net income for the year ended
December 31, 2010 and the three months ended March 31,
2011: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2010
|
|
|
March 31, 2011
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
78,243
|
|
|
$
|
9,255
|
|
Net increase in interest
expense(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted provision for income
taxes(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
(a) |
|
The following is a reconciliation of historical interest expense
to pro forma, as adjusted interest expense for the year ended
December 31, 2010 and the three months ended March 31,
2011: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2010
|
|
|
March 31, 2011
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
5,388
|
|
|
$
|
3,878
|
|
Net increase resulting from the refinancing
transactions(i)
|
|
|
|
|
|
|
|
|
Decrease resulting from the use of proceeds of this
offering(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted interest expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Reflects the difference in interest expense between the
historical amounts incurred under our term loan facility and
senior secured revolving credit facility, including the
amortization of deferred financing costs, and the interest
expense that would have been incurred under our 11.00% senior
secured notes due 2018 and our amended and restated senior
secured revolving credit facility (based on the amount drawn
upon consummation of the refinancing transactions of
$93.2 million, at an assumed weighted interest rate
of %), assuming the refinancing
transactions were consummated on January 1, 2010. |
|
|
|
(ii) |
|
Reflects the reduction in interest expense, after giving effect
to the refinancing transactions as if they had occurred on
January 1, 2010, as a result of the use of a portion of the
proceeds from this offering to repay amounts outstanding under
our senior secured revolving credit facility and our senior
secured notes, assuming this offering was consummated on
January 1, 2010. See Use of Proceeds. |
|
|
|
(b) |
|
Reflects $ million and
$ million in income taxes for
the year ended December 31, 2010 and the three months ended
March 31, 2011, respectively, on a pro forma, as adjusted
basis after giving effect to the increase in interest expense as
a result of the refinancing transactions described above, as a
result of our conversion from a subchapter S corporation to
a subchapter C corporation, using an effective tax rate of
40.0% for the year ended December 31, 2010, and 39.0% for the
three months ended March 31, 2011. |
|
|
|
(3) |
|
Does not include those members of our sales force who primarily
serve our state and local law enforcement customers, which were
10, 14 and 14 members of our sales force as of
December 31, 2008, 2009 and 2010, respectively, and
12 members of our sales force as of March 31, 2011,
because these members perform fundamentally different functions
in the sales process than the other members of our sales force.
See Managements Discussion and Analysis of Financial
Condition and Results of OperationsComponents of Our
Consolidated Statements of OperationsNet Sales. |
|
|
|
(4) |
|
We define EBITDA as net income before interest expense,
provision for income taxes and depreciation and amortization.
EBITDA is not a measure of financial performance under U.S. GAAP
and should not be considered as an alternative to net income as
a measure of performance. Because EBITDA is not a measurement
determined in accordance with U.S. GAAP and is susceptible to
varying calculations, EBITDA, as presented, may not be
comparable to other similarly titled measures presented by other
companies. We believe that EBITDA is a useful financial metric
to assess our operating performance from period to period by
excluding certain items that we believe are not representative
of our core business, as well for providing a comparison of our
operating performance to that of other companies in our industry. |
We use EBITDA in a number of ways, including:
|
|
|
|
|
for planning and budgeting purposes;
|
|
|
|
to evaluate the effectiveness of our business strategies;
|
10
|
|
|
|
|
in communications with our board of directors concerning our
consolidated financial performance; and
|
|
|
|
to determine managements compensation.
|
The following table reconciles net income, the most directly
comparable GAAP financial measure, to EBITDA for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
41,964
|
|
|
$
|
57,850
|
|
|
$
|
78,243
|
|
|
$
|
17,129
|
|
|
$
|
9,255
|
|
Interest expense, net(a)
|
|
|
1,256
|
|
|
|
1,317
|
|
|
|
5,261
|
|
|
|
733
|
|
|
|
3,850
|
|
Depreciation and amortization
|
|
|
2,049
|
|
|
|
2,140
|
|
|
|
974
|
|
|
|
249
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(b)
|
|
$
|
45,269
|
|
|
$
|
61,307
|
|
|
$
|
84,478
|
|
|
$
|
18,111
|
|
|
$
|
13,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
(a)
|
|
Interest expense, net for the year ended December 31, 2010
includes amortization of deferred financing costs of $537,143.
Interest expense, net for three month period ended
March 31, 2011 includes amortization of deferred financing
costs of $301,853 and the write-off of deferred financing costs
as a result of the refinancing transactions of $1.5 million. |
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|
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(b)
|
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For the year ended December 31, 2009, EBITDA was negatively
impacted by a write off of approximately $3.0 million
related to our acquisition of
MAR-VEL
International, Inc. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsAcquisition of MAR-VEL International, Inc.
In addition, for the year ended December 31, 2010 and the
three months ended March 31, 2011, EBITDA was negatively
impacted by costs consisting principally of legal, accounting
and other professional fees incurred in connection with this
offering and the pursuit of other strategic opportunities and
financings. |
EBITDA has limitations as an analytical tool and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. See
Non-GAAP Financial Measures.
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|
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(5) |
|
As adjusted balance sheet data assumes that the net proceeds to
us from this offering, after deducting underwriting discounts
and estimated offering expenses, will be approximately
$ , assuming the common stock is
offered at $ per share, the
midpoint of the range set forth on the cover page of this
prospectus and gives effect to (a) the use of proceeds from this
offering (1) to make a final distribution of
$ million to our existing
stockholders in connection with the termination of our
S corporation status, (2) to exercise our option to
redeem up to 35%, or approximately $96.3 million, of our
outstanding senior secured notes, including the write-off of
related deferred financing costs and 11% prepayment premium, and
(3) to the extent any proceeds remain, to repay a portion
of the amounts outstanding under our outstanding senior secured
revolving credit facility and (b) the payment of the remainder
of the transaction bonuses in the amount of $2.4 million
upon the consummation of this offering. See Recent
Transactions, Use of Proceeds and
Capitalization. |
11
RISK
FACTORS
Purchasing our common stock in this offering involves a high
degree of risk. You should carefully consider the following
factors, in addition to the other information contained in this
prospectus, in deciding whether to invest in our common stock.
This prospectus contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include
those discussed below.
Risks
Related to Our Business
If we are unable to maintain our relationships with our
customers or are unable to develop relationships with new
customers, it could adversely affect our operating performance
and our ability to generate cash flow to fund our
operations.
Sales of the products and related services we offer to our five
largest customers amounted to 48% and 47% of our net sales for
the year ended December 31, 2010 and the three months ended
March 31, 2011, respectively. For the year ended
December 31, 2010, our three largest customers were the
U.S. Armys Natick Soldier Systems, the United States
Army Research, Development and Engineering Command, and the
Defense Logistics Agency Troop Support (formerly the Defense
Supply Center Philadelphia), or DLATS, which
generated approximately 24%, 8% and 7% of our sales,
respectively. For the three months ended March 31, 2011,
our three largest customers were the U.S. Armys
Natick Soldier Systems, the United States Army Research,
Development and Engineering Command, and DLATS, which generated
approximately 24%, 9% and 5% of our sales, respectively.
In addition to being our third largest customer, DLATS is the
agency that awarded us the Spec Ops TLS contract and the Fire
and Emergency Services Tailored Logistics Support contract, or
FES TLS, contract. Many of our customers other than
DLATS use the Spec Ops TLS contract
and/or the
FES TLS contract as the contractual procurement vehicle that
results in sales recorded by us. However, the authority to award
actual purchase orders in these situations always resides with
DLATS. Accordingly, DLATS awards us certain purchase orders for
products which are requisitioned by, and provided to,
third-parties that we consider to be customers. For each of the
year ended December 31, 2010 and the three months ended
March 31, 2011, sales to DLATS as a customer combined, with
sales to other customers which were awarded to us by DLATS under
our Spec Ops TLS contract or our FES TLS, contract represent 48%
of our sales.
Among the key factors in maintaining our relationships with
federal government agencies is our performance on individual
contracts and purchase orders and the strength of our
professional reputation. The loss of, or deterioration in, our
relations with one or more of our significant customers or our
inability to develop relationships with new customers would
adversely affect our business, results of operations and
financial condition.
We rely on U.S. government entities for substantially all
of our sales. A loss of or a failure to obtain new contractual
procurement vehicles could adversely affect our operating
performance and our ability to generate cash flow to fund our
operations.
We generate substantially all of our sales from contracts with
the U.S. government and its agencies, primarily the
agencies and offices within the Department of Defense. For each
of the year ended December 31, 2010 and the three months
ended March 31, 2011, approximately 97% of our net sales
were derived directly or indirectly from sales to
U.S. government agencies, including approximately 88% and
89%, respectively, to agencies and offices within the Department
of Defense. We expect that Department of Defense contracts will
continue to be our primary source of sales for the foreseeable
future. The continuation and renewal of our existing government
contracts and new government contracts are, among other factors,
contingent upon the availability of adequate funding for various
U.S. government agencies, including the Department of
Defense. The loss or significant curtailment of our material
government contracts, or our failure to renew existing contracts
or enter into new contracts would adversely affect our business,
results of operations and financial condition.
12
Total sales under our Spec Ops TLS contract amounted to
approximately 44% of our total net sales for each of the year
ended December 31, 2010 and the three months ended
March 31, 2011. Total sales under our GEN III contract
amounted to approximately 19% of our total net sales for each of
the year ended December 31, 2010 and the three months ended
March 31, 2011. Our GEN III contract typically contributes
an equal amount to our sales each month. Sales under our three
federal supply schedules with the U.S. General Services
Administration aggregated approximately 9% and 7% of our total
net sales for the year ended December 31, 2010 and the
three months ended March 31, 2011, respectively. Sales
under one or more of these contracts could end for a number of
reasons, including the completion of the customers
requirements, the completion or early termination of our current
contract, the consolidation of our work into another contract
where we are not the holder of that contract, or the loss of a
competitive bid for the follow-on work related to our current
contract. For example, our GEN III contract is currently in the
final year of its five-year term, expiring on November 20,
2011 and our Spec Ops TLS contract, which was recently renewed
for an additional one-year period, is up for another option year
renewal in March 2012. If the GEN III contract or the Spec Ops
TLS contract is not continued, or if they are re-competed and
awarded to another bidder, we would no longer have any sales
under these contracts. The occurrence of any of these events
could adversely affect our business, results of operations and
financial condition.
Changes in the spending policies or budget priorities of
the U.S. government, and the Department of Defense in
particular, or delays in the passage of the U.S. government
budget, could cause us to lose sales.
Changes in U.S. government spending could affect our
operating performance and lead to an unexpected loss of sales.
The loss or significant reduction in funding by the Department
of Defense for any of the large programs in which we participate
could also result in a material decrease to our future sales,
earnings and cash flows. Congress usually appropriates funds to
procuring agencies, such as the Department of Defense, who then
allocate funds for a given program or contract on a September 30
fiscal year basis, even though contract periods of performance
may extend over many years. Consequently, at the beginning of a
program, the contract may be only partially funded, with
additional monies committed to the contract by the procuring
agency only as appropriations are made by Congress for future
fiscal years. The factors that could impact U.S. government
spending and reduce our federal government contracting business
include:
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policy
and/or
spending changes implemented by the current administration;
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a significant decline in, or reallocation of, spending by the
U.S. government, in general, or by the Department of
Defense, in particular;
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changes, delays or cancellations of U.S. government
programs, requirements or policies;
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the adoption of new laws or regulations that affect companies
that provide services to the U.S. government;
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U.S. government shutdowns or other delays in the government
appropriations process;
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curtailment of the U.S. governments outsourcing of
procurement and logistics services to private contractors;
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changes in the political climate, including with regard to the
funding or operation of the products and related services we
offer;
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developments in Iraq or Afghanistan, including the sustained
withdrawal of troops, or other geopolitical developments that
affect demand for our services and the products we
offer; and
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general economic conditions, including a slowdown in the economy
or unstable economic conditions in the United States or in the
countries in which we operate.
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These or other factors could cause U.S. government agencies
to reduce their purchases under our contracts, to exercise their
right to terminate our contracts in whole or in part, or decline
to exercise options to renew our contracts.
13
A delay in the passage of the U.S. governments budget
could delay procurement of the services and solutions we provide
and have an adverse effect on our future sales. In years when
the U.S. government does not complete its budget process
before the end of its fiscal year on September 30,
government operations are typically funded pursuant to a
continuing resolution that authorizes agencies of
the U.S. government to continue to operate, but does not
authorize new spending initiatives. When the
U.S. government operates under a continuing resolution,
government agencies may delay or cancel funding we expect to
receive from customers on work we are already performing and new
initiatives and programs are likely to be delayed or cancelled,
which could materially adversely affect our business, results of
operations and financial condition.
Federal government contracts contain provisions giving
government customers a variety of rights that are unfavorable to
us, including the ability to terminate a contract at any time
for convenience.
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. These
provisions may allow the government to:
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terminate existing contracts for convenience, as well as for
default;
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reduce orders under contracts or subcontracts;
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cancel multi-year contracts and related orders if funds for
contract performance for any subsequent year become unavailable;
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decline to exercise an option to renew a multi-year contract;
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suspend or debar us from doing business with the federal
government or with a governmental agency;
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prohibit future procurement awards with a particular agency as a
result of a finding of an organizational conflict of interest
based upon prior related work performed for the agency that
would give a contractor an unfair advantage over competing
contractors;
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subject the award of contracts to protest by competitors, which
may require the contracting agency or department to suspend our
performance pending the outcome of the protest;
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claim rights in products and systems produced by us; and
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control or prohibit the export of the products and related
services we offer.
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If the U.S. 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. If the government terminates a contract for
default, we may not even recover those amounts and instead may
be liable for excess costs incurred by the government in
procuring undelivered items and services from another source.
Our contracts with foreign governments generally contain similar
provisions relating to termination at the convenience of the
customer.
Some of our U.S. government contracts have an initial term
of two years with multiple option periods, exercisable at the
discretion of the government at previously negotiated prices.
The government is not obligated to exercise any option under a
contract. Furthermore, the government is typically required to
open all programs to competitive bidding and, therefore, may not
automatically renew a contract. In addition, at the time of
completion of any of our government contracts, the contract is
frequently required to be re-opened to competitive bidding.
If one of our government customers were to unexpectedly
terminate, cancel or decline to exercise an option to renew one
or more of our significant contracts or programs, our failure to
replace sales generated from such contracts would result in
lower sales and have an adverse effect on our earnings, which
would adversely affect our business, results of operations and
financial condition.
14
We depend on our relationships with key vendors. If we are
not able to maintain these relationships, our net sales,
profitability and growth prospects could be adversely
affected.
The success of our business depends to a large extent on our
strategic relationships with key vendors and our ability to
maintain a sufficient supply of products to meet our
customers needs. In 2010, our top ten vendors accounted
for approximately 52% of the products we purchased for resale,
and no vendor accounted for over 11% of the products we
purchased for resale. Our relationships with our vendors can be
terminated by either party at any time. If we lost a vendor and
were unable to substitute products from another vendor, it would
adversely affect our business, results of operations and
financial condition.
Additionally, we have instituted a preferred vendor program,
comprised of approximately 300 vendors in an effort to secure
preferential terms and support. We rely on these preferred
vendor relationships in order to improve the likelihood of
winning bids for new contractual procurement vehicles, to win
orders under existing contractual procurement vehicles. In the
event that we are unable to maintain those preferred vendor
relations, the loss of preferential terms and support would
adversely affect our business, results of operations and
financial condition.
If our vendors do not meet our needs or expectations, or
those of our customers, our business would suffer.
The success of our business depends on our reputation for
providing logistics and supply chain solutions. The products we
provide to customers are purchased from approximately
1,400 active vendors (in the past 24 months). We do
not manufacture any of the products we provide to our customers
and we rely on third-party vendors to deliver the products that
we sell to our clients. As a result, we do not directly control
the manufacturing or availability of the products provided by
our vendors. If our vendors do not meet our needs or
expectations, or those of our customers, our professional
reputation may be damaged and our business would be harmed.
Supply interruptions could arise from shortages of raw
materials, labor disputes or weather conditions affecting
vendors production, transportation disruptions, or other
reasons beyond our control. We may have disputes with our
vendors arising from, among other things, the quality of
products and services or customer concerns about the vendor. If
any of our vendors fail to timely meet their contractual
obligations or have regulatory compliance or other problems, our
ability to fulfill our obligations may be jeopardized. Economic
downturns can adversely affect a vendors ability to
manufacture or deliver products. Further, vendors may also be
enjoined from manufacturing and distributing products to us as a
result of litigation filed by third parties, including
intellectual property litigation. If we were to experience
difficulty in obtaining certain products, there could be an
adverse effect on our results of operations and on our customer
relationships and our reputation. Additionally, our key vendors
could also increase pricing of their products, which could
negatively affect our ability to win contracts by offering
competitive prices, which, in turn, would adversely affect our
business, results of operations and financial condition.
We generate substantially all of our sales from contracts
awarded through competitive procurement processes, which can
impose significant costs upon us and negatively impact our
results of operations and financial condition.
We generate substantially all of our sales from federal
government contracts that are awarded through a competitive
procurement process. Competitive procurement imposes significant
costs and presents a number of risks to us, including:
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the substantial cost and managerial time and effort that we
spend to prepare bids and proposals for contracts that may not
be awarded to us and schedules that may not be used; and
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the expense and delay that we may face if our competitors
protest or challenge our contract awards, and the risk that any
such protest or challenge could result in the rebidding of
offers, or in termination, reduction or modification of the
awarded contract.
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The government contracts for which we compete typically have
multiple option periods, and if we fail to win a contract or
fail to perform under a contract, we generally will be unable to
compete again for that contract for several years. Because of
the nature of our business, we could lose contracts to
competitors
15
during recompete periods. Additionally, some contracts reach the
end of their terms as projects are completed, funding is
terminated or the contract ceiling is reached. If we fail to win
new contracts, receive renewal options or continue with an
existing contract upon recompetition, it may result in
additional costs and expenses and loss of sales, and we will not
have an opportunity to compete for these contract opportunities
again until such contracts expire.
Many of our U.S. government customers spend their
procurement budgets through multiple-award contracts, under
which we are required to compete among the awardees for
post-award orders. Failure to win post-award orders could affect
our ability to increase our sales.
The U.S. government can select multiple winners under
multiple-award contracts, federal supply schedules and other
agency-specific indefinite quantity and indefinite delivery
contracts, as well as award subsequent purchase orders among
such multiple winners. This means that there is no guarantee
that these indefinite quantity and indefinite delivery,
multiple-award contracts will result in the actual orders equal
to the ceiling value under the contract, or result in any actual
orders. We are only eligible to compete for work (purchase
orders and delivery orders) as an awardee pursuant to
government-wide acquisition contracts already awarded to us. Our
failure to compete effectively in this procurement environment
could reduce our sales, which would adversely affect our
business, results of operations and financial condition.
Our failure to comply with a variety of complex
procurement rules and regulations could damage our reputation
and result in our being liable for penalties, including
termination of our U.S. government contracts, disqualification
from bidding on future U.S. government contracts, suspension or
debarment from U.S. government contracting.
We must comply with laws and regulations relating to the
formation, administration and performance of
U.S. government contracts, which affect how we do business
with our customers and may impose added costs on our business.
Some significant laws and regulations that affect us include:
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the Federal Acquisition Regulation, or FAR, and
supplements, which regulate the formation, administration and
performance of U.S. government contracts;
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the Truth in Negotiations Act, which requires certification and
disclosure of cost and pricing data in connection with certain
contract negotiations;
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the Civil False Claims Act, which provides for substantial civil
penalties for violations, including for submission of a false or
fraudulent claim to the U.S. government for payment or
approval;
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the Procurement Integrity Act, which requires evaluation of
ethical conflicts surrounding procurement activity and
establishing certain employment restrictions for individuals who
participate in the procurement process; and
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the Small Business Act and the Small Business Administration, or
the SBA, size status regulations, which regulate
eligibility for performance of government contracts which are
set-aside for, or a preference is given in the evaluation
process if awarded to, specific types of contractors such as
small businesses and minority-owned businesses.
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The FAR and many of our U.S. government contracts contain
organizational conflicts of interest clauses that may limit our
ability to compete for or perform certain other contracts.
Organizational conflicts of interest arise when we engage in
activities that provide us with an unfair competitive advantage.
A conflict of interest issue that precludes our competition for
or performance on a significant program or contract could harm
our prospects and negative publicity about a conflict of
interest issue could damage our reputation.
Any failure to comply with applicable laws and regulations could
result in contract termination, damage to our reputation, price
or fee reductions or suspension or debarment from contracting
with the government, each of which could materially adversely
affect our business, results of operations and financial
condition.
In addition, the U.S. government may revise existing
contract rules and regulations or adopt new contract rules and
regulations at any time and may also face restrictions or
pressure regarding the type and amount of services it may obtain
from private contractors. Congressional legislation and
initiatives dealing with
16
mitigation of potential conflicts of interest, procurement
reform and shifts in the buying practices of
U.S. government agencies resulting from those proposals
could have adverse effects on government contractors, including
us. Any of these changes could impair our ability to obtain new
contracts or renew contracts under which we currently perform
when those contracts are eligible for recompetition. Any new
contracting methods could be costly or administratively
difficult for us to implement, which would adversely affect our
business, results of operations and financial condition.
Our growth strategy requires us to hire qualified
employees in order to expand our sales force. If we fail to
attract and retain skilled personnel, our ability to maintain
and grow our business could be limited.
Our business involves the development of tailored solutions for
our customers, a process that relies heavily upon the expertise
and services of our employees. Our continued success depends on
our ability to recruit and retain highly trained sales personnel
who preferably have military experience and who work well with
our military and federal civilian government customers. Many of
our sales personnel are former members of the military and have
specific knowledge of and experience with our federal government
customers operations, and we obtain some of our contracts
based on that knowledge and experience. The loss of services of
key personnel could impair our ability to win new business.
Competition for personnel in the military industry is intense,
and recruiting, training and retention costs place significant
demands on our resources. If we are unable to recruit and retain
a sufficient number of qualified employees, in particular,
highly trained sales personnel, our ability to maintain and grow
our business would be limited.
Our business is subject to reviews, audits and price
adjustments by the U.S. government, which, if resolved
unfavorably to us, would adversely affect our business, results
of operations and financial condition.
U.S. government agencies, including the Department of
Defense and others, routinely audit and review a
contractors performance on government contracts, indirect
rates and pricing practices, and compliance with applicable
contracting and procurement laws, regulations and standards.
Based on the results of such audits, the auditing agency is
authorized to adjust our unit prices if the auditing agency does
not find them to be fair and reasonable. The
auditing agency is also authorized to require us to refund any
excess proceeds we received on a particular item over its final
adjusted unit price.
The Department of Defense, in particular, also reviews the
adequacy of, and compliance with, our internal control systems
and policies, including our purchasing, accounting, financial
capability, pricing, labor pool, overhead rate and management
information systems. Our failure to obtain an
adequate determination of our various accounting and
management internal control systems from the responsible
U.S. government agency could significantly and adversely
affect our business, including our ability to bid on new
contracts and our competitive position in the bidding process.
Failure to comply with applicable contracting and procurement
laws, regulations and standards could also result in the
U.S. government imposing penalties and sanctions against
us, including suspension of payments and increased government
scrutiny that could delay or adversely affect our ability to
invoice and receive timely payment on contracts or perform
contracts, or could result in suspension or debarment from
competing for contracts with the U.S. government. In
addition, we could suffer serious harm to our reputation if
allegations of impropriety were made against us, whether or not
true.
If, as the result of an adverse audit finding, we were suspended
or prohibited from contracting with the U.S. government, or
any significant U.S. government agency, if our reputation
or relationship with U.S. government agencies was impaired
or if the U.S. government otherwise ceased doing business
with us or significantly decreased the amount of business it
does with us, it would adversely affect our business, results of
operations and financial condition.
Our sales will be adversely affected if we fail to receive
renewal or follow-on contracts.
Renewal and follow-on contracts are important because our
contracts are typically for fixed terms. The typical term of our
contracts with the U.S. government is between one and two
base years, with three to four option years following. In
particular, our GEN III contract is currently in the final year
of its five-year term
17
and our Spec Ops TLS contract, which was recently renewed for an
additional one-year period, is up for another option year
renewal in March 2012. If the GEN III contract or the Spec Ops
TLS contract is not continued, or if they are re-competed and
awarded to another bidder, we would no longer have any sales
under these contracts. The loss of sales from our possible
failure to obtain renewal or follow-on contacts would adversely
affect our business, results of operations and financial
condition.
Our sales abroad to U.S. customers and to certain foreign
customers expose us to risks associated with operating
internationally.
Our sales abroad to
non-U.S.
customers outside of the United States currently generate a
limited portion of our total net sales. However, as we seek to
expand internationally and increase our sales to foreign
governments and allied militaries, our international business
operations may be subject to additional and different risks than
our domestic business, including the following:
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compliance with the Arms Export Control Act and Export
Administration Regulations, or EAR;
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compliance with the U.S. Foreign Corrupt Practices Act, or
FCPA, and equivalent foreign regulations;
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compliance with the International Traffic in Arms Regulations,
or ITAR;
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compliance with the trade sanctions laws and regulations
administered by the U.S. Department of the Treasurys
Office of Foreign Assets Control, or OFAC;
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the burden and cost of compliance with foreign laws, treaties
and technical standards and changes in those regulations;
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contract award and funding delays;
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potential restrictions on transfers of funds;
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import and export duties and value added taxes;
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transportation delays and interruptions;
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uncertainties arising from foreign local business practices and
cultural considerations; and
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potential military conflicts and political risks.
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Failure to comply with U.S. government laws and regulations
applicable to transactions abroad would have an adverse impact
on our business with the U.S. government and could expose
us to administrative, civil or criminal penalties,
and/or
suspension and debarment from U.S. government contracting.
Failure to comply with applicable foreign laws and regulations
could also have an adverse impact on our business abroad and
could expose us to
non-U.S. administrative,
civil or criminal penalties. Additionally, these risks related
to international operations may expose us to potentially
significant contract losses.
In some countries, there is increased chance for economic, legal
or political changes that may adversely affect the performance
of our services, sale of our products or repatriation of our
profits. We do not know the impact that these regulatory,
geopolitical and other factors may have on our business in the
future and any of these factors would adversely affect our
business, results of operations and financial condition.
We may not be able to receive the necessary licenses
required for us to sell our export-controlled products overseas.
In addition, the loss of our registration as either an exporter
or a broker under ITAR would adversely affect our business,
results of operations and financial condition.
U.S. government agencies, primarily the Directorate of
Defense Trade Controls within the State Department and the
Bureau of Industry Security within the U.S. Department of
Commerce, must license every shipment of export-controlled
products that we export. These licenses are required due to both
the products we export and to the foreign customers we service.
If we do not receive a license for an export-controlled product,
we cannot ship that product. We cannot be sure of our ability to
gain any licenses required to export our products, and failure
to receive a required license would eliminate our ability to
make
18
that sale. A delay in obtaining the necessary licenses to sell
our export-controlled products abroad could result in delayed
deliveries and delayed recognition of revenue, which could cause
us reputational damage and could result in a customers
decision not to do business with us in the future.
In addition to obtaining a license for each of our exports
outside of the United States, we are also required to maintain a
standing registry under ITAR as both a broker and an exporter.
We operate as a broker when we facilitate sales between a
foreign party shipping products directly to a buyer outside the
United States or to a foreign customer. We operate as an
exporter when we ship products to our customers outside the
United States. If we were to lose our registration as either a
broker or an exporter under ITAR, we would not be able to
facilitate international sales or sell export-controlled
products abroad, respectively, which would adversely affect our
business, results of operations and financial condition.
We are subject to laws and regulations concerning our
international operations, including export restrictions, U.S.
economic sanctions and the FCPA. If we are not in compliance
with applicable legal requirements, we may be subject to civil
or criminal penalties and other remedial measures, which would
adversely affect our business, results of operations and
financial condition.
Our international operations are subject to laws and regulations
restricting our international operations, including activities
involving restricted countries, organizations, entities and
persons that have been identified as unlawful actors or that are
subject to U.S. economic sanctions. To the extent that we
operate outside the United States, we are subject to the FCPA,
which prohibits U.S. companies and their intermediaries
from bribing foreign officials for the purpose of obtaining or
keeping business or otherwise obtaining favorable treatment, and
other laws concerning our international operations. Any
violations of these laws and regulations, including any
resulting fines, penalties or restrictions on export activities
(including other U.S. laws and regulations as well as local
laws), would adversely affect our reputation and the market for
our shares, and may require certain of our investors to disclose
their investment in our company under certain state laws. If we
are not in compliance with export restrictions,
U.S. economic sanctions or other laws and regulations that
apply to our international operations, we may be subject to
civil or criminal penalties and other remedial measures, which
could adversely affect our business, results of operations and
financial condition.
Misconduct of our employees, agents and business partners,
including security breaches, could result in reputational
damage, could subject us to fines and penalties and could cause
us to lose our ability to contract with the U.S.
government.
Misconduct, fraud or other improper activities by our employees,
agents or business partners could have a significant adverse
impact on our business and reputation, particularly because we
are a U.S. government contractor. Such misconduct could
include the failure to comply with U.S. government
procurement regulations, regulations regarding the protection of
classified information, legislation regarding the pricing of
labor and other costs in U.S. government contracts,
regulations on lobbying or similar activities, environmental
laws and any other applicable laws or regulations. Misconduct
involving data security lapses resulting in the compromise of
personal information or the improper use of our customers
sensitive or classified information could result in remediation
costs, regulatory sanctions against us and serious harm to our
reputation. Other examples of potential misconduct include
falsifying time records and violations of the Anti-Kickback Act
or the FCPA. Although we have implemented policies, procedures
and controls to prevent and detect these activities, these
precautions may not prevent all misconduct and as a result, we
could face unknown risks or losses. Our failure to comply with
applicable laws or regulations or misconduct by any of our
employees, agents or business partners could result in
reputational damage, could subject us to fines and penalties,
suspension or debarment from contracting with the
U.S. government and loss of security clearance, any of
which would adversely affect our business, results of operations
and financial condition.
19
The loss of one or more members of our senior management
team could impair our relationships with U.S. government
customers and our ability to compete, and could disrupt the
management of our business.
We believe that our success depends on the continued
contributions of the members of our senior management team. Our
senior management team has extensive industry experience, and
the relationships and reputation that members of our senior
management team have established and maintain with
U.S. government personnel contribute to our ability to
maintain good customer relations and to identify new business
opportunities. The loss of the services of one or more of our
senior executives could impair our ability to identify and
secure new contracts, to maintain good customer and vendor
relations and to otherwise manage our business, any of which
would adversely affect our business, results of operations and
financial condition.
We may face difficulties as we expand our operations into
countries in which we have limited operating experience.
We provide operational equipment and logistics solutions to
foreign governments and militaries and to our
U.S. government customers who are operating abroad. We
intend to continue expanding our global footprint, which may
involve expanding into countries other than those in which we
currently operate. Our business outside of the United States is
subject to various risks, including:
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changes in economic and political conditions in the United
States and abroad;
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compliance with international and domestic laws and regulations
and any changes therein;
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wars, civil unrest, acts of terrorism and other conflicts;
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natural disasters;
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changes in tariffs, trade restrictions, trade agreements and
taxations;
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difficulties in managing or overseeing foreign operations;
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limitations on the repatriation of funds because of foreign
exchange controls;
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less developed and less predictable legal systems than those in
the United States; and
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intellectual property laws of countries which do not protect our
intellectual property rights to the same extent as the laws of
the United States.
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The occurrence or consequences of any of these factors may
restrict our ability to operate in the affected region
and/or
decrease the profitability of our operations in that region. As
we expand our business in foreign countries, we will become
exposed to increased risk of loss from foreign currency
fluctuations and exchange controls as well as longer accounts
receivable payment cycles. We have limited control over these
risks, and if we do not correctly anticipate changes in
international economic and political conditions, we may not
alter our business practices in time to avoid adverse effects on
our business, results of operations and financial condition.
If we are unable to manage our growth, our business could
be adversely affected.
We have grown and expanded significantly in recent years. Our
net sales grew at a compound annual growth rate of 61% from 2006
to 2010 and have we have significantly expanded our employee
base, including increasing the weighted average number of
personnel in our sales force from 57 to 134 between 2007 and
2010. To date, we have relied primarily upon organic growth for
this expansion, rather than growth through acquisitions. Our
future results will depend upon our ability to continue to grow
organically or to demonstrate the ability to successfully
identify and integrate non-dilutive acquisitions. We anticipate
that we will continue to expand our workforce, primarily through
continued expansion of our sales team, and our operations, which
will place significant demands on our management, as well as on
our administrative, operational, and financial resources. If we
are unable to expand our operational, financial, and management
information systems in a manner that supports our growth, or are
unable to attract, motivate and manage a skilled workforce, we
may not be able to continue to satisfy our customer demands. If
we expand our business too rapidly in anticipation of increased
customer demand that does not materialize, or in order to
compete for contractual procurement vehicles that we are not
awarded, the increase in our operating expenses could
20
exceed our revenue growth and as a result decrease our net
income. If we are unable to manage our growth, our business,
results of operations or financial condition could be adversely
affected.
We may no longer be able to participate in the federal
governments small business programs which may affect our
business and our sales.
We are currently classified as a small business under certain
provisions of the Small Business Administration regulations.
Under our current employee count we are eligible to compete for
government contracts set aside for businesses designated under
certain North American Industry Classification Systems
(NAICS) codes as small businesses with fewer than
500 employees. To calculate the number of our employees
under the Small Business Administration regulations, we
determine the average number of individuals employed on a
full-time and part-time basis (including employees of any
affiliates as defined in accordance with Small
Business Administration regulations) based upon the number of
employees in each pay period for the preceding twelve calendar
months. As of March 31, 2011, pursuant to this calculation,
we had 443 employees.
Although we currently meet the applicable standard for certain
small business contracts, if we or our affiliates significantly
increase the number of our respective employees, we could lose
eligibility for new government contracts and other awards that
are set aside for small businesses under certain NAICS codes.
Under the Small Business Administration regulations, a concern
that is qualified as a small business at the time it receives a
contract is considered a small business throughout the life of
that contract. Therefore, none of our small business set aside
contracts will automatically terminate should we cease to
qualify as a small business. It is within the government
contracting officers discretion, however, to request that
we recertify our status as a small business in connection with a
contract renewal or to decline to exercise any option to renew a
contract if we fail to qualify. While we have successfully
competed for a number of contractual procurement vehicles that
are not set aside for small businesses, our Spec Ops TLS
contract, which accounted for approximately 44% of our total
net sales for each of the year ended December 31, 2010 and the
three months ended March 31, 2011, was awarded to us
pursuant to a NAICS code designating a small business as having
fewer than 500 employees.
If we are no longer classified as a small business, or if our
status as a small business is successfully challenged, we may
need to modify our competitive strategy going forward in order
maintain our rate of government contracts wins, and if not
successful, our business, results of operations or financial
condition could be adversely affected.
Our failure to obtain and maintain necessary security
clearances may limit our ability to perform classified work for
government customers, which could cause us to lose
business.
Some government contracts require us to maintain facility
security clearances and require some of our employees to
maintain individual security clearances. A number of our
employees maintain a top secret clearance level. 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 cleared
employees lose or are unable to timely obtain security
clearances or we lose a facility clearance, our
U.S. government customers may terminate the contract or
decide not to renew it upon its expiration. As a result, to the
extent we cannot obtain or maintain the required security
clearances for a particular contract, or we fail to obtain them
on a timely basis, we may not generate the sales anticipated
from the contract, which could harm our operating results. 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 will be unable to
perform that contract and we may not be able to compete for or
win new awards for similar work.
Some of our officers and directors have significant
ownership interests in other companies, which could cause
conflicts of interests that result in our not acting on
opportunities on which we would otherwise act.
Some of our officers and directors have significant ownership
interests, individually and collectively, in several companies
with which we have entered into material transactions. The
ownership of our directors and officers in these companies could
create, or appear to create, conflicts of interest with respect
to matters
21
involving both us and those companies, which could have
different implications for those companies than they do for us.
As a result, we may not pursue certain opportunities on which we
would otherwise act. See Certain Relationships and Related
Party Transactions.
Our management team has limited experience managing a
public company, and regulatory compliance may divert its
attention from the
day-to-day
management of our business.
The individuals who now constitute our management team have
limited experience managing a publicly-traded company and
limited experience complying with the increasingly complex laws
pertaining to public companies. Our management team may not
successfully or efficiently manage our transition into a public
company that will be subject to significant regulatory oversight
and reporting obligations under federal securities laws. In
particular, these new obligations will require substantial
attention from our senior management and divert their attention
away from the
day-to-day
management of our business, which could adversely affect our
business, results of operations and financial condition.
We may not be able to identify suitable acquisition
candidates, effectively integrate newly acquired businesses or
achieve expected profitability from acquisitions.
We have in the past acquired additional businesses and may in
the future choose to supplement our organic growth by pursuing
strategic acquisitions aimed at augmenting our contractual
procurement vehicle portfolio, broadening and diversifying our
customer base, expanding our product offerings and vendor
network or increasing our geographic presence. There can be no
assurance that suitable candidates for acquisitions can be
identified or, if suitable candidates are identified, that
acquisitions can be completed on acceptable terms, if at all.
Even if suitable candidates are identified, any future
acquisitions may entail a number of risks that could adversely
affect our business and the market price of our common stock,
including the integration of the acquired operations, diversion
of managements attention, risks of entering markets in
which we have limited experience, adverse short-term effects on
our reported operating results, the potential loss of key
employees of acquired businesses and risks associated with
unanticipated liabilities. There is no assurance that we will be
able to achieve any expected benefits from any acquisition.
We may use common stock to pay for acquisitions. If the owners
of potential acquisition candidates are not willing to receive
common stock in exchange for their businesses, our acquisition
prospects could be limited. Future acquisitions could also
result in accounting charges, potentially dilutive issuances of
equity securities and increased debt and contingent liabilities,
including liabilities related to unknown or undisclosed
circumstances, any of which could materially adversely affect
our business, results of operations and financial condition.
Internal system or service failures could disrupt our
business and impair our ability to effectively provide the
products and related services we offer to our customers, which
could damage our reputation and adversely affect our business,
results of operations and financial condition.
Any system or service disruptions, including those caused by
projects to improve our information technology systems, in
particular our Oracle system, if not anticipated and
appropriately mitigated, would have an adverse effect on our
business including, among other things, an adverse effect on our
ability to bill our customers for work performed on our
contracts, collect the amounts that have been billed, confirm
orders within 24 hours as required by many of our
government contracts, and produce accurate financial statements
in a timely manner.
We could also be subject to systems failures, including network,
software or hardware failures, whether caused by us, third-party
service providers, intruders or hackers, computer viruses,
natural disasters, power shortages or terrorist attacks. We do
not currently have redundant application servers or clustered
databases for our Oracle system or our other information
technology systems. Any such failures could cause loss of data
and interruptions or delays in our business, cause us to incur
remediation costs, subject us to claims and damage our
reputation. In addition, the failure or disruption of our
communications or utilities could cause us to interrupt or
suspend our operations or otherwise adversely affect our
business. Our property and
22
business interruption insurance may be inadequate to compensate
us for all losses that may occur as a result of any system or
operational failure or disruption which would adversely affect
our business, results of operations and financial condition.
Because we are a holding company with no operations of our
own, we are financially dependent on receiving distributions
from our subsidiaries and we could be harmed if such
distributions could not be made in the future.
We are a holding company and all of our operations are conducted
through subsidiaries. Consequently, we rely on dividends or
advances from our subsidiaries (including ones that are wholly
owned). We do not currently expect to declare or pay dividends
on our common stock for the foreseeable future; however, to the
extent that we determine in the future to pay dividends on our
common stock, none of our subsidiaries will be obligated to make
funds available to us for the payment of dividends. The ability
of such subsidiaries to pay dividends and our ability to receive
distributions on our investments in other entities is subject to
applicable local law. Such laws and restrictions could limit the
payment of dividends and distributions to us, which would
restrict our ability to continue operations. In addition,
Delaware law may impose requirements that may restrict our
ability to pay dividends to holders of our common stock.
Our substantial indebtedness could adversely affect our
financial flexibility and our competitive position.
We have a significant amount of indebtedness. As of
March 31, 2011, our total long-term debt was
$289.6 million, representing the senior secured notes and
other long-term debt, and $66.1 million in borrowings
outstanding under our senior secured revolving credit facility.
As of March 31, 2011, after taking into account borrowing
base limitations and outstanding letters of credit, we would
have had commitments under the senior secured revolving credit
facility available to us of $83.9 million.
Subject to the limitations contained in the senior secured
revolving credit facility and the indenture governing the senior
secured notes, which we refer to as the senior secured
notes indenture, we may be able to incur substantial
additional debt from time to time to finance working capital,
capital expenditures, investments or acquisitions, or for other
purposes. If we do so, the risks related to our high level of
debt could intensify. Specifically, our high level of debt could
have important consequences to the you and significant effects
on our business, including:
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making it more difficult for us to satisfy our obligations with
respect to our debt;
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impairing our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, restructuring, acquisitions or general corporate
purposes, which could be exacerbated by further volatility in
the credit markets;
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requiring a substantial portion of our cash flows to be
dedicated to debt service payments instead of other purposes,
thereby reducing the amount of cash flows available for working
capital, capital expenditures, product development,
restructuring, acquisitions and other general corporate purposes;
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increasing our vulnerability to general adverse economic and
industry conditions;
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exposing us to the risk of increased interest rates as
borrowings under the senior secured revolving credit facility
will be, and other indebtedness that we incur in the future may
be, at variable rates of interest;
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limiting our flexibility in planning for and reacting to changes
in our business and the industry in which we compete;
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placing us at a disadvantage compared to other, less leveraged
competitors; and
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increasing our cost of borrowing.
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In addition, the senior secured notes indenture and the senior
secured revolving credit facility contain restrictive covenants
that will limit our ability to engage in activities that may be
in our long-term best interests. Our failure to comply with
those covenants could result in an event of default which, if
not cured or waived, could result in the acceleration of all our
debt.
23
We may not be able to generate sufficient cash to service
all of our indebtedness and may be forced to take other actions
to satisfy our obligations under our indebtedness, which may not
be successful.
Our ability to make scheduled payments on or refinance our debt
obligations depends on our financial condition and operating
performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business,
legislative, regulatory and other factors beyond our control. We
may be unable to maintain a level of cash flows from operating
activities sufficient to permit us to pay the principal,
premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we could face substantial
liquidity problems and could be forced to reduce or delay
investments and capital expenditures or to dispose of material
assets or operations, seek additional debt or equity capital or
restructure or refinance our indebtedness. We may not be able to
effect any such alternative measures on commercially reasonable
terms to us or at all and, even if successful, those alternative
actions may not allow us to meet our scheduled debt service
obligations. The senior secured revolving credit facility and
the senior secured notes indenture restrict our ability to
dispose of assets and use the proceeds from those dispositions
and also restrict our ability to raise debt or equity capital to
be used to repay other indebtedness when it becomes due. We may
not be able to consummate those dispositions or to obtain
proceeds in an amount sufficient to meet any debt service
obligations then due.
Our inability to generate sufficient cash flows to satisfy our
debt obligations, or to refinance our indebtedness on
commercially reasonable terms to us or at all, would materially
and adversely affect our financial position and results of
operations.
If we cannot make scheduled payments on our debt, we will be in
default and holders of the senior secured notes could declare
all outstanding principal and interest to be due and payable,
the lenders under the senior secured revolving credit facility
could terminate their commitments to loan money and could
foreclose against the assets securing their borrowings and we
could be forced into bankruptcy or liquidation. All of these
events could result in your losing your investment in our common
stock.
Risks
Related to Our Common Stock
There is no existing market for our common stock, and we
do not know if one will develop to provide you with adequate
liquidity.
Prior to this offering, there has not been a public market for
our common stock. We cannot predict the extent to which investor
interest in our company will lead to the development of an
active trading market on the New York Stock Exchange or
otherwise or how liquid that market might become. If an active
trading market does not develop, you may have difficulty selling
any of our common stock that you buy. The initial public
offering price for the common stock will be determined by
negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will
prevail in the open market following this offering.
Consequently, you may not be able to sell our common stock at
prices equal to or greater than the price you paid in this
offering.
The price of our common stock may fluctuate significantly,
and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent
you from being able to sell your common stock at or above the
price you paid for your common stock. The market price of our
common stock could fluctuate significantly for various reasons,
including:
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our operating and financial performance and prospects;
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the overall performance of the equity markets;
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the number of shares of our common stock publicly owned and
available for trading;
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our quarterly or annual earnings or those of other companies in
our industry;
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conditions or trends in our industry;
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the publics reaction to our press releases, our other
public announcements and our filings with the Securities and
Exchange Commission, or SEC;
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changes in earnings estimates or recommendations by research
analysts who track our common stock or the stock of other
companies in our industry;
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strategic actions by us or our competitors, such as acquisitions
or restructurings;
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new laws or regulations or new interpretations of existing laws
or regulations applicable to our business;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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threatened or actual litigation;
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any major change in our board of directors or management;
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changes in general conditions in the United States and global
economies or financial markets, including those resulting from
war, incidents of terrorism or responses to such events; and
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sales of common stock by us or members of our management team.
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In addition, in recent years, the stock market has experienced
significant price and volume fluctuations. This volatility has
had a significant impact on the market price of securities
issued by many companies across many industries. The changes
frequently appear to occur without regard to the operating
performance of the affected companies. Hence, the price of our
common stock could fluctuate based upon factors that have little
or nothing to do with our company, and these fluctuations could
materially reduce our share price. Securities class action
litigation has often been instituted against companies following
periods of volatility in the overall market and in the market
price of a companys securities. This litigation, if
instituted against us, could result in very substantial costs,
divert our managements attention and resources and harm
our business, operating results and financial condition.
Provisions in our charter documents and Delaware law may
make it difficult for a third party to acquire us and could
depress the price of our common stock.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. Among other things, our certificate
of incorporation and bylaws:
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authorize our board of directors to issue, without stockholder
approval, preferred stock with such terms as the board of
directors may determine;
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divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year;
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vest the sole power of a majority of our board of directors to
fix the number of directors;
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permit directors to be removed only for cause and only by a
majority vote of our stockholders;
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action by unanimous written consent of our stockholders or to
call special meetings;
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give the sole power of our board of directors to fill any
vacancy on our board whether such vacancy occurred as a result
of an increase in the number of directors or otherwise; and
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specify advance notice requirements for stockholder proposals
and director nominations.
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In addition, following this offering, we will be subject to the
provisions of Section 203 of the Delaware General
Corporation Law, regulating corporate takeovers and which has an
anti-takeover effect with respect to transactions not approved
in advance by our board of directors, including discouraging
takeover attempts that might result in a premium over the market
price for shares of our common stock. In general, those
provisions prohibit a Delaware corporation from engaging in any
business combination with any interested
25
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after such date, the business combination is approved by
the board of directors and authorized at a meeting of
stockholders, and not by written consent, by at least two-thirds
of the outstanding voting stock that is not owned by the
interested stockholder.
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In general, Section 203 defines a business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any such
entity or person.
A Delaware corporation may opt out of this provision by express
provision in its original certificate of incorporation or by
amendment to its certificate of incorporation or bylaws approved
by its stockholders. However, we have not opted out of, and do
not currently intend to opt out of, this provision.
We have no plans to pay dividends on our common stock
after this offering, so you may not receive funds without
selling your common stock.
We have no plans to pay dividends on our common stock after this
offering. We generally intend to invest our future earnings, if
any, to fund our growth. Any payment of future dividends will be
at the discretion of our board of directors and will depend on,
among other things, our earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual
restrictions applying to the payment of dividends, and other
considerations that our board of directors deems relevant. The
agreements governing our outstanding indebtedness also include
limitations on our payment of dividends. Accordingly, you may
have to sell some or all of your common stock in order to
generate cash flow from your investment. You may not receive a
gain on your investment when you sell your common stock and you
may lose the entire amount of the investment.
You will suffer immediate and substantial dilution.
The initial public offering price per share of our common stock
is substantially higher than our as adjusted net tangible book
value per common share immediately after the offering. As a
result, you will pay a price per share that substantially
exceeds the book value of our assets after subtracting our
liabilities. At the offering price of
$ per share, the mid-point of the
range set forth on the cover of this prospectus, you will incur
immediate and substantial dilution in the amount of
$ per share.
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The requirements of being a public company will increase
our costs and may strain our resources and distract
management.
We will face increased legal, accounting, administrative and
other costs and expenses as a public company that we do not
incur as a private company. After the consummation of this
offering, we will be subject to the following: the reporting
requirements of the Securities Exchange Act of 1934, which
requires that we file annual, quarterly and current reports with
respect to our business and financial condition, the rules and
regulations implemented by the SEC, the Sarbanes-Oxley Act of
2002, the Public Company Accounting Oversight Board and the New
York Stock Exchange, each of which imposes additional reporting
and other obligations on public companies. We expect that
compliance with these public company requirements will increase
our legal and compliance costs and make some activities more
time-consuming. We may need to hire a number of additional
employees with public accounting and disclosure experience in
order to meet our ongoing obligations as a public company. A
number of those requirements will require us to carry out
activities we have not done previously. For example, we will
create new board committees and adopt new internal controls and
disclosure controls and procedures. In addition, we will incur
additional expenses associated with our SEC reporting
requirements. For example, under Section 404 of the
Sarbanes-Oxley Act of 2002, for our annual report on
Form 10-K
for our fiscal year ending December 31, 2012, we will need
to document and test our internal control procedures, our
management will need to assess and report on the effectiveness
of our internal control over financial reporting and our
independent accountants will need to issue an opinion on the
effectiveness of our internal control over financial reporting.
Furthermore, if we identify any issues in complying with those
requirements (for example, if we or our accountants identify a
material weakness or significant deficiency in our internal
control over financial reporting), we could incur additional
costs rectifying those issues, and the existence of those issues
would adversely affect us, our reputation or investor
perceptions of us.
We also expect that it will be difficult and expensive to obtain
director and officer liability insurance, and we may be required
to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our board of
directors or as executive officers. Advocacy efforts by
stockholders and third parties may also prompt even more changes
in governance and reporting requirements. We expect that the
additional reporting and other obligations imposed on us by
these rules and regulations will increase our legal and
financial compliance costs substantially. These increased costs
will require us to divert a significant amount of money that we
could otherwise use to expand our business and achieve our
strategic objectives.
In order to maintain and improve the effectiveness of our
internal control over financial reporting and disclosure
controls and procedures, significant resources and management
oversight will be required. This may divert managements
attention from other business concerns, which could materially
adversely affect our business, financial condition and results
of operations. If we are unable to conclude that our internal
control over financial reporting and disclosure controls and
procedures are effective, or if our independent public
accounting firm is unable to provide us with an unqualified
report as to the effectiveness of our internal control over
financial reporting in future years, investors may lose
confidence in our financial reports and our stock price may
decline.
In the past, we have identified significant deficiencies
in our internal control over financial reporting.
In the course of the preparation and external audit of our
consolidated financial statements for the years ended
December 31, 2007, 2008 and 2009, we and our independent
registered public accounting firm identified significant
deficiencies in our internal control over financial
reporting, as defined in the standards established by the Public
Company Accounting Oversight Board. A significant deficiency is
a deficiency, or combination of deficiencies, in internal
control over financial reporting that is less severe than a
material weakness, yet important enough to merit attention by
those responsible for oversight of a companys financial
reporting.
The significant deficiencies identified were related to: (a) the
improper timing of revenue recognition in respect of certain
product shipments where title did not pass to the customer until
delivery, (b) the allocation
27
of purchase price, in particular the proper recording of
intangible assets, in connection with an acquisition and
(c) our controls for indentifying and accounting for
related party transactions, including the failure to consolidate
certain of our affiliates as variable interest entities.
Following the identification of these control deficiencies, we
have taken actions and measures to improve our internal control
over financial reporting. Our remediation efforts may not,
however, enable us to avoid material weaknesses or other
significant deficiencies in the future.
Future sales of shares of our common stock by existing
stockholders could depress the price of our common stock.
If our existing stockholders sell, or indicate an intent to
sell, substantial amounts of our common stock in the public
market after the
180-day
contractual
lock-up and
other legal restrictions on resale discussed in this prospectus
lapse, the trading price of our common stock could decline
significantly and could decline below the initial public
offering price. Based on shares outstanding as of March 31,
2011, upon completion of this offering, we will have outstanding
approximately shares
of common stock. Of these shares, only shares of common stock
sold in this offering by the selling stockholders will be
immediately freely tradable, without restriction, in the public
market.
After the
lock-up
agreements pertaining to this offering expire and based on
shares outstanding as of March 31, 2011, an
additional shares
will be eligible for sale in the public
market, of which are held by
directors, executive officers and other affiliates and will be
subject to volume limitations under Rule 144 under the
Securities Act of 1933, or the Securities Act. In
addition, shares reserved for
future issuance under our 2011 Incentive Award Plan become
eligible for sale in the public market in the future, subject to
certain legal and contractual limitations. Upon the consummation
of this offering, we intend to grant equity awards to our
non-employee directors and certain of our employees in the form
of restricted stock units and stock options under the 2011
Equity Incentive Award Plan. See Executive
CompensationExecutive Compensation Plans2011 Equity
Incentive Award Plan. If these additional shares are sold,
or if it is perceived that they will be sold, in the public
market, the price of our common stock could decline
substantially.
We are a controlled company within the meaning
of the New York Stock Exchange rules and, as a result, will
qualify for, and intend to rely on, exemptions from certain
corporate governance requirements.
Upon the consummation of this offering, certain of our directors
and executive officers will continue to beneficially own a
majority of our outstanding common stock. As a result, we are a
controlled company within the meaning of the New
York Stock Exchange corporate governance standards. Under the
New York Stock Exchange rules, a company of which more than 50%
of the voting power is held by an individual, group or another
company is a controlled company and may elect not to
comply with certain New York Stock Exchange corporate governance
requirements, including:
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the requirement that a majority of the board of directors
consist of independent directors;
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the requirement that we have a nominating/corporate governance
committee that is composed entirely of independent directors
with a written charter addressing the committees purpose
and responsibilities;
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the requirement that we have a compensation committee that is
composed entirely of independent directors with a written
charter addressing the committees purpose and
responsibilities; and
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the requirement for an annual performance evaluation of the
nominating/corporate governance and compensation committees.
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Following this offering, we intend to utilize each of these
exemptions. As a result, we will not have a majority of
independent directors and our nominating/corporate governance
and compensation committees will not consist entirely of
independent directors. Accordingly, you will not have the same
protections afforded to stockholders of companies that are
subject to all of the New York Stock Exchange corporate
governance requirements.
28
Upon completion of this offering, the selling stockholders
will continue to have significant influence over all matters
submitted to a stockholder vote, which will limit your ability
to influence corporate activities and may adversely affect the
market price of our common stock.
Upon completion of this offering, the selling stockholders will
own approximately % of our common
stock, or approximately % if the
underwriters option to purchase additional shares is
exercised in full. As a result of this ownership, the selling
stockholders will continue to have substantial influence over
the outcome of votes on all matters requiring approval by our
stockholders, including the election of directors, the adoption
of amendments to our certificate of incorporation and bylaws and
approval of significant corporate transactions. In addition, the
existing stockholders have agreed pursuant to the stockholders
agreement to vote for all our directors as selected pursuant to
that agreement. Under the agreement, one director will be
designated by Daniel Clarkson (provided Mr. Clarkson and
his affiliates hold at least 1% of our common stock,
collectively), one director will be designated by R. Scott
LaRose (provided Mr. LaRose and his affiliates hold at
least 1% of our common stock, collectively) and Luke Hillier may
designate any number of other directors. See Description
of Capital
StockStockholders
Agreement. The selling stockholders can also take actions
that have the effect of delaying or preventing a change in
control of us or discouraging others from making tender offers
for our shares, which could prevent stockholders from receiving
a premium for their shares. These actions may be taken even if
other stockholders oppose them. Moreover, this concentration of
stock ownership may make it difficult for stockholders to
replace management. In addition, this significant concentration
of stock ownership may adversely affect the trading price for
our common stock because investors often perceive disadvantages
in owning stock in companies with controlling stockholders. This
concentration of control could be disadvantageous to other
stockholders with interests different from those of our
officers, directors and principal stockholders and the trading
price of shares of our common stock could be adversely affected.
See Principal and Selling Stockholders for a more
detailed description of our stock ownership.
If securities or industry analysts do not publish research
or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could
decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. Securities and industry
analysts do not currently, and may never, publish research on
our company. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively impacted. In the event securities or industry
analysts initiate coverage, if one or more of the analysts who
cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts cease coverage
of our company or fail to publish reports on us regularly,
demand for our stock could decrease, which might cause our stock
price and trading volume to decline.
29
FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business
and Compensation Discussion and Analysis, contains
forward-looking statements. These statements relate to future
events or our future financial performance, and involve known
and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These risks and
other factors include, among other things, those listed in
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as
may, should, expects,
intends, plans, anticipates,
believes, estimates,
predicts, potential,
continue, assumption or the negative of
these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ
materially. All forward-looking statements are subject to risks
and uncertainties that may cause actual results to differ
materially from those that we expected, including:
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deterioration in our relationships with our customers or an
inability to develop relationships with new customers;
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the loss of our contractual procurement vehicles or a failure to
obtain new contractual procurement vehicles;
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changes in spending policies or budget priorities of the
U.S. government and the Department of Defense;
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our government contracts, which give our government customers a
variety of rights that are unfavorable to us;
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the deterioration of our vendor relationships or an inability to
develop relationships with substitute vendors;
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our reliance on our vendors;
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costs associated with the competitive procurement process;
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the impact of competing for post-award contract orders;
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the failure to comply with extensive procurement rules and
regulations;
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our growth strategy, which requires us to attract and retain
skilled personnel and to identify suitable acquisitions;
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the unfavorable resolution of reviews, audits and price
adjustments by the U.S. government;
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the failure to receive renewal or follow-on contracts;
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the risks associated with sales to certain foreign customers;
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the failure to comply with the export-control laws and
regulations applicable to our business;
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the failure to comply with the laws that regulate our
international operations, including the FCPA;
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employee misconduct;
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the loss of any member of our senior management team;
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the difficulties of international expansion;
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the inability for us to manage our growth;
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future ineligibility to participate in the federal
governments small business programs;
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the failure to obtain and maintain security clearances;
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30
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possible conflicts of interest presented by some of our
officers and directors ownership interests in other
companies;
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our management teams limited experience in managing a
public company;
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the risks associated with our acquisition strategy;
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an internal system or services failure;
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the financial dependence on receiving distributions due to our
status as a holding company; and
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the risks associated with our substantial indebtedness.
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Although we believe that the expectations reflected in the
forward-looking statements contained in this prospectus are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. These forward-looking
statements are made as of the date of this prospectus and,
except as required under the federal securities laws and the
rules and regulations of the SEC, we assume no obligation to
update or revise them or to provide reasons why actual results
may differ.
We do not undertake any responsibility to release publicly any
revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of
this prospectus. Additionally, we do not undertake any
responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ
from those expressed or implied by the forward-looking
statements contained in this prospectus.
31
USE OF
PROCEEDS
We estimate that the net proceeds to us from this offering,
after deducting underwriting discounts and estimated offering
expenses, will be approximately
$ million based upon an
assumed initial public offering price of
$ per share, the midpoint of
the price range set forth on the cover of this prospectus.
We intend to use the net proceeds from this offering (1) to make
a final distribution of
$ million to our existing
stockholders in connection with the termination of our
S corporation status and (2) to exercise our option to
redeem up to 35%, or approximately $96.3 million, of our
outstanding 11% senior secured notes due 2018 at a redemption
price of 111% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the redemption date. We will use the
remainder of the net proceeds of this offering, if any, to repay
a portion of the amounts outstanding under our senior secured
revolving credit facility.
As of March 31, 2011, there was $66.1 million
outstanding under our senior secured revolving credit facility,
which bears interest at a variable rate, which was 3.3% at
March 31, 2011. In 2010, the weighted-average interest rate
paid under our senior secured revolving credit facility was 4%.
The principal amount outstanding of the loans under our senior
secured revolving credit facility is due and payable in full on
March 25, 2016. See Dividend Policy and
Description of Certain Indebtedness.
The proceeds from the offering of the 11% senior secured notes
due 2018 were used (1) to make a distribution of
$217.1 million to our stockholders, (2) to repay our
term loan facility, (3) to pay the transaction bonuses and
(4) to pay related transaction fees and expenses.
We will not receive any proceeds from the sale of shares of our
common stock by the selling stockholders.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share would
increase (decrease) the net proceeds to us from this offering by
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us and the selling stockholders.
32
DIVIDEND
POLICY
Historically, due to our status as a subchapter
S corporation, we have distributed annually to our
stockholders a substantial portion of our prior years
taxable income. During fiscal years 2009 and 2010, we declared
distributions of $31.6 million and $129.0 million,
respectively. Distributions to our stockholders in 2010 include
a special distribution of $50.0 million in February 2010
using funds drawn from our senior secured revolving credit
facility and a special distribution of $48.6 million on
October 22, 2010 using the proceeds of our former term loan
facility. The remainder of the distributions in 2010 were paid
to our stockholders to fund their tax obligations related to
their ownership of ADS Tactical, Inc. Through March 31,
2011, we made distributions of approximately $10.7 million for
estimated taxes for the fourth quarter of 2010. Subsequent to
March 31, 2011, in April 2011 we made $5.7 million in
distributions for the final 2010 and first quarter 2011 tax
distributions, and in June 2011 we made $3.5 million in
distributions for second quarter 2011 tax distributions. We
expect to make additional distributions related to taxable
income each quarter until the consummation of this offering. On
March 25, 2011, we made a distribution of
$217.1 million to our stockholders with proceeds from the
sale of the senior secured notes. In connection with this
offering, we will convert from a subchapter S corporation
to a subchapter C corporation, and we do not anticipate
paying any additional cash dividends on our common stock in the
foreseeable future.
Our future dividend policy is within the discretion of our board
of directors and will depend upon various factors, including our
results of operations, financial conditions, covenants contained
in our senior secured revolving credit facility and the senior
secured notes indenture, capital requirements, future prospects,
investment opportunities and other factors deemed relevant by
our board of directors.
33
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
consolidated capitalization as of March 31, 2011 on an
actual basis and on an as adjusted basis giving effect to this
offering and the use of proceeds therefrom. As adjusted data
assumes that the net proceeds to us from this offering, after
deducting underwriting discounts and estimated offering
expenses, will be approximately
$ , assuming the common
stock is offered at
$ per share, the
midpoint of the range set forth on the cover page of this
prospectus. As adjusted data gives effect to (a) the use of
proceeds from this offering (1) to make a final
distribution of $ million to
our existing stockholders in connection with the termination of
our S corporation status, (2) to exercise our option
to redeem up to 35%, or approximately $96.3 million, of our
senior secured notes and (3) to the extent any proceeds
remain, to repay a portion of the amounts outstanding under our
senior secured revolving credit facility and (b) the
payment of the remainder of the transaction bonuses in the
amount of $2.4 million upon the consummation of this
offering.
You should read this table in conjunction with Use of
Proceeds, Selected Consolidated Financial and Other
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Description of Certain Indebtedness and our
consolidated financial statements and the related notes included
elsewhere in this prospectus.
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As of
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March 31, 2011
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Actual
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As Adjusted
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(In thousands)
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Cash and cash equivalents
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$
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1,938
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Line of
credit(1)
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66,056
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11% senior secured notes due 2018
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275,000
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Other long term debt, including current portion
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14,642
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Total debt
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355,698
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Stockholders equity (deficit):
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Common stock (no par value; actual, 300,000 shares
authorized, 148,140 shares issued and outstanding; as
adjusted for
the -for-1
stock
split, shares
authorized, shares
issued and outstanding)
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Additional paid-in capital
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63
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Noncontrolling interests
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4,099
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Retained earnings (accumulated
deficit)(2)
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(207,324
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)
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Total stockholders equity
(deficit)(2)
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(203,162
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)
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Total
capitalization(2)
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$
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152,536
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(1) |
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Line of credit consists of our senior secured revolving credit
facility. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and
Capital ResourcesSenior Secured Revolving Credit
Facility. |
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(2) |
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As adjusted retained earnings (accumulated deficit),
stockholders equity (deficit) and total capitalization
give effect to the write-off of approximately
$ million of unamortized
deferred financing costs outstanding at March 31, 2011 and
11% prepayment premium in connection with the repayment of our
indebtedness with the use of proceeds from this offering, a
final distribution of $ to our
existing stockholders in connection with the termination of our
S corporation status, and to the payment of the remainder of the
transaction bonuses in an amount of $2.4 million upon the
consummation of this offering. See Prospectus
SummaryRecent Transactions and Use of
Proceeds. As adjusted retained earnings (accumulated
deficit) and stockholders equity (deficit) do not give
effect to distributions to our stockholders of $5.7 million
made in April 2011 principally related to estimated taxes for
the fourth quarter of 2010 and the first quarter of 2011, and
distributions to our stockholders of $3.5 million made in
June 2011 principally related to estimated taxes for the second
quarter of 2011. |
34
DILUTION
If you buy our common stock in this offering, your interest will
be diluted to the extent of the difference between the initial
public offering price per share and the net tangible book value
per share after this offering.
As of March 31, 2011, our net tangible book value was
approximately
$ million,
or $
per share after giving effect to the refinancing transactions
and
our -for
1 stock split to be effected prior to the completion of this
offering. Net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of
shares of common stock outstanding as of March 31, 2011.
After giving effect to the issuance and sale
of shares
of common stock in this offering at an assumed initial public
offering price of
$
per share, the midpoint of the offering range on the cover page
of this prospectus and deducting the underwriting discounts and
estimated offering expenses that we will pay and the application
of the proceeds from this offering as described under Use
of Proceeds, our net tangible book value as of
March 31, 2011, would have been approximately
$ million, or
$ per share. This represents an
immediate increase in net tangible book value of
$ per share to existing
stockholders and an immediate dilution of
$ per share to new investors
purchasing common stock in this offering. The following table
illustrates this dilution on a per share basis:
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Assumed initial public offering price per share
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$
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Net tangible book value per share as of March 31, 2011
(after giving effect to the refinancing transactions)
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Increase in net tangible book value per share attributable to
this offering
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Net tangible book value per share after this offering
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Dilution per share to new investors
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$
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) our net tangible book value by
$ million, the net tangible
book value per share after this offering by
$ per share and the dilution to
new investors in this offering by
$ per share, assuming the common
stock is offered at $ , the
midpoint of the range set forth on the cover page of this
prospectus and assuming the number of shares offered by us and
the selling stockholders, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us and the selling stockholders.
The following table sets forth, as of March 31, 2011, the
total number of shares of common stock owned by existing
stockholders and to be owned by new investors, and the total
consideration paid, and the average price per share paid by our
existing stockholders and to be paid by new investors purchasing
shares of common stock in this offering, before deducting the
underwriting discounts and estimated offering expenses that we
will pay:
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Shares Purchased
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Total Consideration
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Average Price
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Number
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Percent
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|
Amount
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Percent
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Per Share
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(Dollars in millions, except share data)
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Existing stockholders
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%
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$
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%
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$
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New investors
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%
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%
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Total
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100.0
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%
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$
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$
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100.0
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%
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$
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The tables and calculations above assume no exercise or vesting
of:
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all restricted stock unit and option grants expected to occur
concurrently with the consummation of this offering and all
shares reserved for future issuance pursuant to our 2011 Equity
Incentive Award Plan.
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To the extent any of these options are exercised, there will be
further dilution to new investors.
35
SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected historical financial and
other data, as well as certain pro forma information that gives
effect to our conversion from a subchapter S corporation to
a subchapter C corporation for tax purposes, as if it had
occurred on January 1 of each period. In addition, certain
pro forma, as adjusted information gives effect to the
refinancing transactions and the use of proceeds from this
offering.
You should read the following selected historical consolidated
financial and other data below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and the related notes included elsewhere in
this prospectus. The selected consolidated financial data in
this section are not intended to replace the consolidated
financial statements and are qualified in their entirety by the
consolidated financial statements and the related notes included
elsewhere in this prospectus.
The consolidated statements of operations data for the years
ended December 31, 2008, 2009 and 2010 and the consolidated
balance sheet data as of December 31, 2009 and 2010 have
been derived from our audited consolidated financial statements
included in this prospectus. The consolidated statements of
operations data for the years ended December 31, 2006 and
2007 and the consolidated balance sheet data as of
December 31, 2006, 2007 and 2008 have been derived from
consolidated financial statements that are not included in this
prospectus. The unaudited condensed consolidated statements of
operations data for the three months ended March 31, 2010
and 2011, and the unaudited condensed consolidated balance sheet
data as of March 31, 2011, have been derived from our
unaudited condensed consolidated financial statements included
elsewhere in this prospectus. We have prepared the unaudited
information on the same basis as the audited consolidated
financial statements and have included, in our opinion, all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the
financial information set forth in those statements. Our results
of operations for the three months ended March 31, 2011,
are not necessarily indicative of the results to be obtained for
the full fiscal year.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
197,611
|
|
|
$
|
440,395
|
|
|
$
|
660,535
|
|
|
$
|
932,177
|
|
|
$
|
1,330,840
|
|
|
$
|
292,283
|
|
|
$
|
343,917
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
172,020
|
|
|
|
386,588
|
|
|
|
572,992
|
|
|
|
809,117
|
|
|
|
1,166,391
|
|
|
|
258,853
|
|
|
|
302,691
|
|
Selling, general and administrative
|
|
|
18,268
|
|
|
|
31,405
|
|
|
|
44,323
|
|
|
|
60,897
|
|
|
|
80,945
|
|
|
|
15,568
|
|
|
|
28,121
|
|
Intangible asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,323
|
|
|
|
22,402
|
|
|
|
43,220
|
|
|
|
59,167
|
|
|
|
83,504
|
|
|
|
17,862
|
|
|
|
13,105
|
|
Interest income
|
|
|
127
|
|
|
|
241
|
|
|
|
225
|
|
|
|
84
|
|
|
|
127
|
|
|
|
47
|
|
|
|
28
|
|
Interest expense
|
|
|
(566
|
)
|
|
|
(1,825
|
)
|
|
|
(1,481
|
)
|
|
|
(1,401
|
)
|
|
|
(5,388
|
)
|
|
|
(780
|
)
|
|
|
(2,342
|
)
|
Write-off of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,884
|
|
|
|
20,818
|
|
|
|
41,964
|
|
|
|
57,850
|
|
|
|
78,243
|
|
|
|
17,129
|
|
|
|
9,255
|
|
Net income attributable to common stockholders
|
|
$
|
6,884
|
|
|
$
|
20,818
|
|
|
$
|
42,010
|
|
|
$
|
57,709
|
|
|
$
|
77,282
|
|
|
$
|
16,737
|
|
|
$
|
9,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Pro Forma Data
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma provision for income taxes
|
|
$
|
2,719
|
|
|
$
|
8,223
|
|
|
$
|
16,594
|
|
|
$
|
22,795
|
|
|
$
|
30,913
|
|
|
$
|
6,611
|
|
|
$
|
3,554
|
|
Pro forma net income
|
|
|
4,165
|
|
|
|
12,595
|
|
|
|
25,370
|
|
|
|
35,055
|
|
|
|
47,330
|
|
|
|
10,518
|
|
|
|
5,701
|
|
Pro forma net income attributable to common stockholders
|
|
|
4,165
|
|
|
|
12,595
|
|
|
|
25,416
|
|
|
|
34,914
|
|
|
|
46,369
|
|
|
|
10,126
|
|
|
|
5,558
|
|
Pro forma net income per common share after giving effect to
stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding after giving
effect to stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma, As Adjusted Data
(unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income attributable to common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted earnings per common
share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(In thousands)
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(7,049
|
)
|
|
$
|
11,617
|
|
|
$
|
15,893
|
|
|
$
|
35,291
|
|
|
$
|
31,742
|
|
|
$
|
12,510
|
|
|
$
|
31,817
|
|
Net cash used in investing activities
|
|
|
(1,384
|
)
|
|
|
(1,662
|
)
|
|
|
(14,888
|
)
|
|
|
(6,586
|
)
|
|
|
(2,947
|
)
|
|
|
(1,520
|
)
|
|
|
(1,226
|
)
|
Net cash provided by (used in) financing activities
|
|
|
6,322
|
|
|
|
(9,764
|
)
|
|
|
492
|
|
|
|
(29,547
|
)
|
|
|
(27,340
|
)
|
|
|
(11,065
|
)
|
|
|
(31,463
|
)
|
Depreciation and amortization
|
|
|
645
|
|
|
|
961
|
|
|
|
2,049
|
|
|
|
2,140
|
|
|
|
974
|
|
|
|
249
|
|
|
|
469
|
|
Capital expenditures
|
|
|
1,415
|
|
|
|
929
|
|
|
|
8,297
|
|
|
|
9,181
|
|
|
|
3,387
|
|
|
|
781
|
|
|
|
1,371
|
|
EBITDA(3)
|
|
|
7,968
|
|
|
|
23,363
|
|
|
|
45,269
|
|
|
|
61,307
|
|
|
|
84,478
|
|
|
|
18,111
|
|
|
|
13,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
As of December 31,
|
|
|
|
|
|
As
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Actual
|
|
|
Adjusted(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
508
|
|
|
$
|
699
|
|
|
$
|
2,197
|
|
|
$
|
1,355
|
|
|
$
|
2,810
|
|
|
$
|
1,938
|
|
|
$
|
|
|
Working capital
|
|
|
19,175
|
|
|
|
29,031
|
|
|
|
37,210
|
|
|
|
59,883
|
|
|
|
30,647
|
|
|
|
53,957
|
|
|
|
|
|
Total debt
|
|
|
23,434
|
|
|
|
17,042
|
|
|
|
41,969
|
|
|
|
44,665
|
|
|
|
148,825
|
|
|
|
355,698
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
4,705
|
|
|
|
18,276
|
|
|
|
38,186
|
|
|
|
65,455
|
|
|
|
15,387
|
|
|
|
(203,162
|
)
|
|
|
|
|
|
|
|
(1) |
|
We historically have been treated as a subchapter S corporation
for U.S. federal income tax purposes. As a result, our income
has not been subject to U.S. federal income taxes or state
income taxes in those states where S corporation status is
recognized. In general, the corporate income or loss of a
subchapter S corporation is allocated to its stockholders for
inclusion in their personal federal income tax returns and state
income tax returns in those states where S corporation status is
recognized. In connection with this offering, we will convert
from a subchapter S corporation to a subchapter C corporation.
Pro forma provision for income taxes reflects combined federal
and state income taxes on a pro forma basis, as if we had been
taxed as a subchapter C corporation, using an effective tax rate
of 39.5% for 2006, 2007, 2008 and 2009, an effective tax rate of
40.0% for 2010. The effective tax rates used for the three month
periods ended March 31, 2010 and 2011 were 39.5% and 39.0%,
respectively. |
|
|
|
|
|
Pro forma net income reflects historical net income before
income taxes less the pro forma provision for income taxes. Pro
forma net income does not give effect to the refinancing
transactions or the use of proceeds from this offering. |
|
|
|
(2) |
|
Pro forma, as adjusted data give effect to the following
transactions as if they had occurred on January 1, 2010:
(a) this offering and the use of proceeds therefrom,
(b) our conversion from a subchapter S corporation to
a subchapter C corporation, using an effective tax rate of
40.0% for the year ended December 31, 2010, and 39.0% for
the three months ended March 31, 2011 and (c) the
refinancing transactions. |
38
|
|
|
|
|
Pro forma, as adjusted net income for the year ended
December 31, 2010 and the three months ended March 31,
2011, does not include adjustments to historical amounts as
reflected for the write-off of deferred financing costs in
connection with the refinancing transactions, or the payment of
the cash bonuses in connection with the refinancing
transactions, and does not include adjustments for the write-off
of approximately $ million of
related deferred financing costs and 11% prepayment premium for
the optional redemption of 35% of our outstanding senior secured
notes as a result of the use of proceeds from this offering. |
|
|
|
|
|
The following is a reconciliation of historical net income to
pro forma, as adjusted net income for the year ended
December 31, 2010 and the three months ended March 31,
2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
|
|
|
December 31, 2010
|
|
|
March 31, 2011
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income
|
|
$
|
78,243
|
|
|
$
|
9,255
|
|
|
|
|
|
Net increase in interest
expense(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted provision for income
taxes(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted net income
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The following is a reconciliation of historical interest expense
to pro forma, as adjusted interest expense for the year ended
December 31, 2010 and the three months ended March 31,
2011: |
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2010
|
|
|
March 31, 2011
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
5,388
|
|
|
$
|
3,878
|
|
Net increase resulting from the refinancing
transactions(i)
|
|
|
|
|
|
|
|
|
Decrease resulting from the use of proceeds of this
offering(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, as adjusted interest expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Reflects the difference in interest expense between the
historical amounts incurred under our term loan facility and
senior secured revolving credit facility, including the
amortization of deferred financing costs, and the interest
expense that would have been incurred under our 11.00% senior
secured notes due 2018 and our amended and restated senior
secured revolving credit facility (based on the amount drawn
upon consummation of the refinancing transactions of
$93.2 million, at an assumed weighted interest rate
of %), assuming the refinancing
transactions were consummated on January 1, 2010. |
|
|
|
(ii) |
|
Reflects the reduction in interest expense, after giving effect
to the refinancing transactions as if they had occurred on
January 1, 2010, as a result of the use of a portion of the
proceeds from this offering to repay amounts outstanding under
our senior secured revolving credit facility and our senior
secured notes, assuming this offering was consummated on
January 1, 2010. See Use of Proceeds. |
|
|
|
(b) |
|
Reflects $ million and
$ million in income taxes for
the year ended December 31, 2010 and the three months ended
March 31, 2011, respectively, on a pro forma, as adjusted
basis after giving effect to the increase in interest expense as
a result of the refinancing transactions described above, as a
result of our conversion from a subchapter S corporation to
a subchapter C corporation, using an effective tax rate of
40.0%, and 39.0% for the three months ended March 31, 2011. |
39
|
|
|
(3) |
|
We define EBITDA as net income before interest expense,
provision for income taxes and depreciation and amortization.
EBITDA is not a measure of financial performance under U.S. GAAP
and should not be considered as an alternative to net income as
a measure of performance. Because EBITDA is not a measurement
determined in accordance with U.S. GAAP and is susceptible to
varying calculations, EBITDA, as presented, may not be
comparable to other similarly titled measures presented by other
companies. We believe that EBITDA is a useful financial metric
to assess our operating performance from period to period by
excluding certain items that we believe are not representative
of our core business, as well for providing a comparison of our
operating performance to that of other companies in our industry. |
We use EBITDA in a number of ways, including:
|
|
|
|
|
for planning and budgeting purposes;
|
|
|
|
to evaluate the effectiveness of our business strategies;
|
|
|
|
in communications with our board of directors concerning our
consolidated financial performance; and
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|
|
|
to determine managements compensation.
|
The following table reconciles net income, the most directly
comparable GAAP financial measure, to EBITDA for the periods
presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
6,884
|
|
|
$
|
20,818
|
|
|
$
|
41,964
|
|
|
$
|
57,850
|
|
|
$
|
78,243
|
|
|
$
|
17,129
|
|
|
$
|
9,255
|
|
Interest expense,
net(a)
|
|
|
439
|
|
|
|
1,584
|
|
|
|
1,256
|
|
|
|
1,317
|
|
|
|
5,261
|
|
|
|
733
|
|
|
|
3,850
|
|
Depreciation and amortization
|
|
|
645
|
|
|
|
961
|
|
|
|
2,049
|
|
|
|
2,140
|
|
|
|
974
|
|
|
|
249
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(b)
|
|
$
|
7,968
|
|
|
$
|
23,363
|
|
|
$
|
45,269
|
|
|
$
|
61,307
|
|
|
$
|
84,478
|
|
|
$
|
18,111
|
|
|
$
|
13,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Interest expense, net for the year ended December 31, 2010
includes amortization of deferred financing costs of $537,143.
Interest expense, net for the three months ended March 31,
2011 includes amortization of deferred financing costs of
$301,853 and the write-off of deferred financing costs as a
result of the refinancing transactions of $1.5 million. |
|
|
|
(b)
|
|
For the year ended December 31, 2009, EBITDA was negatively
impacted by a write off of approximately $3.0 million
related to our acquisition of
MAR-VEL
International, Inc. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsAcquisition of MAR-VEL International, Inc.
In addition, for the year ended December 31, 2010 and the
three months ended March 31, 2010 and 2011, EBITDA was
negatively impacted by costs consisting principally of legal,
accounting and other professional fees incurred in connection
with this offering and the pursuit of other strategic
opportunities and financings. |
EBITDA has limitations as an analytical tool and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. See Non-GAAP Financial
Measures.
|
|
|
(4) |
|
As adjusted balance sheet data assumes that the net proceeds to
us from this offering, after deducting underwriting discounts
and estimated offering expenses, will be approximately
$ , assuming the common stock is
offered at $ per share, the
midpoint of the range set forth on the cover page of this
prospectus and gives effect to (a) the use of proceeds from this
offering (1) to make a final distribution of
$ million to our existing
stockholders in connection with the termination of our
S corporation status, (2) to exercise our option to
redeem up to 35%, or approximately $96.3 million, of our
outstanding senior secured notes, including the write-off of
related deferred financing costs and 11% prepayment premium and
(3) to the extent any proceeds remain, to repay a portion
of the amounts outstanding under our senior secured revolving
credit facility and (b) the payment of the remainder of the
transaction bonuses in the amount of $2.4 million upon the
consummation of this offering. See Prospectus
SummaryRecent Transactions, Use of
Proceeds and Capitalization. |
40
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with our
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in
Risk Factors.
Business
Overview
We believe we are a leading provider of value-added logistics
and supply chain solutions specializing in tactical and
operational equipment, based on 2010 sales. We drive sales
between a fragmented base of vendors and a decentralized group
of customers by tailoring our solutions to meet their needs.
Most of our over 4,000 active customers (in the past
24 months) are within the Department of Defense and the
Department of Homeland Security. Our business model is adaptable
and scalable to serve other domestic and foreign government
agencies. Through our vendor network, we offer our customers
access to over 160,000 items, including apparel, expeditionary
equipment, optical equipment, communications equipment,
emergency medical supplies, lighting, eyewear and other tactical
items, which we combine with our broad suite of value-added
supply chain management services. We leverage our established
supply chain management and government procurement expertise to
develop and strengthen key customer and vendor relationships.
Our
Market Opportunity
Over the last decade, the U.S. government has changed its
approach to procurement of operational equipment by shifting
away from custom-made products and equipment built to precise
specifications, towards readily available, commercial
off-the-shelf
products and equipment. Over the same period, the Department of
Defense streamlined the procurement process by providing
increased access to flexible contractual procurement vehicles.
As a result, the Defense Logistics Agency, or the
DLA, has increased its reliance upon outside vendors
and service providers for the logistics solutions necessary to
get tactical and operational equipment to military personnel and
to handle the supply chain management for a diverse and growing
array of commercial
off-the-shelf
products.
Concurrently with this shift in approach to procurement, the
needs of the U.S. military and the nature of modern warfare
have evolved significantly. The demands of recent conflicts have
shifted the Department of Defenses focus towards equipping
military personnel to engage in ground-based irregular warfare
against asymmetric threats, and away from developing large-scale
weapons platforms to support traditional air, land and sea
campaigns against other major world powers. As a result, the
Department of Defense now places a greater emphasis on ensuring
that each soldier is equipped for the needs of modern combat
with standardized,
state-of-the-art
equipment. To increase the combat effectiveness and safety of
soldiers, the Department of Defense has increased its average
spend-per-soldier
on equipment from $2,000 per soldier during World War II
(1941-1946)
to $19,000 during the Global War on Terror
(2001-2008)
(adjusted to 2009 dollars based on the consumer price index).
This trend is expected to continue as soldiers are provided a
broader set of more complicated and expensive equipment kits to
improve combat effectiveness and prepare for a more diverse
range of missions. The Department of Defense projects that the
amount spent on equipment per soldier will increase
substantially in the future.
Preparing for irregular warfare requires a significant number of
trained and equipped personnel ready to deploy. As of March 31,
2011, the Department of Defense had approximately
1.4 million active duty military personnel worldwide. For
example, the recently implemented Army Force Generation model
requires that approximately one-third of active-duty units and
one-sixth of reserve units are available to deploy each year,
regardless of whether the United States is at war. In addition,
all branches of the U.S. military are increasingly called
upon to undertake missions beyond the scope of their traditional
national defense functions, such as assistance with disaster
relief, border patrol and nation building. Each of these
soldiers requires the latest operational equipment for his or
her mission, which creates a continual need for new equipment
for these soldiers.
41
We believe these trends will continue for the foreseeable
future. As the U.S. military continues to decentralize its
approach to procurement and increase the amount of the overall
defense budget allocated for equipment for each soldier, and as
an increasing number of our customers experience the benefits of
our supply chain management services, we believe we can continue
to grow our sales over time, notwithstanding changes in overall
U.S. defense spending.
As a result of these trends, we have grown from
$197.6 million of net sales, $6.9 million of net
income and $8.0 million of EBITDA for the year ended
December 31, 2006, to $1,330.8 million of net sales,
$78.2 million of net income and $84.5 million of
EBITDA for the year ended December 31, 2010. This
represents a compound annual growth rate of our net sales, net
income and EBITDA from 2006 to 2010 of 61%, 84% and 80%,
respectively. While we continue to be well positioned to take
advantage of this market opportunity and we expect to continue
to experience growth in our net sales, net income and EBITDA,
there can be no assurance that we will be able to maintain the
level of compound annual growth rate in the future.
The Department of Defense operated under a continuing resolution
from October 2010 to April 2011, a result of the longest delay
in passing a federal budget since 1976. A continuing
resolution is a form of appropriations legislation used to
fund government agencies in the event that a formal
appropriations bill has not been ratified by Congress before the
beginning of the governments fiscal year. It provides for
funding only at a reduced or similar level as the previous
fiscal year, and as a result, government agencies operating
under a continuing resolution do not know their spending budget
until a final appropriations bill has been passed. Given the
uncertainty around the total Department of Defense budget that
results from a continuing resolution, Department of Defense
agencies typically reduce allocations to their internal
purchasing entities. Consequently, during the period of the
continuing resolution most of our customers had access to only a
portion of the funding they had in the comparable previous
period while not under the continuing resolution.
The impact of the continuing resolution on our growth should be
viewed across both 2010 and 2011. While we do not believe it
significantly impacted overall underlying demand for our
products and services, it disrupted normal
year-on-year
and seasonal ordering patterns, as agencies both prepared for,
and later reacted to, uncertainty in their budgets.
In mid-2010, as it began to appear that Congress would not pass
a Department of Defense budget in a timely manner, agencies
began to prepare to operate under a continuing resolution by
accelerating their orders of operational readiness equipment.
Our sales force worked closely with customers to encourage
purchasing in advance of budgetary uncertainty. Many customers
decided to purchase equipment in 2010 that they may have
otherwise decided to order in 2011. This positively impacted
both U.S. federal government purchasing activity and net sales
in our third and fourth fiscal quarters of 2010. As a result,
some purchases that we expect would have been booked in 2011
were booked in 2010. The net result was that the continuing
resolution had a positive impact on our
year-on-year
growth in 2010, over what we would have expected had a
Department of Defense budget been passed in a timely manner.
The continuing resolution has had a continuing impact in 2011.
Many of our customers were uncertain as to their total annual
2011 budget during the first two quarters of their fiscal year.
The result was that in our fourth fiscal quarter of 2010 and
first fiscal quarter of 2011, decision makers delayed some
purchases while awaiting clarity on their budgets. We expect
that this will exaggerate our normal fluctuations in sales from
quarter-to-quarter
in 2011, resulting in lower growth in the second fiscal quarter
of 2011. The passing of an appropriations bill in April gave
agencies certainty as to their budget allocations. As a result,
we believe our customers may place their orders in the remainder
of 2011 in order to use that portion of their budget previously
preserved by deferring orders so that it will not be forfeited
at the end of the government fiscal year.
Components
of Our Consolidated Statements of Operations
Net
Sales
Contractual
Procurement Vehicles
We derive our net sales from the sale of goods and logistics
solutions primarily to branches and units of the
U.S. military or other federal agencies. In order for the
U.S. military and other federal agencies to use budgetary
funds to purchase goods and services, each acquisition must be
executed through an appropriate
42
contractual procurement vehicle. To shorten the contracting
period, the U.S. government has created broad
indefinite delivery and indefinite quantity, or
IDIQ, contracts to act as procurement vehicles.
These contracts provide regulatory and payment conduits that
allow the customer to use government funds to purchase equipment
and services from a limited number of pre-approved suppliers;
however, they do not commit any customer to any set volume of
purchases. The volume committed in any particular sale is set at
the time the customer order is established.
Most of our net sales are derived from individual orders for
goods and services through IDIQ contracts. Under these
contracts, we agree to provide itemized products and related
services at fixed prices established at the time a customer
order is made (or at the time the contract is entered into under
some of our single-award IDIQ contracts, as described below).
Although these contracts include certain parameters defining the
types of products that may be purchased through the contract and
limit the personnel that may use the contract as a vehicle to
spend government funds, our contracts typically provide us with
significant flexibility to source the specified products from
multiple vendors. There are generally three different types of
IDIQ contracts: multiple-award contracts, single-award contracts
and federal supply schedules.
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|
|
Multiple-award IDIQ contracts are awarded to a limited number of
pre-approved suppliers and have ceiling limitations on the total
amount of government funds that can be used through the
contract. The award of particular purchase orders under these
contracts requires a second competitive bidding process among
that limited number of suppliers (which typically occurs within
one day to a week upon submission of a bid). Our Spec Ops TLS
contract and FES TLS contract are examples of multiple-award
IDIQ contracts.
|
|
|
|
|
|
Single-award IDIQ contracts function very much like
multiple-award IDIQ contracts. However, they are awarded to a
sole-supplier and often cover a much narrower breadth of
products. The particular agency and customers who wish to make
purchases under a single-award IDIQ contract commit to a
pre-approved sole supplier for the equipment and services to be
provided through that contract. Our single-award IDIQ contract
vehicles, such as our GEN III contract, are often entered into
with a program office within a particular branch of the
U.S. military to provide a standardized suite of products
that are intended for a broad cross-section of forces in that
particular military branch. Through these single-award IDIQ
contracts, we commit to fulfill any orders received for goods
and services identified in those contracts over a period of
time, up to pre-determined volume limitations at fixed prices,
which are established at the time the contract is awarded.
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|
Federal supply schedules, such as our U.S. General Services
Administration, or GSA, supply schedules, allow all
federal government agencies to purchase items identified in the
schedule from a list of pre-approved suppliers at pre-determined
maximum prices. Unlike multiple-award IDIQ contracts, federal
supply schedules do not typically require a second round of
bidding to secure a purchase order and do not have ceiling
limitations on the total amount of government funds that can be
used through the procurement vehicle. Under our federal supply
schedules, we may be the only pre-approved supplier for a
particular product, while for other products there are multiple
pre-approved suppliers, including our vendors.
|
We do not commit to provide products at specific prices unless
we have reached agreement with one or more of our vendors to
supply the requisite products at an agreed upon price. For
orders scheduled to be delivered over a longer period of time,
such as in connection with our single-award program sales
contracts, we will often negotiate annual price escalator
provisions into the contract to preserve our margins. None of
our sales are generated from
time-and-materials
or cost-reimbursable contracts.
Although our contracts do not commit our customers to any set
amount of purchases, the volume of our sales and our growth is
partially dependent upon maintaining and increasing the number
and size of our contracts. By broadening our contract portfolio,
we are able to increase the variety of products and services
that we may sell and expand our potential customer base. In
addition, as the federal government changes its procurement
strategy for a particular product or service, we may need to win
new IDIQ and other contracts in order to continue selling those
items. As our customers procurement needs change, we may
also need to enter into new single-award IDIQ and other types of
contracts in order to continue to sell our products to our
customers on a sufficient scale and in a manner that meets their
requirements.
43
Sales
Force
Although some of our contracts may guarantee a nominal level of
sales, our sales volume will continue to be largely a function
of the size and ability of our sales force. Our sales force
generates demand for the products and related services we offer
by working closely with our customers to match our product
offerings to their needs. Our portfolio of contracts is used by
our sales team to facilitate processing of customer demand
generated by their sales efforts. For the year ended
December 31, 2010, our net sales were derived from over
60,000 customer orders.
In calculating the total number of sales representatives in our
sales force and the amount of net sales and gross profit
attributable to each sales representative, we do not include
those members of our sales force who primarily serve our state
and local law enforcement customers, which were 10, 14 and
14 members of our sales force as of December 31, 2008,
2009 and 2010, respectively, and 12 members of our sales force
as of March 31, 2011. We treat sales to state and local law
enforcement customers differently because these sales do not
currently contribute a meaningful amount to our overall net
sales and gross profit are derived from a distinct customer set,
which possesses unique sales cycles and contractual processes.
Sales representatives who serve our state and local law
enforcement customers perform fundamentally different functions
in the sales process than the other members of our sales force.
These representatives focus primarily on marketing and customer
service rather than on direct sales. Consequently, the
activities and headcount of the sales representatives who serve
our state and local law enforcement customers do not correlate
to our financial performance in the same way as the activities
and headcount of our other sales personnel. As a result, we
exclude state and local law enforcement personnel in calculating
the weighted average number of sales representatives and when
reviewing sales force performance and overall financial results.
For the years ended December 31, 2008, 2009 and 2010, we
had a weighted average total of 74, 99 and 134 members in
our sales force, respectively. We use the following process to
calculate our weighted average sales force: first we determine
the number of sales representatives at the end of each month; we
then multiply that number by a factor that is determined by
where the month falls during the year; finally, we take the
average of the sum of the monthly numbers. For example, for a
full year period, the number of sales representatives at the end
of January is multiplied by twelve, the number of sales
representatives at the end of February is multiplied by eleven,
and the factor by which each month-end number of sales
representatives is multiplied decreases by one for each
succeeding month so that the number of sales representatives at
the end of December is multiplied by one.
In 2010, the size of our weighted average sales force increased
by an additional 35 members. As of December 31, 2008,
2009 and 2010 the total number of sales representatives at the
end of the period was 87, 118 and 166, respectively. As of March
31, 2011, the total number of sales representatives at the end
of the period was 185.
As of March 31, 2011, pursuant to the calculation of the
number of our employees under the Small Business Administration
regulations, we had 443 employees. As we continue to grow,
we may in the future no longer be eligible to compete for
government contracts set aside for businesses designated under
certain NAICS codes for small businesses with fewer than
500 employees. Under the Small Business Administration
regulations, a concern that is qualified as a small business at
the time it receives a contract is considered a small business
throughout the life of that contract. Therefore, none of our
small business set aside contracts will automatically terminate
should we cease to qualify as a small business with fewer than
500 employees. Our Spec Ops TLS contract, which accounted
for approximately 44% of our total net sales for each of the
year ended December 31, 2010 and the three months ended
March 31, 2011, was awarded to us pursuant to a NAICS code
designating a small business as having fewer than
500 employees.
The government contracting officer may request that we recertify
our status as a small business at the time of renewal of a
contract. The contracting officer may take into consideration
all factors relating to performance under the contract including
small business status in deciding to renew a contract. According
to our internal data management system through which we track
bids solicited and awards granted to us under our Spec Ops TLS
contract, we won approximately 90% of the awards granted under
the Spec Ops TLS contract in 2010. As a result, to the extent we
continue to compete successfully under this contract, we believe
44
that our Spec Ops TLS contract will be renewed even in the event
we are no longer able to recertify as a small business.
We have also successfully competed for a number of contractual
procurement vehicles that are not set aside for small businesses
and we believe that we will continue to do so effectively. While
management does not believe that any future loss of our status
as a small business will have a material adverse effect on our
results of operations, we cannot assure you that we will be able
to maintain our current results of operations and financial
condition if we are no longer able to participate in the federal
governments small business programs. See Risk
FactorsRisks Related to BusinessWe may no longer be
able to participate in the federal governments small
business programs which may affect our business and our
sales.
Vendors
We have established long-term relationships with approximately
1,400 active vendors (in the past 24 months). We have also
instituted a preferred vendor program, which is comprised of
approximately 300 vendors, that enables us to secure
preferential terms and support on thousands of products. This
allows us to generate sales by competitively bidding on
opportunities for new and existing customers. We have
established incentives for our sales team to increase sales of
our preferred vendors products, which further enhances our
value proposition to our preferred vendors and allows us to
generate additional sales on favorable terms. For the year ended
December 31, 2010, approximately 90% of our sales were
sourced from our preferred vendors. As additional vendors come
to realize the value proposition provided by our experienced
sales force, customer relationships and access to contractual
procurement vehicles, we expect to continue to expand our
preferred vendor program.
Seasonality
We experience some seasonality in our orders as a result of the
timing of U.S. federal government purchasing activity,
which tends to increase near the end of the U.S. federal
government fiscal year on September 30. Most of the funded
federal government contracts stipulate that the budget
allocation must be used during the corresponding fiscal year or
be forfeited. That often results in increased spending near the
end of the U.S. federal government fiscal year. This
practice results in an increase in our fourth quarter net sales
as a percentage of our total net sales for the year, as many of
these items are shipped during the
90-day
period following receipt of the corresponding orders. For each
of the years ended December 31, 2009 and 2010, 31% of our
net sales were recognized in the fourth quarter. The seasonality
in our results is partially mitigated by sales under our GEN III
contract, which typically contributes an equal amount to our net
sales each month and comprised approximately 19% of our net
sales for the year ended December 31, 2010. As we continue
to grow and as sales under our single-award contracts, such as
GEN III, account for a smaller percentage of our net sales in
the future, we expect the seasonality in our results to increase.
The nature of our business may result in significant
fluctuations in sales from
quarter-to-quarter.
In particular, our sales in any period may be impacted by
changes in government funding decisions and the average size and
product mix of the orders shipped during the period. In
addition, the timing with respect to the fulfillment of large
orders may cause volatility in our sales from one period to the
next. The timing and composition of future orders and government
funding decisions are difficult to predict, and we expect to
continue to experience these fluctuations in sales in the future.
Gross
Profit
Our gross profit is a function of the difference between the
price our customers pay us for the products and services we
provide and the price we pay our vendors for those products and
services, or our cost of goods sold. Cost of goods
sold consists only of our merchandise costs, and does not
include shipping and handling costs, which have not historically
represented a significant portion of our expenses. As a result,
metrics that are a function of cost of goods sold, such as gross
profit and gross margin, may not be comparable to those of other
entities that define cost of goods sold differently from us.
The factors that affect our gross profit include:
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|
whether we are providing value-added supply chain management
services, such as kitting and assembly, custom sourcing
solutions, training and product education, product research and
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45
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development and quality assurance, to our customers in
connection with particular product sales. In general, we are
able to generate higher gross margins on sales of products where
we perform additional value-added services, since we are able to
charge higher prices for these bundled products, relative to the
sale of stand-alone component parts;
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whether the products are being sold to a new customer or are
being supplied by vendors with whom we are working to establish
a new preferred relationship. From time to time, we will bid for
a particular customer order or program award at prices that may
initially reflect lower margins in order to establish a
relationship with a new customer or vendor or where we believe
we will be able to improve our gross margins over the life of
the contract through price escalation provisions in those
contracts or by working with our vendors to improve pricing
terms; and
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whether the order size creates a request for a volume-based
discount. Similar to the discounts we may receive from our
vendors for large orders, from time to time our customers may
expect similar volume-based discounts from us on very large
orders.
|
Before bidding for contract awards and customer orders, we have
agreed upon pricing terms with the corresponding vendors at
levels that allow us to be competitive, while also preserving
our gross margins. For commitments to deliver items over a
longer period of time, such as through our single-award program
contracts, we will often negotiate annual price escalator
provisions as part of the arrangement to preserve our margins.
Over the term of a single-award program contract, we will often
work with our vendors to improve the pricing terms they offer us
so that we may realize improved gross margins over the life of
the program. Our contracts generally afford us with a
significant amount of flexibility in sourcing the specified
items from different vendors. This flexibility maintains
competition among our vendors for many of the products we sell,
which often allows us to obtain additional price improvements
over the term of the contract.
As described above, demand starts with our sales force. By
monitoring and controlling the size and profitability of our
sales force, we can gauge the overall success of our business.
In particular, we use gross profit per sales representative as a
measure to evaluate our performance. Gross profit per sales
representative is equal to the gross profit realized during the
period under consideration, divided by the weighted average
number of representatives on our sales force during the period.
For purposes of calculating gross profit per sales
representative, we do not include gross profit attributable to
those members of our sales force who primarily serve our state
and local law enforcement customers. Total gross profit
attributable to those members who primarily serve our state and
local law enforcement customers was $2,649,178, $2,023,133 and
$393,456 for the years ended December 31, 2008, 2009 and
2010, respectively. For the years ended December 31, 2008,
2009 and 2010, our weighted average sales force consisted of 74,
99 and 134 members, respectively. Our gross profit per weighted
average sales representative for each of the years ended
December 31, 2008, 2009 and 2010, was approximately
$1,147,000, $1,223,000 and $1,224,000, respectively. Because it
typically takes three to six months to sufficiently train new
sales representatives before they make a meaningful contribution
to our net sales, expanding our sales force has the result of
temporarily decreasing gross profit per sales representative.
Selling,
General and Administrative Expenses
Our selling, general and administrative, or
SG&A, expenses consist primarily of payroll,
payroll taxes, freight, commissions, travel and advertising and
marketing expense. Certain of these expenses, including costs
related to our infrastructure, payroll expense and travel, do
not increase in proportion to increases in sales. In addition,
products and other value-added services sold through our
single-award IDIQ contracts often require less on-going sales
effort to sustain and we generally incur lower freight, travel,
commissions and employee costs per sales dollar received for
these products. Since we will be a public company after the
consummation of this offering, we anticipate that our SG&A
expenses will increase due to increases in audit fees,
professional fees, directors and officers insurance
costs and expenses related to hiring additional personnel and
expanding our administrative functions.
Following this offering, we expect to incur additional stock
compensation expense in connection with future option grants and
other awards made in the form of our common stock. In connection
with equity awards we expect to issue upon consummation of this
offering, we expect to incur a stock compensation
46
charge of approximately
$ million in the third
quarter. See Executive CompensationEquity
Compensation Plans.
Taxes
Prior to the consummation of this offering, we have been taxed
under the rules and regulations of Subchapter S of the Internal
Revenue Code of 1986, as amended, or the Code. Under
those rules and regulations, we do not pay federal or state
income taxes on our taxable income. Instead, our stockholders
are liable for individual federal and state income taxes on
their respective share of our income or loss. In connection with
this offering, we will convert from a subchapter
S corporation to a subchapter C corporation. In connection
with this conversion, we will record a tax benefit (estimated to
be approximately $500,000 as if the conversion occurred on
December 31, 2010) to recognize deferred taxes. Upon
conversion to a subchapter C corporation, we will be subject to
tax in the United States as well as any other tax jurisdictions
in which we conduct business.
Interest
Expense
We incurred significant indebtedness in connection with the
refinancing transactions. As a result, our annual interest
expense will increase significantly from prior years
interest expense. Annual interest expense is expected to
increase from historical interest expense by approximately
$30 million. After further giving effect to the use of
proceeds from this offering, assuming our common stock is
offered at $ per share, the
midpoint of the range set forth on the cover page of this
prospectus, annual interest expense is expected to increase from
historical interest expense by approximately $
million, assuming redemption of up to 35%, or approximately
$96.3 million, of our senior secured notes, the maximum
amount permitted to be redeemed under the senior secured notes
indenture and $ million to repay a portion of the
amounts remaining outstanding under our senior secured revolving
credit facility. See Prospectus SummaryRecent
Transactions and Liquidity and Capital
Resources.
Acquisition
of MAR-VEL International, Inc.
In June 2008, we acquired the stock of MAR-VEL International,
Inc., or MAR-VEL. We acquired MAR-VEL in order to
gain access to its Prime Vendor multiple-award IDIQ contract,
which was the predecessor to our current Spec Ops TLS
multiple-award IDIQ contract. The acquisition provided us with
additional contract capacity to continue our sales growth until
the award of our Spec Ops TLS contract was obtained. The
aggregate purchase price for MAR-VEL was $5.5 million. Once
we were awarded the Spec Ops TLS contract in 2009, the renewal
option on the MAR-VEL Prime Vendor contract was not exercised.
Therefore, the remaining unamortized portion of the intangible
asset related to the MAR-VEL sales contract of $3.0 million
was recorded as an impairment loss in 2009.
Results
of Operations
The table below shows our results of operations for the periods
presented in dollar amounts (in millions) and as a percentage of
net sales.
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Year Ended December 31,
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Three Months Ended March 31,
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2008
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2009
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2010
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2010
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2011
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(unaudited)
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Net sales
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$
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660.5
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100.0
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%
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$
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932.2
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100.0
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%
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$
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1,330.8
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100.0
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%
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$
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292.3
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100.0
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%
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$
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343.9
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100.0
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%
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Cost of goods sold
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573.0
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86.7
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%
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809.1
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86.8
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%
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1,166.4
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87.6
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%
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258.9
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88.6
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%
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302.7
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88.0
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%
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Gross profit
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$
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87.5
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13.3
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%
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$
|
123.1
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13.2
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%
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$
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164.4
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12.4
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%
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$
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33.4
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11.4
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%
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41.2
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|
12.0
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%
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Selling, general and administrative expenses
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44.3
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6.7
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%
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|
|
60.9
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|
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|
6.5
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%
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80.9
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6.1
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%
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|
15.6
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5.3
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%
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|
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28.1
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|
8.2
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%
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Intangible asset impairment
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|
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3.0
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0.3
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%
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Interest expense, net
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1.2
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|
|
0.2
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%
|
|
|
1.4
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|
|
0.2
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%
|
|
|
5.3
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|
|
|
0.4
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%
|
|
|
0.7
|
|
|
|
0.2
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%
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|
|
3.8
|
|
|
|
1.1
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%
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Net income
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$
|
42.0
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|
|
|
6.4
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%
|
|
$
|
57.8
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|
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|
6.2
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%
|
|
$
|
78.2
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|
|
|
5.9
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%
|
|
$
|
17.1
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|
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|
5.9
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%
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|
$
|
9.3
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|
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|
2.7
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%
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47
Comparison
of the Three Months Ended March 31, 2011 and the Three
Months Ended March 31, 2010.
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Three Months Ended
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March 31,
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% Change
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2010
|
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2011
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2011 Over 2010
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(In millions)
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(unaudited)
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Net sales
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$
|
292.3
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$
|
343.9
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|
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|
18
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%
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Cost of goods sold
|
|
|
258.9
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|
|
|
302.7
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|
17
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%
|
|
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|
|
|
|
|
|
|
|
|
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|
Gross profit
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|
$
|
33.4
|
|
|
$
|
41.2
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|
|
23
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%
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Selling, general and administrative expenses
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|
|
15.6
|
|
|
|
28.1
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|
|
|
80
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%
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Interest expense, net
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|
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0.7
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|
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3.8
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443
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%
|
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|
|
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Net income
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$
|
17.1
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|
$
|
9.3
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(46
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%)
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Net
Sales
Net sales for the three months ended March 31, 2011 were
$343.9 million, as compared to $292.3 million for the
three months ended March 31, 2010, which represented a
$51.6 million, or 18%, increase. Our net sales for the
three months ended March 31, 2011 were positively impacted
by the net weighted average addition of 24 members to our sales
force during the three months ended March 31, 2011 for a
total weighted average sales force of 171 members as compared to
the addition of 14 members for the three months ended
March 31, 2010 and a total weighted average sales force of
122 members. In June 2010, we began shipping orders under our
Fire Resistant Environmental Ensemble, or FREE,
contract, which contributed $26.8 million of additional
sales for the three months ended March 31, 2011. In
addition, sales under our GEN III contract were
$4.5 million higher in 2011, compared to 2010, due to
shipments of a new camouflage pattern at higher prices and the
annual price increase of approximately 3.5%. Sales under
commercial purchase orders increased by $9.0 million
primarily due to increased sales to existing customers. Sales
under the TLS contracts increased by $7.3 million with
sales under the FES TLS contract increasing by $1.4 million
and the remaining $5.9 million of additional sales being
generated across various product categories under our TLS
contracts. Overall increases were partially offset by a
$5.0 million decrease in GSA sales.
Gross
Profit
Gross profit for the three months ended March 31, 2011 was
$41.2 million, as compared to $33.4 million for the
three months ended March 31, 2010, which represented a 23%
increase. The increase in gross profit was primarily
attributable to the increase in the volume of our sales combined
with a slight improvement in margin percentage. Gross profit as
a percentage of net sales for the first quarter of 2011
increased to 12.0% as compared to 11.4% for the first quarter of
2010. The lower gross profit as a percentage of sales for the
first quarter of 2010 was primarily due to lower gross profit as
a percentage of net sales realized from the sale of new
products, in particular expeditionary equipment and structures,
from new vendors during that quarter. From time to time, we
execute orders on lower gross margins in order to establish a
relationship with a new customer or vendor.
Selling,
General and Administrative Expenses
SG&A expenses for the three months ended March 31,
2011 were $28.1 million, as compared with
$15.6 million for the three months ended March 31,
2010, which represented an 80% increase. This increase was
primarily due to the $6.6 million transaction bonuses paid
in connection with the offering of the senior secured notes as
well as an increase in professional fees primarily incurred in
connection with certain financing transactions. The increase in
SG&A expenses was also due to the increase in the volume of
our sales and the related payroll, commissions, travel, freight
and other expenses incurred from expanding our sales force and
supporting infrastructure. SG&A expenses were 8.2% of net
sales for the three months ended March 31, 2011, up from
5.3% of net sales for the three months ended March 31,
2010. Excluding $6.6 million in transaction bonuses and $1.8
million in professional fees related to the refinancing
transactions and certain financing transactions, SG&A
expenses were 5.7% of net sales.
48
Net
Income
Net income for the three months ended March 31, 2011 was
$9.3 million, as compared with $17.1 million for the
three months ended March 31, 2010, which represented a 46%
decrease. This decrease was due primarily to the expenses
resulting from the refinancing transactions in the first quarter
of 2011 which included the transaction bonuses of
$6.6 million and the write-off of deferred financing costs
of $1.5 million. In addition, our interest expense, net for the
first quarter of 2011 was $3.8 million, as compared with
$0.7 million for the same period of 2010, primarily as a
result of increased borrowings under our new senior secured
revolving credit facility, our new senior secured term loan and
the senior secured notes. Net income as a percentage of net
sales for 2011 decreased to 2.7% as compared to 5.9% for 2010.
Excluding $6.6 million in transaction bonuses, $1.8 million in
professional fees and the write-off of deferred financing costs
of $1.5 million related to the refinancing transactions and
certain financing transactions, net income as a percentage of
net sales was 5.7% for the first quarter of 2011.
Comparison
of the Year Ended December 31, 2010 and the Year Ended
December 31, 2009.
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|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
|
2009
|
|
|
2010
|
|
|
2010 Over 2009
|
|
|
|
(In millions)
|
|
|
|
|
|
Net sales
|
|
$
|
932.2
|
|
|
$
|
1,330.8
|
|
|
|
43
|
%
|
Cost of goods sold
|
|
|
809.1
|
|
|
|
1,166.4
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
123.1
|
|
|
$
|
164.4
|
|
|
|
34
|
%
|
Selling, general and administrative expenses
|
|
|
60.9
|
|
|
|
80.9
|
|
|
|
33
|
%
|
Intangible asset impairment
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1.4
|
|
|
|
5.3
|
|
|
|
279
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57.8
|
|
|
$
|
78.2
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales for the year ended December 31, 2010 were
$1,330.8 million, compared to $932.2 million for the
year ended December 31, 2009, which represented a 43%
increase. This increase was primarily due to a higher sales
volume during 2010. Our net sales for the year ended
December 31, 2010 were positively impacted by the net
weighted average addition of 35 members to our sales force
during the year ended December 31, 2010, as compared to the
year ended December 31, 2009, which resulted in increased
sales to existing customers and additional sales to new
customers within our customer base. Sales growth also resulted
from the introduction of new products sold through our
multiple-award IDIQ contracts. In particular, our TLS contracts
generated an additional $436.8 million of incremental
sales, offset by the $213.7 million decrease in Prime
Vendor sales, as our Prime Vendor contract was replaced in 2009
by TLS and sales were phased out. Of the net $223.1 million
increase in TLS contracts, sales of expeditionary equipment and
structures through our Spec Ops TLS contract, which began in the
first quarter of 2009, contributed $147.5 million of
additional sales, sales under our FES TLS contract, under which
we sell fire-resistant apparel and first-responder apparel and
equipment, contributed $9.8 million. The remaining
$65.8 million of additional sales were generated across
other various product categories under our TLS contracts. In
addition, sales under our GEN III contract were
$22.6 million higher in 2010, compared to 2009, due to a
lapse in full funding of monthly kit shipments in January 2009.
In June 2010, we began shipping orders under our Fire Resistant
Environmental Ensemble, or FREE, contract, which
contributed $95.0 million of additional sales for the year
ended December 31, 2010. The remaining $57.9 million
increase in net sales included $38.7 million of additional
commercial sales, primarily to defense contractors. Sales
through our GSA federal supply schedules for the year ended
December 31, 2010 were $126.0 million, compared to
$136.5 million for the year ended December 31, 2009.
This decrease was primarily the result of our decision to effect
certain sales in 2010 under our TLS contracts that were
effectuated in 2009 under our GSA federal supply schedules.
49
Gross
Profit
Gross profit for the year ended December 31, 2010 was
$164.4 million, as compared to $123.1 million for the
year ended December 31, 2009, which represented a 34%
increase. The increase in gross profit was primarily
attributable to the increase in the volume of our sales. Gross
profit per sales representative was $1,224,000 for the year
ended December 31, 2010, as compared to $1,223,000 for the
year ended December 31, 2009. Our weighted average sales
force for the year ended December 31, 2010 was
134 members, as compared to 99 members for the year
ended December 31, 2009. Gross profit as a percentage of
net sales for the year ended December 31, 2010 decreased to
12.4% as compared to 13.2% for the year ended December 31,
2009. Consistent with our business model, this decrease was
primarily due to lower gross profit as a percentage of net sales
realized from the sale of new products, in particular
expeditionary equipment and structures, from new vendors. From
time to time, we will execute orders on lower gross margins in
order to establish a relationship with a new customer or vendor.
Selling,
General and Administrative Expenses
SG&A expenses for the year ended December 31, 2010
were $80.9 million, compared to $60.9 million for the
year ended December 31, 2009, which represented a 33%
increase. This increase was primarily due to the increase in the
volume of our sales and the related payroll, commissions,
travel, freight and other expenses incurred from expanding our
sales force and supporting infrastructure. SG&A expenses
were 6.1% of net sales for the year ended December 31,
2010, down from 6.5% of net sales for the year ended
December 31, 2009. This decrease was primarily a result of
our ability to leverage our existing infrastructure through a
decrease of 0.6% in payroll and payroll-related expenses as a
percentage of net sales. In addition, depreciation and
amortization decreased by 0.1% of net sales, as a result of the
write-off of the unamortized portion of the intangible asset
related to the acquisition of MAR-VEL. See
Acquisition of MAR-VEL International, Inc.
These decreases were partially offset by an increase of 0.4% in
expenses for professional fees as a percentage of net sales
primarily incurred in connection this offering and the pursuit
of other strategic opportunities and financings.
Net
Income
Net income for the year ended December 31, 2010 was
$78.2 million, compared to $57.8 million for the year
ended December 31, 2009, which represented a 35% increase.
This increase was attributable to the factors described above.
Net income as a percentage of net sales for 2010 decreased to
5.9% as compared to 6.2% for 2009. This decrease was primarily
the result of our decline in gross profit as a percentage of net
sales, as described above, offset slightly by lower SG&A
expenses as a percentage of net sales. In addition, our interest
expense, net for 2010 was $5.3 million, as compared with
$1.4 million for 2009, primarily as a result of increased
borrowings under our senior secured revolving credit facility
and our former term loan facility. Our interest expense will
increase significantly in 2011 as a result of the offering of
our senior secured notes.
Comparison
of the Year Ended December 31, 2009 and the Year Ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
|
2008
|
|
|
2009
|
|
|
2009 Over 2008
|
|
|
|
(In millions)
|
|
|
|
|
|
Net sales
|
|
$
|
660.5
|
|
|
$
|
932.2
|
|
|
|
41
|
%
|
Cost of goods sold
|
|
|
573.0
|
|
|
|
809.1
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
87.5
|
|
|
$
|
123.1
|
|
|
|
41
|
%
|
Selling, general and administrative expenses
|
|
|
44.3
|
|
|
|
60.9
|
|
|
|
37
|
%
|
Intangible asset impairment
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
Interest expense, net
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42.0
|
|
|
$
|
57.8
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Net
Sales
Net sales for the year ended December 31, 2009 was
$932.2 million, as compared with $660.5 million for
the year ended December 31, 2008, which represented a 41%
increase. This increase was primarily due to a higher volume of
sales during 2009. Our net sales were positively impacted by the
net weighted average addition of 25 members to our sales force
during 2009, or a 34% increase, and the resulting increased
sales to existing customers and additional sales to new
customers, primarily within the U.S. Army and the
U.S. Air Force. Sales growth also resulted from the
introduction of new products sold through multiple-award
contracts during 2009. As a result, combined sales through our
multiple-award TLS and former Prime Vendor contracts increased
$181.5 million, over $104.8 million of which was
related to the sale of expeditionary equipment and structures
(which we began selling under these contracts in the first
quarter of 2009), partially offset by a $15.5 million
decrease in sales under our GEN III contract due to a one-time
lapse in full funding of monthly kit shipments in January 2009.
In addition, sales through our GSA federal supply schedules
increased by $52.4 million, of which $20.9 million
resulted from the sale of additional Escalation of Force Kits.
In 2009, we also increased our commercial sales to defense
contractors by approximately $42.0 million.
Gross
Profit
Gross profit for the year ended December 31, 2009 was
$123.1 million, as compared to $87.5 million for the
year ended December 31, 2008, which represented a 41%
increase. The increase in gross profit was primarily
attributable to the increase in the volume of our sales. Gross
profit as a percentage of net sales for 2009 remained relatively
constant at 13.2%, as compared to 13.3% for 2008. Consistent
with our business model, this was largely the result of improved
gross profit as a percentage of net sales on sales of existing
products and solutions. In particular, we experienced
improvements on gross profit as a percentage of net sales under
our GEN III contract, which were offset by lower gross profit as
a percentage of net sales from the sale of new products,
primarily expeditionary equipment and structures. For the year
ended December 31, 2009, we had a weighted average total of
99 members in our sales force as compared to 74 for the year
ended December 31, 2008. Our gross profit per weighted
average sales representative was approximately $1,223,000 in
2009, as compared to $1,147,000 in 2008, due to expanded product
offerings.
Selling,
General and Administrative Expenses
SG&A expenses for the year ended December 31, 2009
were $60.9 million, as compared with $44.3 million for
the year ended December 31, 2008, which represented a 37%
increase. This increase was primarily due to the increase in the
volume of our sales and the related payroll, commissions,
travel, freight and other expenses incurred from expanding our
sales force and supporting infrastructure. SG&A expenses
were 6.5% of net sales for the year ended December 31,
2009, down from 6.7% of net sales for the year ended
December 31, 2008. This decrease was primarily a result of
our ability to leverage our existing infrastructure and our
customers paying for the freight costs in connection with sales
of expeditionary equipment and structures. This decrease was
partially offset by an increase in payroll and payroll taxes as
a percentage of net sales.
Net
Income
Net income for the year ended December 31, 2009 was
$57.8 million, as compared with $42.0 million for the
year ended December 31, 2008, which represented a 38%
increase. This increase was attributable to the factors
discussed above. Net income as a percentage of net sales for
2009 decreased to 6.2% as compared to 6.4% for 2008.
Improvements in SG&A expenses as a percentage of net sales
during 2009 were offset by the negative impact of a
$3.0 million charge related to the write-off of certain
intangibles in connection with the MAR-VEL acquisition. See
Acquisition of MAR-VEL International, Inc.
Liquidity
and Capital Resources
General
Our primary liquidity needs are for working capital and capital
expenditures. We have historically financed our operations
through cash from operating activities and borrowings under our
revolving credit
51
facilities and expect that these will continue to be our
principal sources of liquidity in the future. Based on our
current level of operations, we believe that our cash flow from
operations, available cash and available borrowings under our
senior secured revolving credit facility will be adequate to
meet our liquidity needs for at least the next twelve months. We
cannot assure you, however, that our business will generate
sufficient cash flow from operations, that currently anticipated
cost savings and operating improvements will be realized on
schedule or that future borrowings will be available to us under
our senior secured revolving credit facility in an amount
sufficient to enable us to repay our indebtedness or to fund our
other liquidity needs. See Risk FactorsRisks Related
to Our Common Stock.
Our business and growth strategy has historically required only
a modest amount of capital expenditures. In 2009, we spent
$9.2 million on capital expenditures, primarily in
connection with the purchase of our current headquarters, and in
2010 capital expenditures were $3.4 million, primarily in
connection with the move to our new corporate offices and the
construction of a warehouse. Our corporate offices and warehouse
are each owned by related entities under the common ownership
that are consolidated with ADS in our historical financial
statements. See Certain Relationships and Related Party
Transactions. We expect our capital expenditures to
increase in 2011 to approximately $4.5 million (of which we
have already invested $1.4 million during the three months
ended March 31, 2011), primarily in connection with the
construction of a warehouse.
Historically, a substantial portion of our sales have been
shipped directly from our vendors. For the year ended
December 31, 2010, approximately 51% of our net sales were
from orders shipped directly from the vendor. While the
remainder of our shipments go through our warehouse, only a
small percentage are held in inventory without a customer order.
This allows us to minimize capital requirements for merchandise
inventory. We may experience future increases in merchandise
inventory related to new single-award contracts, such as the
increase in merchandise inventory that we experienced in 2007 in
connection with the award of our GEN III contract.
Historically, our cash flow from operations has been relatively
stable in relationship to our net sales as a result of the
quality of our accounts receivable and the fact that only a
small percentage of our net sales are generated from items held
in inventory without a customer order. As of March 31,
2011, our allowance for doubtful accounts was $400,000. We
expect this to continue for the foreseeable future, and as we
experience growth in our net income, we expect our cash flow
from operating activities to improve as well.
As a result of the refinancing transactions, annual interest
expense is expected to increase from historical interest expense
by approximately $30 million. After further giving effect
to the use of proceeds from this offering, assuming our common
stock is offered at $ per share,
the midpoint of the range set forth on the cover page of this
prospectus, annual interest expense is expected to increase from
historical interest expense by approximately $
million, assuming redemption of up to 35%, or approximately
$96.3 million, of our senior secured notes, the maximum amount
permitted to be redeemed under the senior secured notes
indenture, and $ million to repay a portion of the
amounts remaining outstanding under our senior secured revolving
credit facility. See Prospectus SummaryRecent
Transactions and Liquidity and Capital
Resources.
ADS Tactical, Inc. is a holding company and all of our
operations are conducted through our subsidiaries. Consequently,
we rely on dividends or advances from our subsidiaries. The
ability of such subsidiaries to pay dividends and our ability to
receive distributions on our investments in other entities is
subject to applicable local law. Such laws and restrictions
could limit the payment of dividends and distributions to us.
52
A summary of operating, investing and financing activities are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Year
|
|
|
Ended
|
|
|
|
Ended December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash provided by operating activities
|
|
$
|
15.9
|
|
|
$
|
35.3
|
|
|
$
|
31.7
|
|
|
$
|
12.5
|
|
|
$
|
31.8
|
|
Cash used in investing activities
|
|
|
(14.9
|
)
|
|
|
(6.6
|
)
|
|
|
(3.0
|
)
|
|
|
(1.5
|
)
|
|
|
(1.2
|
)
|
Cash provided by (used in) financing activities
|
|
|
0.5
|
|
|
|
(29.5
|
)
|
|
|
(27.3
|
)
|
|
|
(11.1
|
)
|
|
|
(31.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
1.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.9
|
)
|
Cash and cash equivalents at the beginning of year
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
$
|
2.2
|
|
|
$
|
1.4
|
|
|
$
|
2.8
|
|
|
$
|
1.3
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, we had $1.9 million in cash and
cash equivalents and $54.0 million in working capital.
As of December 31, 2010, we had $2.8 million in cash
and cash equivalents and $30.6 million in working capital.
Cash
provided by operating activities.
For the three months ended March 31, 2011 our operating
activities generated net cash of $31.8 million as compared
to $12.5 million for the same period in 2010. This increase
was primarily due to a $14.4 million decrease in inventory
in the first three months ended March 31, 2011 as levels
normalized due to the multiple camouflage patterns we carried
during 2010 for a customer program. This compares to a
$6.4 million build up of inventory in the first quarter of
2010 as we ramped up for the inception of a new program which
began in the second quarter of 2010. In addition, accounts
receivable decreased by $23.6 million for the three months
ended March 31, 2011 as compared to a $10.5 million
decrease for the same period in 2010. The fourth quarter
accounted for 31% of sales for both years so a decline in
receivables was expected in the first quarter. These increases
were partially offset by a $7.8 million decrease in net
income for the three months ended March 31, 2011 compared
to the same period in 2010 primarily due to the refinancing
transactions, additional interest expense and increased
professional fees primarily incurred in connection with certain
other financing transactions. In addition, there was a
$13.0 million decrease in accounts payable in the first
quarter of 2011 as compared to a $6.2 million decrease in
the first quarter of 2010.
For the year ended December 31, 2010, our operating
activities generated net cash of $31.7 million, as compared
to $35.3 million for the year ended December 31, 2009.
The $3.6 million decrease in net cash generated from
operating activities was primarily due to an increase in net
income of $20.4 million for the year ended
December 31, 2009 compared to 2010, offset by an increase
in inventories of $26.5 million for the year ended
December 31, 2010 compared to an increase of
$8.5 million for the year ended December 31, 2009. In
addition, the year ended December 31, 2009 included a
non-cash charge related to intangible asset impairment of
$3.0 million. The comparable increases in accounts
receivable and accounts payable for the years ended
December 31, 2009 and 2010, were the result of increases in
revenue and cost of goods sold for both periods.
For the year ended December 31, 2009, our operating
activities generated net cash of $35.3 million, as compared
to $15.9 million for the year ended December 31, 2008.
The increase was primarily due to the increase in net income of
$15.8 million during 2009. The increase in cash generated
from operating activities was also the result of an increase in
accounts payable of $32.1 million in 2009, offset by an
increase in accounts receivable of $53.1 million during
this period. The increases in accounts receivable and accounts
payable were primarily the result of increases in sales and cost
of goods sold and the timing of payments and collections.
53
Cash
used in investing activities.
For the three months ended March 31, 2011, net cash used in
investing activities was $1.2 million as compared to
$1.5 million for the same period in 2010. In the first
quarter of 2011, the costs were primarily related to
construction costs associated with a new warehouse scheduled to
open in the second quarter of 2011, whereas in the first quarter
of 2010, the costs related to the build-out of the new corporate
headquarters.
For the year ended December 31, 2010, net cash used in
investing activities was $3.0 million, as compared to
$6.6 million of net cash used in investing activities
during the year ended December 31, 2009. The use of cash in
2010 was primarily due capital expenditures related to the move
into our headquarters and the construction of our warehouse. For
the year ended December 31, 2009, the $7.5 million
purchase of our new headquarters, combined with
$1.7 million in miscellaneous equipment purchases were
somewhat offset by $2.1 million in repayment of advances to
affiliated companies and stockholders.
For the year ended December 31, 2009, net cash used in
investing activities was $6.6 million, as compared to
$14.9 million of net cash used in investing activities
during 2008. In 2009, we used $7.5 million of cash to
purchase our existing headquarters and $1.7 million to fund
other capital expenditures, and received $2.1 million from
the repayment of advances to affiliated companies. In 2008, we
used $4.7 million of cash to acquire MAR-VEL and
$7.5 million for the purchase of a warehouse. In 2008, we
also used $0.8 million to fund other capital expenditures
and made advances of $1.9 million to affiliated companies.
Cash
provided by (used in) financing activities.
For the three months ended March 31, 2011, net cash used in
financing activities was $31.5 million as compared to
$11.1 million for the same period in 2010. The refinancing
transactions accounted for the majority of the financing
activities in the first quarter of 2011. See Senior
Secured Notes. In addition, we paid $24.1 million on
our senior secured revolving credit facility from cash generated
by operating activities. During the three months ended
March 31, 2010, we entered into a senior secured revolving
credit facility. The proceeds from the senior secured revolving
credit facility were used to repay our former revolving credit
facility, to repay the remaining $9.0 million outstanding
on our former term loan and to make a $50.0 million special
distribution to stockholders.
For the year ended December 31, 2010, net cash used in
financing activities was $27.3 million, as compared to
$29.5 million during the year ended December 31, 2009.
Net cash used in financing activities of $27.3 million in
2010 was a result of cash distributions to our stockholders of
$129.0 million and repayment of debt of $14.3 million,
offset primarily by borrowings of $118.5 million. In 2010,
we borrowed $67.0 million under our senior secured
revolving credit facility to repay our former revolving credit
facility, $50.0 million under our term loan facility and
$1.5 million under our construction loan related to our new
warehouse. We repaid a former term loan with a payment of
$9.0 million and made additional payments of
$5.3 million on our term loan facility and property
mortgages. The cash distributions to our stockholders of
$129.0 million in 2010 included two special distributions
totaling $98.6 million and distributions for taxes of
$30.4 million.
For the year ended December 31, 2009, net cash used in
financing activities was $29.5 million, as compared to net
cash provided by financing activities of $0.5 million in
2008. In 2009, we incurred long-term debt of $6.4 million
related to the purchase of our existing headquarters, incurred
$1.6 million under our former revolving credit facility,
made cash distributions of $33.2 million to our
stockholders primarily relating to taxable income and made
principal payments on long-term debt of $5.3 million. In
2008, we incurred long-term debt of $6.3 million related to
the purchase of a warehouse, incurred $21.5 million under
our former revolving credit facility, made cash distributions of
$25.5 million to our stockholders primarily relating to
taxable income and made principal payments on long-term debt of
$3.1 million.
In April 2011, we made distributions to our stockholders of
$5.7 million principally related to estimated taxes for the
fourth quarter of 2010 and the first quarter of 2011, and in
June 2011 we made distributions to our stockholders of
$3.5 million principally related to estimated taxes for the
second quarter of 2011. We will continue to make additional
distributions related to taxable income each quarter until the
consummation of this offering. In connection with this offering
we will convert from a subchapter S corporation to a
subchapter
54
C corporation. Tax payments will no longer be distributed
to stockholders and will be classified as cash provided by (used
in) operating activities.
Senior
Secured Revolving Credit Facility
On February 18, 2010, we refinanced our then-existing
credit facility by entering into a $180.0 million senior
secured revolving credit facility with an optional increase in
commitments of up to $25.0 million, which we later amended
on October 22, 2010 to permit us to enter into our term
loan facility. In connection with the refinancing transactions,
we amended and restated the senior secured revolving credit
facility to, among other things, repay our term loan facility,
provide for up to $200.0 million in borrowings with an
optional increase in commitments of up to $50.0 million,
and permit the offering of the senior secured notes and the
distributions to our equity holders. The amended and restated
senior secured revolving credit facility became effective
concurrently with the completion of the offering of the senior
secured notes. See Description of Certain
IndebtednessSenior Secured Revolving Credit Facility.
Borrowings under the senior secured revolving credit facility
bear interest at a rate per annum equal to, at our option,
either (a) with respect to base rate loans and swingline
loans, a base rate determined by reference to the highest of
(1) the prime rate of Wells Fargo Bank, National
Association, (2) the federal funds effective rate plus
0.50% and (3) a LIBOR rate determined by reference to the
costs of funds for U.S. dollar deposits for an interest
period of one month adjusted for certain additional costs, plus
1.00% or (b) with respect to Eurodollar rate loans, a LIBOR
rate determined by reference to the costs of funds for
U.S. dollar deposits for the interest period relevant to
such borrowing adjusted for certain eurocurrency liabilities
established by the Federal Reserve Board, in each case plus an
applicable margin ranging from 1.25% to 2.75%. At March 31,
2011, the applicable margin was 1.50%. Commencing with the
completion of the first calendar quarter after June 30,
2011, the applicable margin for borrowings thereunder will be
subject to adjustment each fiscal quarter, based on the average
excess availability. Interest-only payments are due monthly.
As of March 31, 2011, we had $66.1 million drawn under
the senior secured revolving credit facility. After taking into
account borrowing base limitations and outstanding letters of
credit, we would have had commitments under the senior secured
revolving credit facility available to us of $83.9 million.
As of March 31, 2011, we had $6.7 million letters of
credit outstanding.
The borrowing base for the senior secured revolving credit
facility at any time is expected to equal the (a) sum of
90% of eligible government accounts receivable, plus 85% of
eligible commercial accounts receivable, plus the lesser of
(i) 65% of the value of eligible inventory, (ii) 85%
of the net recovery percentage of the value of eligible
inventory and (iii) $80.0 million and minus
(b) reserves established and modified from time to time.
Our senior secured revolving credit facility contains a number
of covenants that, among other things and subject to certain
exceptions, restrict our ability and the ability of our
subsidiaries to incur additional indebtedness and alter, modify
or make payments on certain indebtedness; incur additional
liens; make investments, including: purchase of obligations or
securities, capital contributions, loans, deposits, guarantees,
or acquisitions; consolidate, merge, dissolve or liquidate; pay
dividends on our or our subsidiaries capital stock or
redeem, repurchase or retire such capital stock or our other
indebtedness; create restrictions on the payment of dividends or
other amounts to us; engage in transactions with our affiliates;
make accounting changes or amendments to organizational
documents; modify material contracts; alter the business we
conduct; and sell or transfer assets, including capital stock of
our subsidiaries.
Each of the covenants limiting dividends and other restricted
payments, investments, loans and acquisitions, incurrence of
unsecured debt, and prepayments or redemptions of certain
indebtedness are expected to permit the restricted actions so
long as certain payment conditions are satisfied, including
certain specified excess availability and fixed charge coverage
tests. In addition, we are required to maintain, on a monthly
basis, a fixed charge coverage ratio of not less than 1.1 to 1.0
if either an event of default has occurred and is continuing or
the undrawn availability under our senior secured revolving
credit facility is less than 12.5% of our aggregate commitment,
which requirement shall no longer apply after such conditions
cease to apply for a period of 90 days. The senior secured
revolving credit facility contains certain customary
representations and warranties, affirmative covenants and
collateral reporting and covenants. Prior to
55
the effectiveness of the amended and restated senior secured
revolving credit facility, as of March 31, 2011, we were in
compliance with all covenants. Noncompliance with certain
covenants in the senior secured revolving credit facility,
including the failure to meet the ratio described above, would
result in an event of default as defined in the senior secured
revolving credit facility, which could result in the
acceleration of all amounts outstanding under the senior secured
revolving credit facility
and/or a
termination of the commitments thereunder. An event of default
under the senior secured revolving credit facility will also
result in a cross-default under the senior secured notes
indenture.
We are required to make prepayments under the senior secured
revolving credit facility at any time when and to the extent
that, the aggregate amount of outstanding loans and letters of
credit under our senior secured revolving credit facility
exceeds either the borrowing base or the aggregate commitments
of the lenders. See Description of Certain
Indebtedness.
Senior
Secured Notes
On March 25, 2011, we issued $275.0 million of
11% senior secured notes due April 1, 2018. Interest
on the senior secured notes is payable on April 1 and October 1
of each year. The proceeds from the offering of the senior
secured notes, along with amounts drawn from our senior secured
revolving credit facility, were used (1) to make a
distribution of $217.1 million to our stockholders,
(2) to repay our term loan facility, (3) to pay the
transaction bonuses and (4) to pay related transaction fees
and expenses, including discounts and commissions to the initial
purchasers of the senior secured notes. See Prospectus
SummaryRecent Transactions.
The senior secured notes are secured by a first-priority lien
(subject to certain exceptions and permitted liens) on certain
fixed and intangible assets, capital stock of certain
subsidiaries, certain intercompany loans held by us and the
guarantors of the senior secured notes, proceeds of the
foregoing, in each case held by us and the guarantors of the
senior secured notes. The senior secured notes are also secured
by a second-priority lien (subject to certain exceptions and
permitted liens) on all accounts (other than certain notes
accounts), instruments, chattel paper and other contracts
evidencing such accounts, inventory, certain investment
property, cash (other than cash proceeds of the collateral
first-priority lien on the senior secured notes), general
intangibles and instruments related to the foregoing and
proceeds of the foregoing, in each case held by us and the
guarantors of the senior secured notes.
Prior to April 1, 2015, the senior secured notes may be
redeemed in part or in full at a redemption price equal to 100%
of the principal amount of the senior secured notes, plus a
make-whole premium calculated in accordance with the senior
secured notes indenture and accrued and unpaid interest, if any.
In addition, prior to April 1, 2014, up to 35% of the
original principal amount of the senior secured notes (including
any additional notes issued under the senior secured notes
indenture) may be redeemed with the net proceeds of certain
equity offerings completed before April 1, 2014 at 111%,
provided that after giving effect to such redemption, not less
than 50% of the senior secured notes remain outstanding. On or
after April 1, 2015, the senior secured notes may be
redeemed in part or in full at the following percentages of the
outstanding principal amount prepaid: 108.250% prior to
April 1, 2016; 105.500% on or after April 1, 2016, but
prior to April 1, 2017; and 100% on or after April 1,
2017. In the event of a Change in Control, as
defined in the senior secured notes indenture, the company will
be required to offer to repurchase the senior secured notes at a
price equal to 101% of the principal amount, plus accrued and
unpaid interest, if any, to the date of repurchase. In addition,
the company will be required to offer to repurchase the senior
secured notes at a price equal to 100% of the principal amount,
plus accrued and unpaid interest, if any, with net proceeds, as
defined in the senior secured notes indenture, from certain
asset sales including collateral securing the senior secured
notes as defined under the senior secured notes indenture, if
such proceeds have not otherwise been used in certain specified
manners within 365 days of the date of the asset sale.
The senior secured notes indenture contains customary covenants
and restrictions on the activities of us and our restricted
subsidiaries, including, but not limited to, our ability to
incur additional indebtedness; pay dividends or make
distributions or redeem our capital stock; pay or redeem or
purchase certain indebtedness; make certain loans and
investments; sell assets; create liens on certain assets to
secure debt; enter into agreements restricting our
subsidiaries ability to pay dividends; consolidate, merge,
sell or otherwise dispose of all or substantially all of our
assets; and engage in transactions with affiliates. Certain of
these covenants
56
will be suspended if the senior secured notes are assigned an
investment grade rating by both Standard & Poors
Rating Services and Moodys Investor Service, Inc. and no
default has occurred or is continuing. If either rating on the
senior secured notes should subsequently decline to below
investment grade, the suspended covenants would be reinstated.
We were in compliance with our financial covenants at
March 31, 2011.
The senior secured notes will not be registered under the
Securities Act. See Description of Certain
Indebtedness.
Term
Loan Facility
On October 22, 2010, we entered into the term loan facility
with Wells Fargo Bank, National Association as administrative
agent. On March 25, 2011, we fully repaid the term loan
facility with a portion of the proceeds from the offering of our
senior secured notes. See Prospectus SummaryRecent
Transactions.
The term loan facility provided for a total commitment of
$50.0 million in a single borrowing. The proceeds from the
borrowing under the term loan facility were used to fund
permitted dividends and cover related transaction costs,
including a cash distribution of approximately
$48.6 million to our principal stockholders, which was
distributed on October 22, 2010.
The term loan facility was scheduled to mature on
February 18, 2013 and bore interest at variable rates based
on the Eurodollar rate or the banks base rate plus an
applicable margin of 4.00% and 3.00%, respectively. Interest on
the Eurodollar rate loan was payable on the last day of each
applicable interest period, while interest on the banks
base rate loan was payable monthly in arrears not later than the
first day of each calendar month.
Guarantees
We guarantee debt in the amount of $8.5 million incurred by
one of our affiliates and debt in the amount of
$6.1 million incurred by another of our affiliates. The
financial statements of both of these affiliates have been
consolidated with our financial statements. We also guarantee
two mortgages totaling $2.0 million related to office and
warehouse space that we lease. For more information, please see
Certain Relationships and Related Party Transactions
and the consolidated financial statements included elsewhere in
this prospectus.
Critical
Accounting Policies and Significant Accounting
Estimates
The preparation of financial statements and related disclosures
in conformity with U.S. generally accepted accounting
principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements
and net sales and expenses during the periods reported. The
following accounting policies involve critical accounting
estimates because they are particularly dependent on
estimates and assumptions made by management about matters that
are highly uncertain at the time the accounting estimates are
made. In addition, while we have used our best estimates based
on the facts and circumstances available to us at the time,
different estimates reasonably could have been used in the
current period. Changes in the accounting estimates we used are
reasonably likely to occur from period to period, which may have
a material impact on the presentation of our financial condition
and results of operations. We review these estimates and
assumptions periodically and reflect the effects of revisions in
the period that they are determined to be necessary. For further
information on all of our significant accounting policies,
please see note 2 of the accompanying notes to our audited
consolidated financial statements included elsewhere in this
prospectus.
Revenue
Recognition
We derive revenue primarily from the sale and distribution of
tactical and operational equipment. In order for revenue and the
related cost of sales from product sales to be recognized there
must be (i) persuasive evidence that an arrangement exists,
(ii) delivery has occurred, (iii) the price to the buyer is
fixed or determinable and (iv) collectability of the related
receivable is reasonably assured. Revenue is recognized
depending on the specific terms of the arrangement: either
at the point of shipment for those sales under FOB shipping
point terms, or when it is received by the customer for sales
under FOB destination terms. For those transactions that are
shipped at or near the end of the reporting period for which the
sales
57
terms are FOB destination, we confirm receipt of the shipment,
and if delivery has not occurred, then the revenue is not
recognized. We evaluate whether it is appropriate to record
product sales and related costs on a gross or net basis in
accordance with
ASC 605-45,
Principal Agent Considerations. Management uses judgment
in this consideration, including whether we are primarily
obligated in a transaction, subject to inventory risk, has
latitude in establishing prices and suppliers, and other factors
or indicators that support the determination of whether we have
acted as a principal or agent in the related transaction.
Shipping and handling costs billed to customers are included in
sales. Many of our products are purchased to meet customer
specifications, and customer arrangements do not typically
involve post-installation or post-sale testing and acceptance.
There is no significant variation in sales terms geographically,
or among product lines and industries.
Accounts
Receivable
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The majority of our accounts
receivable is due from federal, state, and local government
agencies. Credit is extended based on an evaluation of a
customers financial condition. We do not require
collateral from our customers. Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from
customers, net of allowances for doubtful accounts, when
management has determined that the balance is not fully
collectible. Accounts receivable outstanding longer than the
contractual payment terms are considered past due. Amounts
collected on trade accounts receivable are included in net cash
provided by operating activities in the consolidated statements
of cash flows. We determine the need for an allowance for
doubtful accounts by considering the customers financial
condition, the current receivables aging, and current payment
patterns. We review on a quarterly basis the need for an
allowance for doubtful accounts, which represents our best
estimate of the amount of probable credit losses in our existing
accounts receivable. Past due balances over 90 days and
over a specified amount are reviewed individually for
collectibility. If the financial condition of our customers were
to deteriorate beyond our estimates, resulting in an impairment
of their ability to make payments, we would be required to
reserve and write off additional accounts receivable balances,
which would adversely impact our net earnings and financial
condition. Actual uncollectible accounts could exceed our
estimates, and changes to our estimates will be accounted for in
the period of change. Account balances are charged against the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. We do not have
any off-balance-sheet credit exposure related to our customers.
At December 31, 2010, we recorded a $400,000 allowance in
connection with one of our accounts receivable. At
March 31, 2011, our allowance for doubtful accounts was
$400,000 and we expect to fully collect substantially all other
accounts receivable.
Inventory
Inventories consist of tactical and operational equipment
produced and manufactured by other parties and are stated at the
lower of cost or market. Cost is determined by the first-in,
first-out basis. For purposes of analyzing the lower of cost or
market, market is current replacement cost.
We make purchasing decisions principally based upon firm sales
orders from customers, the availability and pricing of finished
products from our vendors, and projected customer requirements.
Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown
in customer demand, customer delay in the issuance of sales
orders, miscalculation of customer requirements, loss of
customers
and/or
cancellation of sales orders and sales contracts. We consider
the need for inventory reserves related to obsolescence and
unusable items on a continual basis.
Market conditions surrounding products are also considered
periodically to determine if there are any net realizable
valuation matters, which would require a write-down of any
related inventories. If market conditions change, it may be
necessary for inventory reserves and write-downs, which would be
accounted for in the period of change. Cash flows from the
purchase and sale of inventory are included in cash flows from
operating activities.
Long-Lived
Assets
We account for the impairment of long-lived assets and
amortizable intangible assets in accordance with standards for
accounting for the impairment or disposal of long-lived assets.
Long-lived assets, such as property, and equipment, and
purchased intangibles subject to amortization are reviewed for
impairment whenever events
58
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Management assesses
the recoverability of long-lived assets whenever events or
changes in circumstance indicate that the carrying value may not
be recoverable.
Management must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of these
assets. Other factors could include, among other things, quoted
market prices, or other valuation techniques considered
appropriate based on the circumstances. If these estimates or
related assumptions change in the future, an impairment charge
may need to be recorded. Impairment charges would be included in
our consolidated statements of operations, and would result in
reduced carrying amounts of the related assets on our
consolidated balance sheets.
Contingencies
and Litigation
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines, and penalties and other sources
are recorded when it is probable that a liability has been
incurred and the amount of the assessment
and/or
remediation can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Such accruals are adjusted as further information develops or
circumstances change.
We periodically assess the potential liabilities related to any
lawsuits or claims brought against us. While it is typically
very difficult to determine the timing and ultimate outcome of
these actions, we use our best judgment to determine if it is
probable that we will incur an expense related to a settlement
for such matters and whether a reasonable estimation of such
probable loss, if any, can be made. Given the inherent
uncertainty related to the eventual outcome of litigation, it is
possible that all or some of these matters may be resolved for
amounts materially different from any estimates that we may have
made with respect to their resolution.
Recent
Accounting Developments
As part of the transition to the Financial Accounting Standards
Board Accounting Standards Codification, or FASB
ASC, plain English references to the corresponding
accounting policies are provided, rather than specific numeric
ASC references. The ASC identifies the sources of accounting
principles and the framework for selecting the principles to be
used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
the U.S. generally accepted accounting principles. The ASC
is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. There was
no impact on the consolidated balance sheets, statements of
income, or cash flows upon the adoption of the ASC.
In June 2009 the FASB issued updated guidance, which amends
guidance for determining whether an entity is a variable
interest entity, or VIE, and requires the
performance of a qualitative rather than a quantitative analysis
to determine the primary beneficiary of a VIE. Under this
guidance, an entity would be required to consolidate a VIE if it
has (i) the power to direct the activities that most
significantly impact the entitys economic performance and
(ii) the obligation to absorb losses of the VIE or the
right to receive benefits from the VIE that could be significant
to the VIE. This guidance is effective for the first annual
reporting period that begins on January 1, 2010, with early
adoption prohibited. The adoption of this guidance did not have
a material impact on the companys consolidated financial
statements.
In May 2009, the FASB issued updated guidance to establish
general standards of accounting for and disclosure of subsequent
events. This guidance, as amended, renames the two types of
subsequent events as recognized subsequent events or
nonrecognized subsequent events and modifies the definition of
the evaluation period for subsequent events as events or
transactions that occur after the balance sheet date, but before
the financial statements are issued. This will require
non-public
entities to disclose the date through which an entity has
evaluated subsequent events and the basis for that date. The
company adopted this guidance during 2009. The adoption of this
guidance did not have a material impact on the companys
consolidated financial statements.
59
Effect of
Inflation
Most of our sales are generated from purchase orders under IDIQ
contracts that are to be performed within 90 days. Some of
our sales under our single-award IDIQ contracts contemplate
deliveries over a period of six to 12 months at
pre-determined prices (subject, in some cases, to price
escalation provisions). We have generally been able to
anticipate increases in costs when pricing the products and
related services we offer under these contracts. For commitments
to deliver items over a longer period of time, such as through
our single-award IDIQ contracts, we have often been able to
negotiate annual price escalator provisions as part of the
arrangement to preserve our margins. Consequently, net income as
a percentage of net sales has not been significantly impacted by
inflation. There can be no assurance, however, that our sales or
operating results will not be impacted by inflation in the
future.
Off-Balance
Sheet Arrangements
We have not created, and are not party to, any special-purpose
or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating our business. We do not
have any off-balance sheet arrangements or relationships with
entities that are not consolidated into or disclosed on our
financial statements that have or are reasonably likely to have
a material current or future effect on our financial condition,
results of operations, liquidity, capital expenditures or
capital resources.
Contractual
Obligations
The following table reflects our contractual obligations and
commercial commitments as of December 31, 2010. Commercial
commitments include lines of credit, guarantees and other
potential cash outflows resulting from a contingent event that
requires our performance pursuant to a funding commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term
debt(1)(2)
|
|
$
|
58,638
|
|
|
$
|
21,065
|
|
|
$
|
24,933
|
|
|
$
|
787
|
|
|
$
|
11,853
|
|
Operating
leases(3)
|
|
|
1,956
|
|
|
|
703
|
|
|
|
767
|
|
|
|
486
|
|
|
|
|
|
Capital
leases(4)
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term
debt(5)
|
|
|
16,598
|
|
|
|
2,318
|
|
|
|
2,346
|
|
|
|
1,610
|
|
|
|
10,324
|
|
Line of
credit(6)
|
|
|
90,155
|
|
|
|
90,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,379
|
|
|
$
|
114,273
|
|
|
$
|
28,046
|
|
|
$
|
2,883
|
|
|
$
|
22,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt includes obligations for (a) our corporate
headquarters in Virginia Beach, VA, which is owned by Tactical
Office, LLC, a related entity under common ownership that is
consolidated with ADS in our historical financial statements,
and (b) our kitting facility in Virginia Beach, VA, which
is owned by Tactical Warehouse, LLC, a related entity under
common ownership that is consolidated with ADS in our historical
financial statements. See Certain Relationships and
Related Party Transactions and notes 6, 10 and 11 to
our consolidated financial statements. |
|
|
|
(2) |
|
Long-term debt as of December 31, 2010 includes our term
loan facility, which was repaid on March 25, 2011 with the
proceeds from the sale of our senior secured notes. See
Prospectus SummaryRecent Transactions. |
|
|
|
(3) |
|
Operating leases includes lease obligations for our main
warehouse in Virginia Beach, VA, our warehouse in San Diego, CA
and an office and warehouse in Pennsauken, NJ. |
|
(4) |
|
Capital leases includes lease obligations for hardware and
software equipment at our facilities in Pennsauken, NJ. |
|
(5) |
|
Includes interest on our term loan facility with estimated
interest payments at 4.3%, which represents the weighted average
interest rate paid during 2010, as well as interest on other
long-term debt and capital leases. This term loan was repaid on
March 25, 2011 with the proceeds of our senior secured
notes. |
|
(6) |
|
Line of credit consists of our senior secured revolving credit
facility. Does not include interest payments on the senior
secured revolving credit facility, which bears interest at a
variable rate. We estimate that |
60
|
|
|
|
|
annual interest payments of $3.6 million would be required
based on a weighted-average interest rate of 4% paid during
2010, including a commitment fee, assuming outstanding
borrowings of approximately $90 million, which we expect to
change in the future as additional borrowings become necessary.
Actual interest may vary. See Liquidity and Capital
ResourcesSenior Secured Revolving Credit Facility. |
The following table summarizes our contractual obligations and
commercial commitments as of December 31, 2010 on an as
adjusted basis to give effect to the refinancing transactions
that we completed in March 2011 as if they had occurred on
December 31, 2010, but does not give effect to this
offering and the use of proceeds therefrom.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
As adjusted long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured notes
|
|
$
|
275,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
275,000
|
|
Other long-term debt
|
|
|
13,638
|
|
|
|
295
|
|
|
|
703
|
|
|
|
787
|
|
|
|
11,853
|
|
Operating
leases(1)
|
|
|
1,956
|
|
|
|
703
|
|
|
|
767
|
|
|
|
486
|
|
|
|
|
|
Capital
leases(2)
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term
debt(3)
|
|
|
226,170
|
|
|
|
31,042
|
|
|
|
62,194
|
|
|
|
62,110
|
|
|
|
70,824
|
|
Line of
credit(4)
|
|
|
93,155
|
|
|
|
93,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
609,951
|
|
|
$
|
125,227
|
|
|
$
|
63,664
|
|
|
$
|
63,383
|
|
|
$
|
357,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes lease obligations for a warehouse in Virginia Beach,
VA, a warehouse in San Diego, CA and an office and
warehouse in Pennsauken, NJ. |
|
(2) |
|
Includes lease obligations for hardware and software equipment
at our facilities in Pennsauken, NJ. |
|
(3) |
|
Includes interest on our senior secured notes as well as
interest on our other long-term debt and capital leases. |
|
(4) |
|
Includes amounts drawn at the closing of the issuance of our
senior secured notes to pay certain fees and expenses in
connection with the refinancing transactions. Does not include
interest payments on the senior secured revolving credit
facility, which bears interest at a variable rate. We estimate
that annual interest payments of $3.7 million would be
required based on a weighted-average interest rate of 4% paid
during 2010, including a commitment fee, assuming outstanding
borrowings of approximately $93 million, which we expect to
change in the future as additional borrowings become necessary
or repayments are made. |
Qualitative
and Quantitative Disclosure about Market Risk
Our exposure to market risk relates to changes in interest rates
for borrowings under our senior secured revolving credit
facility. These borrowings bear interest at variable rates.
Based on the amount outstanding under our senior secured
revolving credit facility on March 31, 2011, a hypothetical
one percentage point increase in interest rates would increase
our annual interest expense by approximately $0.7 million.
While we may enter into agreements limiting our exposure to
higher interest rates, any such agreements may not offer
complete protection from this risk.
61
BUSINESS
Our
Company
We believe we are a leading provider of value-added logistics
and supply chain solutions specializing in tactical and
operational equipment, based on 2010 sales. We drive sales
between a fragmented base of vendors and a decentralized group
of customers by tailoring our solutions to meet their needs.
Most of our over 4,000 active customers (in the past
24 months) are within the Department of Defense and the
Department of Homeland Security. We consider each party that has
the ability to choose between different products and initiates a
purchase requisition within the Department of Defense, the
Department of Homeland Security and other domestic and foreign
government agencies to be a separate customer, although such
party may not be the party that awards us the purchase order for
the products. Our business model is adaptable and scalable to
serve other domestic and foreign government agencies. Through
our vendor network, we offer our customers access to over
160,000 items, which we combine with our broad suite of
value-added supply chain management services. We leverage our
established supply chain management and government procurement
expertise to develop and strengthen key customer and vendor
relationships.
Our customers need the products we offer for ongoing training
and to be prepared for a variety of peacetime operations and
missions at home and abroad. The products we offer include
apparel, expeditionary equipment, optical equipment,
communications equipment, emergency medical supplies, lighting,
eyewear and other items from approximately 1,400 active vendors
(in the past 24 months) such as Camelbak, FLIR, Hunter
Defense Technologies, L-3 Communications, Oakley and SureFire.
Most of the products we distribute require regular replacement
due to wear and tear and technological advancements. We combine
the distribution of our products with our value-added supply
chain management services, which include kitting and assembly,
custom sourcing, training, product research and development and
quality assurance and quality management systems. Our flexible
operating model allows us to maintain an asset-light,
low-inventory, scalable business. For example, for the year
ended December 31, 2010, approximately 51% of our net sales
were from orders shipped directly from the vendor.
Many of our dedicated and knowledgeable 185-person sales force
are former military personnel who understand the changing nature
of 21st century security threats and the mission requirements of
our customers. The members of our sales force utilize their
first-hand understanding of our customers needs and
requirements and the products we offer to help our customers
select the best available products and supply chain management
services for their needs. The members of our sales force then
draw on their training in and experience with the government
procurement process to execute these purchases through our
comprehensive portfolio of contractual procurement vehicles.
We seek to be a critical partner to each of our customers and
vendors. Our value proposition is driven by the combination of
three key factors:
|
|
|
|
|
Deep-Rooted Customer Relationships. Our
customers benefit from our knowledge of, and our ability to
provide access to, a wide variety of products and services,
which we aim to deliver on time and within budget. By utilizing
our logistics solutions and access to our broad portfolio of
contractual procurement vehicles, our customers may save time
and money, which generates repeat business and fosters deep
relationships with our customers.
|
|
|
|
Strategic Vendor Alliances. Our vendors are
able to leverage our experienced sales force, product knowledge,
customer relationships and access to contractual procurement
vehicles to drive demand for their products and reach a customer
base that may otherwise be difficult for them to access
independently.
|
|
|
|
Broad Portfolio of Contractual Procurement
Vehicles. Our contractual procurement vehicles
provide multiple channels through which our customers can
purchase, and our vendors can sell, any of the over 160,000
items we offer without the need for time-consuming individual
contracts or open-market bid
|
62
|
|
|
|
|
processes. Our contractual procurement vehicles give our vendors
access to customers they may not independently have and enable
the U.S. government to realize increased procurement
efficiencies.
|
We believe our value proposition has allowed us to drive the
growth in demand for the products and related services we offer
while building upon the strength of our market position, as
evidenced by the compound annual growth rate of our net sales,
net income and EBITDA from 2006 to 2010 of 61%, 84% and 80%,
respectively.
Our
Market Opportunity
We believe our addressable market is approximately
$100 billion, of which our current market share is
approximately 1%. Our primary customers include U.S. government
agencies whose funds come from, among other sources, the
Readiness & Support portion of the
Operation & Maintenance budget, which is allocated
from the larger Department of Defense base budget. According to
information contained in the Department of Defense Fiscal Year
2011 Budget Request and annual budget press releases from the
Department of Defense, the Operations & Maintenance
base budget and the Department of Defense base budget have grown
at approximately the same compound annual growth rate of 6% from
2005 to 2010. According to the Department of Defenses 2011
budget projections, from 2011 through 2015, the
Operations & Maintenance budgets share of the
total Department of Defense base budget is expected to increase,
with an expected compound annual growth rate of approximately
5%, compared to 3% for the Department of Defense base budget. We
believe the Operation & Maintenance budget is stable
and growing because it funds ongoing military readiness and
training and thus is not driven by active and ongoing conflicts.
The need for our capabilities and services developed over the
last decade, when rapid changes in technology, equipment and
security threats drove the U.S. government to shift away from
standardized products and equipment built to government
specifications, towards readily available, commercial
off-the-shelf
products and equipment. Over the same period, the Department of
Defense has enabled increased procurement authority at the unit
level by providing increased access to flexible contractual
procurement vehicles. The increasing variety of missions, both
of conventional forces as well as special operations forces, has
encouraged commanders to utilize their discretionary budgets to
acquire more specialized equipment.
Further, the consumable nature of the products our customers buy
from us drives reliable and consistent demand. Our customers
subject these products to steady wear and tear, necessitating
regular replacement. Constant technological innovations also
force new developments, rendering current products obsolete and
generating demand for new and advanced products.
Concurrently with the shift in approach to procurement, the
needs of the U.S. military and the nature of modern warfare have
also changed. The demands of recent engagements have shifted the
Department of Defenses focus away from developing
large-scale weapons platforms for use in conflicts with other
major world powers and towards equipping personnel to engage in
ground-based, irregular warfare against asymmetric threats. In
addition, the role of the U.S. military is expanding beyond the
scope of its traditional national defense function. We believe
that the following trends will increase the demand for our
tactical and operational equipment and value-added supply chain
management services:
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Continuous Commitment to Operational Readiness and Troop
Modernization. To maintain a constant state of
operational readiness, the recently implemented Army Force
Generation model rotates units between three levels of
deployment readinesspreparation, eligible, and available.
The model ensures that approximately one-third of active-duty
units and one-sixth of reserve units are available to deploy
each year, regardless of whether the United States is at war. As
new units rotate into each level of readiness, they are issued
new and modernized equipment, creating a continuous need for
tactical and operational equipment.
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Broader Array of Mission
Objectives. Increasingly, the branches of the
U.S. military are called upon to undertake missions beyond the
scope of their traditional national defense functions, such as
assistance with disaster relief, border patrol and
nation-building. These non-traditional missions, especially
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disaster relief, demand sustained operational readiness because
they arise unexpectedly in response to natural or manmade
disasters, such as the earthquake in Haiti in January 2010 or
the recent earthquake and tsunami in Japan. Each of these added
functions requires the use of new and different tactical and
operational equipment.
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Need for Tightly Integrated and Specialized
Equipment. The Department of Defense is focused
on ensuring that each soldier is properly equipped with
state-of-the
art equipment. To increase the effectiveness and safety of
soldiers, the Department of Defense has increased its average
spend-per-soldier
on equipment from approximately $2,000 per soldier during World
War II to approximately $19,000 during the Global War on Terror
(2001-2008)
(adjusted to 2009 dollars based on the consumer price index).
This trend is expected to continue, as the Department of Defense
projects that the amount spent on equipment per soldier will
increase substantially in the future.
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Need for Increased Manpower to Counter Asymmetrical
Threats. The threat of simultaneous, irregular
conflicts requires significant numbers of trained and properly
equipped troops ready to deploy on short notice. To counter
these threats the U.S. Army and Special Forces have grown
their troop levels since 2005. As of September 2009, the
estimated total U.S. military troop levels increased to more
than two million people, of which approximately 10% were
deployed on active missions. We expect that growth to continue
upon approval of the 2011 budget, as evidenced by the 2011
proposed budget.
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Increasing Importance of Expeditionary Warfare
Units. The structure of the U.S. Army was
reorganized in 2004 from divisions into expeditionary warfare
units, called Brigade Combat Teams, to increase its
effectiveness. The U.S. Navy and the U.S. Air Force
also currently have similar expeditionary warfare units.
Expeditionary warfare units are mobile and self-sufficient,
operate away from established bases and are able to deploy
quickly. Maintaining an expeditionary warfare units high
level of mobility, operational readiness, and
self-sustainability requires a significant amount of tactical
and operational equipment that is frequently updated and
replaced.
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As these trends continue, we believe the market opportunity for
the products and related services we offer will continue to
expand. As the U.S. military continues to decentralize its
approach to procurement and increase the amount of the overall
defense budget allocated to tactical and operational equipment
for each soldier, we believe we can continue to expand our sales
over time, notwithstanding fluctuations in military spending.
Our
Competitive Strengths
We believe we have an attractive and proven business model that
allows us to connect a fragmented base of vendors and a
decentralized group of over 4,000 active customers (in the past
24 months), effectively providing our customers an
outsourced solution for their equipment needs. We have leveraged
the over 160,000 items we offer, our value-added supply chain
management services, our experienced sales force and our broad
portfolio of contractual procurement vehicles to drive our
recent growth, as evidenced by the compound annual growth rate
in our net sales of 61% from 2006 to 2010.
The following competitive strengths differentiate us from our
competitors and are critical to our continued success:
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Deep-Rooted Customer Relationships. We aim to
be a one-stop-shop for our customers tactical and
operational equipment needs by streamlining the procurement
process and providing value-added supply chain management
services. As a result of our knowledge, experience, value-added
services and excellent customer service, many of our customers
have come to depend on us to manage the procurement process for
them and to introduce them to new products and provide insight
as to those products best-suited to their particular needs. We
believe that our ability to establish, sustain and grow these
relationships would be difficult and expensive for any one
competitor to replicate.
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Value-Added Supply Chain Solutions. We are
able to effectively manage and coordinate a fragmented supply
chain to provide complete and timely delivery of products to our
customers at attractive prices. We tailor our services to
provide efficient and compelling solutions to meet our
customers needs and requirements. We have enhanced our
customer relationships by reducing complexities and increasing
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efficiencies in their procurement processes, which we believe
makes us a critical partner to our customers.
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Scalable Infrastructure. In recent years, we
have made key strategic investments in both personnel and
infrastructure to build a scalable business that can support
continued rapid growth. Our recent investment in scalable
infrastructure and operations, such as Oracle Enterprise
Resource Planning, gives us the capacity to build upon our past
performance with minimal future capital expenditures. Our
Special Operational Logistics & Visibility Solution,
or SOLVS, system provides our customers with
advanced supply chain technology, ensuring that we are able to
meet their needs in the best manner available. As a result of
our asset-light operating model, we generate significant free
cash flow and have relatively low capital expenditures and
working capital requirements. For example, for the year ended
December 31, 2010, approximately 51% of our net sales were
from orders shipped directly from the vendor.
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Extensive Vendor Relationships and Preferred Vendor
Program. We are the primary avenue into the
government sales channel for many of our vendors as a result of
our familiarity with the complexities of government procurement
and our access to customers in U.S. government agencies. As a
result, new vendors seek to establish relationships with us,
allowing us to continue to expand the breadth of products we
offer, which is critical to our customer base. In response to
this dynamic, we developed a preferred vendor program to further
enhance certain vendor relationships, while allowing us to
benefit from preferential terms and support. Our vendors seek to
grow the amount of business they do with us because of our
ability to increase their sales, provide them with insightful
customer product feedback and facilitate new product
introductions, and we are able to competitively bid on
opportunities as a result of the preferential terms and support
we receive from our preferred vendors.
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Broad Portfolio of Contractual Procurement
Vehicles. Our access to a broad portfolio of
contractual procurement vehicles makes the sale and procurement
process easier and faster for both our customers and our
vendors. We use the term contractual procurement
vehicle to refer to a type of government contract that is
awarded to a limited number of suppliers, authorizing those
suppliers to compete for specific purchase orders from different
government entities. Contractual procurement vehicles do not
commit the government to buy a set amount of goods or services,
but instead, allow the supplier to sell certain goods or
services to the government under the particular contract it
holds. Because we have already qualified for a number of
contracts, we are able to quickly and easily bring incremental
supply online by utilizing multiple vendors to meet demand. Our
extensive contract portfolio facilitates the procurement
process, providing a strong incentive for customers and vendors
to utilize us as one of their leading partners. Obtaining the
type of contractual procurement vehicles used by our customers
requires a demonstrated track record of past performance, which
makes our contract portfolio difficult to replicate.
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Experienced Sales Force. A substantial portion
of our sales personnel has extensive military experience. Our
sales representatives experience and understanding of our
customers is enhanced by their deep product knowledge, expertise
with contractual procurement vehicles and broad access to
products and vendors. Their comprehensive capabilities,
including the valuable feedback regarding products they are able
to provide to both customers and vendors, and their ability to
identify suitable contractual procurement vehicles, enhance our
key relationships while ensuring superior customer service. The
ability of our sales force to recommend and provide the
appropriate product while identifying and offering suitable
contractual procurement vehicles is difficult and costly to
replicate.
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Dedicated and Capable Management Team. With
substantial operational experience and functional knowledge, our
senior management team has successfully led the formation and
development of our business model. Our senior leadership has
been together since 2004 and overseen significant growth in our
net sales and EBITDA. In addition, our Chief Executive Officer
and Chief Operating Officer are among our largest stockholders,
beneficially owning common stock representing an aggregate of
75% of our outstanding equity as of March 31, 2011
and % of our outstanding equity
giving pro forma effect to this offering, respectively.
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Our
Growth Strategy
We strive to meet the constantly changing needs of our customers
by providing them with access to the commercial
off-the-shelf
products best suited to their specific needs and combining them
with our innovative, value-added supply chain management
services. Key elements of our growth strategy include:
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Further Penetrate our Primary Customer
Base. Our primary customer base is fragmented and
characterized by a decentralized procurement process. Our sales
force currently calls on only a small percentage of the
purchasing decision makers at both the program and unit levels
of the U.S. military. We expect to increase sales to our
existing customers and add new customers within our primary
customer base using the following key growth strategies:
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Continue to Expand our Sales Force. Our
ability to penetrate our existing customer base is directly
correlated to the size of our sales force. Once a member of our
sales force calls upon a particular military unit, we typically
have won business from that battalion or unit. To further
increase our level of penetration, we intend to expand the size
of our sales force. In the first three months of 2011, we
increased the overall size of our sales force by
19 representatives, representing a 11% increase from 2010
fiscal year end. With additional sales representatives, we
believe we can replicate our prior unit-level successes in those
currently underserved units.
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Expand our Product Offerings. We continue to
expand the breadth of our product offerings as we strive to meet
the constantly changing needs of our customers. For example, we
recently introduced medical products; tools; maintenance, repair
and operations products; and expeditionary equipment, such as
tents. Our sales force provides our customers with valuable
product knowledge while continuously evaluating our
customers needs in order to design solutions to meet those
needs and drive demand for the products and related services we
offer. We then work directly with our vendor partners to
increase the breadth and quality of our available product lines
specifically based on our customers needs. This approach
is designed to ensure that we offer the latest and best
available commercial
off-the-shelf
products. We believe that our business model provides us the
opportunity to easily expand our product offerings to include
additional operational items needed by our existing customers.
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Increase Demand for our Value-Added Supply Chain
Solutions. We intend to further develop and drive
demand for our customer-centric, value-added supply chain
solutions and to focus on expanding our kitting and assembly and
large integration programs. Our solutions, such as integrated
kits containing all of the necessary equipment for a particular
mission, increase the readiness and effectiveness of our
customers. We believe the significant operational benefits that
our customers realize through these solutions will increase
demand for the products and related services we offer.
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Increase the Number, Size and Scope of our Contractual
Procurement Vehicles. In order to enhance the
flexibility provided by our existing portfolio of contractual
procurement vehicles, we will continue to compete strategically
for new contractual procurement vehicles. We are actively
pursuing a number of opportunities to obtain contract vehicles
that are currently in the development stage, which we believe
will supplement and enhance our existing portfolio of
contractual procurement vehicles and increase the breadth of our
product offerings. We also intend to continue to pursue
large-scale system integration programs, including
custom-sourcing solutions similar to our GEN III and FREE
programs.
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Add New Categories of Customers Outside of our Traditional
Markets. We have achieved a leading position
within our customer base by prioritizing customer service and
striving to deliver the best available value to every customer.
We believe that we are well positioned to forge new
relationships by targeting potential customers that we do not
currently serve or who are not yet material to our operations,
including the Department of Homeland Security and other federal
agencies. Furthermore, we believe there are opportunities to
provide the products and related services we offer in the
U.S.-assisted
equipping of allied foreign militaries and security services.
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Pursue Selected Acquisitions. We may
supplement our organic growth by pursuing selected acquisitions
aimed at augmenting our contractual procurement vehicle
portfolio, broadening and diversifying our customer base,
expanding our product offerings and vendor network or increasing
our geographic presence.
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Our
Corporate Structure
We are a holding company and all of our operations are conducted
through our subsidiaries. The following chart summarizes our
corporate structure:
We also do business with certain related parties and other
affiliated companies. We analyzed each of these entities to
determine whether they are a VIE and, if so, whether they should
be consolidated in our financial statements. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsRecent Accounting
Developments, Principal and Selling
Stockholders, Certain Relationships and Related
Party Transactions and notes 10 and 11 of the
accompanying notes to our
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audited consolidated financial statements included elsewhere in
this prospectus. The following chart sets forth the ownership
structure of our variable interest entities:
Supply
Chain Management Services
We drive supply chain efficiencies by consistently and
critically monitoring the procurement process for areas of
improvement. The result is a lower cost solution with greater
flexibility and faster delivery times. We ship our products
primarily through third parties, with approximately 51% of our
net sales for the year ended December 31, 2010 from orders
shipped directly from the vendor. As a result of our supply
chain expertise, we are often selected to serve as the lead
integrator on large integration programs, with full
decision-making authority over the entire supply chain,
including selection and management of the vendors that provide
each component product. Our logistics solutions address every
aspect of the supply chain, including sourcing, distribution,
shipment tracking and on-time delivery.
The order flow chart below illustrates the operational
efficiency we provide through our supply chain management
services:
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We have developed a comprehensive suite of value-added supply
chain management services that streamline our customers
procurement processes. We integrate these services into the
products we distribute to provide efficient and compelling
solutions tailored to the unique needs of our customers.
Kitting
and assembly
We leverage the extensive knowledge of our sales force and our
broad product offerings to design customized, field-ready kits
comprised of multiple, hand-selected products that are best
suited for the specific operations of our end-users. This
process, which we refer to as kitting, simplifies the
procurement process by allowing our customers to source many
products simultaneously from us, rather than from numerous
separate manufacturers using multiple individual purchase
orders. We have an experienced team of kitting and assembly
experts that ship kits quickly upon receipt of the component
parts, which results in minimal inventory balances. The value
proposition of our kitting and assembly solution has fostered
strong demand from our customers.
An example of one of our kits is the Escalation of Force Kit,
which we developed in partnership with the Rapid Equipping Force
of the U.S. Army. The Escalation of Force Kit consists of items,
such as a voice response translator and portable speed bumps,
that are utilized at vehicle checkpoints at home and abroad.
Custom
sourcing solutions
In conjunction with our preferred vendors, we manage the process
to produce textile-based products, including apparel, load
bearing systems and sleep systems, such as sleeping bags, liners
and inflatable mattresses. These customized solutions allow us
to meet customer specifications in order to improve existing
products and develop new products that are otherwise
unavailable. Our services include prototype design and sourcing
of raw materials, including yarns and fabrics, and we partner
with our vendors to assemble the pieces into finished products.
We manage the entire design and third-party manufacturing
process to produce high quality textile-based products
efficiently, resulting in improved margins and product lead time
for our customers.
Training
and product education
The equipment we sell is often technically advanced and requires
significant training, testing and evaluation to ensure its
effectiveness and safe application. We routinely evaluate our
vendors training programs and then arrange personalized
training sessions between our customers and those vendors whose
training approach we find most effective. We also coordinate
personalized product education sessions, whereby a customer can
learn about a particular product from a vendor prior to
purchase. These training and information sessions help to reduce
the
man-hours
and expense required for equipment selection. We also produce
our own training aids, such as videos and visual user guides,
that assist our customers with the proper use and maximum
effectiveness of the equipment they purchase.
Product
research and development
Our subject matter experts and research and development
personnel routinely test the suitability of new products for our
customers needs and mission requirements. We are able to
provide product improvement suggestions to our vendors based on
the results of these tests and based on feedback from customers.
Both our customers and our vendors seek our expertise and advice
in determining equipment requirements and new product
recommendations.
Quality
assurance and quality management system
The quality of the products we deliver is critical to the safety
and effectiveness of our end users and the success of our
customers. Our quality assurance team is dedicated to performing
ongoing quality control auditing and vendor evaluation. We
continually solicit feedback from our customers regarding the
products and related services we offer and strive to find ways
to ensure that they receive the highest quality commercial
off-the-shelf
products available. We measure the performance of our vendors
using a Supplier Performance Report Card, which provides us with
a quantitative and consistent process to measure vendor
performance. We regularly update our vendors on their
performance and suggest improvements as appropriate. We became
ISO-9001:2008 registered in June 2010. ISO 9001:2008 is an
internationally recognized quality management system preferred
by the U.S. government that focuses on assuring that an
organization will meet
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and exceed its customers needs. Besides conforming to
U.S. government preferences, we believe the quality
standards are procedures we implement to maintain our ISO
registration give us a competitive advantage, improve our
customer service, streamline operations and lower costs.
Web-based
supply chain management solution
As a supplement to our extensive Oracle Enterprise Resource
Planning software, we have developed our SOLVS software. SOLVS
is a secure, web-based logistics solution that enables our
customers to track equipment inventory, including acquisition
dates, costs and quantities, as well as monitor the distribution
process at both the individual soldier and unit level. SOLVS
allows the customer to design, customize and manage the
acquisition and distribution process to their specific needs. By
providing visibility into inventory levels and the supply chain
process (including replacement cycles), our customers are able
to efficiently forecast and fund their tactical and operational
equipment requirements.
Products
We offer our customers access to over 160,000 product
stock-keeping units, or SKUs, covering a broad
spectrum of tactical and operational equipment. The products we
offer are commercial
off-the-shelf,
branded products that we often obtain directly from the
manufacturer. Representative categories of products we offer
include apparel, expeditionary equipment, optical equipment,
communications equipment, emergency medical supplies, lighting,
eyewear and other items from vendors such as Camelbak, FLIR,
Hunter Defense Technologies, L-3 Communications, Oakley and
SureFire. Our key product categories for the year ended
December 31, 2010 are presented below:
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Key Product Categories:
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Representative Products:
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Apparel
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Clothing systems, inner and outer layers, uniforms, headwear,
gloves, belts and vests
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Expeditionary Equipment
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Shelters, heating and cooling systems, generators, expeditionary
tents and sleeping bags
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Optical Equipment
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Binoculars and rangefinders, designators and illuminators, night
and thermal vision and sights and scopes
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Lighting
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Headlamps, flashlights, weapon lights, tactical beacons, safety
lights and shelter lights
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Eyewear
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Ballistic goggles, eye shields, sunglasses, safety glasses and
cleaning accessories
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The products we distribute tend to be consumable and require
regular replacement. They are generally utilized in rugged
environments, subjecting them to additional wear and tear, and
they often quickly become obsolete due to innovations in
technology and changing mission needs. In order to meet the
ongoing need for sustainment and replacement of the types of
products we offer, we routinely test the suitability of new
products for our customers needs and mission requirements.
Customers
We consider each party that has the ability to choose between
different products and initiates a purchase requisition within
the Department of Defense, the Department of Homeland Security
and other domestic and foreign government agencies to be a
separate customer. Most of our over 4,000 active customers (in
the past 24 months) are representatives of the Department
of Defense purchasing goods and services for use by military
personnel in their training, peacetime operations and missions
at home and abroad. We also serve the Department of Homeland
Security and other domestic and foreign government agencies. The
purchasing authority within our customer base is diffuse and
decentralized. In the case of the Spec Ops TLS contract and the
FES TLS contract, the authority to award actual purchase orders
always resides with DLATS, regardless of who the customer is. We
also sell products to private corporations, most of whom
are defense contractors. For the year ended December 31,
2010, our three largest customers were the U.S. Armys
Natick Soldier Systems, the United States Army Research,
Development and Engineering Command, and DLATS, which generated
approximately 24%, 8% and 7% of our sales, respectively. For the
three months ended March 31, 2011, our three largest
customers were the U.S. Armys Natick Soldier Systems,
the United States Army
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Research, Development and Engineering Command, and DLATS, which
generated approximately 24%, 9% and 5% of our sales,
respectively.
In addition to being our third largest customer, DLATS is the
agency that awarded us the Spec Ops TLS contract and the FES TLS
contract. Many of our customers other than DLATS use the Spec
Ops TLS contract
and/or the
FES TLS contract as the contractual procurement vehicle that
results in sales recorded by us. For each of the year ended
December 31, 2010 and the three months ended March 31,
2011, sales to DLATS as a customer combined with sales to other
customers which were authorized by DLATS under the Spec Ops TLS
contract or the FES TLS contract represent 48% of our sales.
We believe our commitment to achieving superior customer service
and the military experience of our sales force enables us to
serve as a meaningful and value-added partner to our customers
through all phases of the product acquisition cycle. As a
trusted partner to our customers, we serve an integral role in
their product selection process and receive insights into future
program requirements. This provides us the opportunity to relay
valuable feedback to our vendors.
Vendors
We have extensive relationships with a fragmented base of
approximately 1,400 active vendors (in the past 24 months)
of tactical and operational equipment. Our deep customer
relationships and broad portfolio of contracts allow us to
increase sales volumes for smaller vendors and typically enable
us to streamline operations and drive demand for larger vendors.
Through our vendors, we offer a wide range of over 160,000 SKUs
to our customers, including protective eyewear from ESS/Oakley,
laser scopes from Insight Technology, hydration systems from
Camelbak, tools from Danaher, knives and rescue hooks from
Benchmade and nylon equipment from London Bridge Trading
Company. Given the fragmented nature of our vendor base, no one
vendor represented more than 11% of our net sales in fiscal 2010
and our top ten vendors accounted for approximately 52% of our
net sales in that year. Our top ten vendors typically change
from year to year as the specific product needs of our customers
change. We are typically not contractually required to supply
specific branded products to our customers, which decreases our
reliance on any particular vendor. We are able to select
secondary and tertiary vendors for many of the product
categories we provide, allowing us to quickly and easily bring
incremental supply online or replace the primary vendor if
necessary.
For many of our vendors, we are their primary avenue into the
government sales channel. We are an integral component of many
of our vendors corporate strategies because they can
leverage our contractual procurement vehicles, experienced sales
force, extensive customer relationships, marketing programs and
product knowledge to reach customers that would otherwise be
difficult for them to access independently. As the government
continues to transition its procurement process, favoring the
use of commercial
off-the-shelf
products, our vendors benefit from being a part of our one-stop
supply chain solution.
To enhance these extensive relationships, we have developed a
preferred vendor program with approximately 300 vendors as of
March 31, 2011, up from 172 as of December 31, 2008.
Before a company can qualify as a preferred vendor, we verify
the quality of its products and establish stringent on-time
delivery standards. We incentivize our sales force to sell our
preferred vendors products and, in exchange, we receive
preferential terms and support. Our preferred vendors benefit by
partnering with us on joint sales calls and in the production of
tradeshows. In 2010, approximately 90% of our net sales came
from products sourced through our preferred vendor program.
Sales and
Marketing
Our dedicated and knowledgeable 185-person sales force, many of
whom are former military personnel, understands the changing
nature of 21st century security threats and the corresponding
impact on our customers. Our sales force possesses knowledge of
and experience with the government procurement process, which
enables them to recommend to our customers both those products
that are best suited to their needs and those procurement
vehicles that will best facilitate their purchases. By calling
on individual units, members of our multi-channel sales force
are able to continue serving their former colleagues in a
critical new capacity. This drives both program sales, which
facilitate
multi-unit
purchases, and unit sales, which are
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individual end-user or unit-level customer purchases. Under many
of our contracts, we have to compete for specific purchase
orders. In order to create demand and generate purchase orders,
our sales force calls on and educates our customers about the
specific products we offer.
Our ability to penetrate our existing customer base is directly
correlated to the size of our sales force. In the military units
for whom we do have a sales representative, we have often been
able to win substantial business. In 2010, we increased the
overall size of our sales force by 48 sales
representatives, in order to further penetrate our customer
base. Our training program provides hands-on training on the
contractual procurement vehicles to which we have access and the
tactical and operational equipment that we offer.
Our commitment to achieving superior customer service is one of
our core competencies. From the highest level of management to
our sales support personnel, we maintain a presence with our
customers through regular in-person visits to ensure that their
needs are fulfilled. Comprehensive customer support is provided
24 hours per day, seven days per week.
Our marketing organization creates a direct link between our
vendors and our customers by facilitating the flow of
information between these two groups. We utilize a variety of
tools to facilitate this information flow, including Warrior
Expo, tradeshows and promotional materials such as catalogs,
brochures and advertisements in major military publications.
Warrior Expo
Warrior Expo is a private tradeshow that we host in Virginia
Beach and which is timed to capture the spending increase ahead
of the U.S. governments September 30 fiscal year-end. We
believe Warrior Expo is one of the most recognized tradeshows in
the industry focusing on tactical and operational equipment for
U.S. government agencies and we have structured it as a high
profile, invitation-only event that is free for military,
federal, state and local agency customers, as well as for our
preferred vendors. It allows customers from all major bases and
territories to preview the latest tactical and operational
equipment from our preferred vendors. In 2010, more than
1,400 customers and 190 vendors attended Warrior Expo.
This has become one of our most successful marketing tools, with
the event expanding to offer breakout sessions in which we and
vendor experts educate customers on procurement, inventory
management, training, and
state-of-the-art
product technology and innovation. In 2010, we started hosting
an annual West Coast-based Warrior Expo in San Diego in the
spring.
Regional Tradeshows
We host regional tradeshows at customer sites to strengthen our
customer and vendor relationships. These trade shows allow
customers to evaluate products at their own sites, while
providing vendors with customer access they would be unable to
achieve independently. They also allow us to be involved with
the initial determination of our customers future
equipment needs.
Industry Tradeshows
We also attend other industry tradeshows, during which we
showcase the latest equipment and technology from our vendors.
We maintained a highly visible presence at 64 industry
tradeshows in 2010. Representative shows include the Association
of the U.S. Army show, the Shooting, Hunting, Outdoor Tradeshow,
the General Services Administration Expo and the Special
Operations Forces Industry Conference show.
Catalogs
We distribute catalogs of our products to showcase the large
selection of tactical and operational equipment we offer,
reinforcing our position as a single-source provider for our
customers tactical and operational equipment needs. We
typically utilize advertisements within our catalogs to co-brand
a preferred vendors product, particularly when we believe
there is market demand for such products. Our catalogs are an
effective marketing tool within our customer base and help to
foster high brand awareness for us and our vendors. While also
making our catalogs available online, in 2010, we distributed
approximately 238,500 catalogs to existing and new customers.
72
Competition
Our competitors include original equipment manufacturers who
sell directly to our customers and specialty distributors who
operate on a much smaller scale. Depending on a particular
contracts requirements, sometimes we compete with vendors
with whom we have partnered in pursuit of other opportunities.
To a certain extent, we believe the U.S. government itself can
be viewed as our largest competitor, because it internally
sources and provides the tactical and operational equipment and
logistics solutions to those units within our customer base that
we have not penetrated. However, we have become a critical
partner to large purchasing organizations within the government,
such as DLA, by enabling them to outsource a significant portion
of their procurement supply chain to us. We believe that by
managing the purchasing, warehousing and distribution elements
of the procurement supply chain for these purchasing
organizations, we are an integral part of the U.S.
governments procurement process.
Customers using our various contractual procurement vehicles can
also procure equipment through the traditional government
procurement process. Competition is based on the price, scope
and availability of product offerings, the depth, breadth and
reliability of logistics and distribution capabilities, the
quality and suitability of products offered and the ease of
procurement.
Contractual
Procurement Vehicles
Our broad and dispersed customer base procures products and
services on behalf of individual military personnel. If all
renewal options are exercised, as of March 31, 2011, we
have access to approximately $10.1 billion in aggregate
available contract capacity, of which approximately
$400 million expires prior to 2012. In addition, if all
renewal options are exercised, three of our contractual
procurement vehicles have unlimited contract capacity through
2019.
We primarily sell the products and related services we offer
from vendors or distributors to the U.S. government using three
different types of IDIQ contracts.
Our IDIQ contract vehicles permit our customers in the U.S.
military and other federal agencies to make purchases from us on
an as-needed basis from time to time, on pre-established terms
and conditions. Our sales force generates demand for products
and services using IDIQ contracts by providing our customers
access to the most appropriate contract. Under these IDIQ
contracts, products and services are sold at fixed prices that
are established at the time a customer order is made (or at the
time the contract is entered into under some of our single-award
program sales contracts, as described below). There are
generally three different types of IDIQ contracts:
multiple-award contracts, single-award contracts and federal
supply schedules. We are able to drive demand for the products
we sell through all types of IDIQ contracts.
Multiple-award IDIQ contracts are awarded to a limited number of
pre-approved suppliers and have ceiling limitations on the total
amount of government funds that can be used through the
procurement vehicle. The award of particular purchase orders
under those contracts require a second competitive bidding
process among that limited number of suppliers (which typically
occurs within one day to a week upon submission of a bid). Our
Spec Ops TLS contract is an example of a multiple-award IDIQ
contract.
Single-award IDIQ contracts function very much like
multiple-award IDIQ contracts. However, they are awarded to a
sole-supplier and often cover a much narrower breadth of
products. The particular agency and customers who wish to make
purchases under a single-award IDIQ contract commit to a
pre-approved sole supplier for the equipment and services to be
provided through that contract. Our single-award IDIQ contract
vehicles, such as our GEN III contract, are often entered into
with a program office within a particular branch of the U.S.
military to provide a standardized suite of products that are
intended for a broad cross-section of forces in that particular
military branch. Through these single-award IDIQ contracts, we
commit to fulfill any orders received for goods and services
identified in those contracts over a period of time, up to
pre-determined volume limitations at fixed-prices established at
the time the contract is awarded.
Our federal supply schedules, such as our GSA supply schedules,
provide all federal government agencies access to a vast
selection of commercial
off-the-shelf
products, allowing the agencies to purchase items identified on
the schedules from a list of pre-approved suppliers at
pre-determined maximum prices. The products and their prices are
listed on the schedules, and may be updated at least three times
per year, on
73
or after the first 12 months of the contract period. Most
GSA supply schedules have an initial five-year period with three
potential five-year renewal options and, similar to other IDIQ
contracts, the customer is not committed to purchase any set
volume. Unlike multiple award IDIQ contracts, federal supply
schedules do not typically require a second round of bidding to
secure a purchase order and do not have ceiling limitations on
the total amount of government funds that can be spent through
the procurement vehicle. Under our federal supply schedules, we
may be the only pre-approved supplier for a particular product,
while for other products there are multiple pre-approved
suppliers, including, in some cases, our vendors.
In addition, we utilize commercial contracts with certain
defense contractors. While these are not contractual procurement
vehicles in our portfolio, they are another channel through
which we effect sales of the products and related services we
offer.
Employees
As of March 31, 2011, we had approximately
440 employees. Our employee base reflects alumni from all
branches of the military, including enlisted personnel, officers
and active reservists. Our employees have operational experience
with the U.S. Navy SEALS, U.S. Army Special Forces,
U.S. Marine Corps, U.S. Air Force, U.S. Coast Guard and
U.S. Marshals. Our employees are not represented by labor
unions. We consider our employee relations to be good.
Environmental
Our operations are subject to federal, state and local health,
safety and environmental laws and regulations, which, among
other matters, regulate the discharge of pollutants into the
environment and the use, handling, generation, emission,
release, discharge, transportation, clean up, treatment, storage
and disposal of, and exposure to, materials, substances and
wastes. Management is not aware of any prior or ongoing
environmental issues that are likely to result in a material
cost or liability to the company.
Backlog
At March 31, 2011, our backlog was $282.8 million. At
March 31, 2010, our backlog was $465.4 million. We
believe this decrease from March 2010 to March 2011 was
primarily the result of the delay in Congress passing a 2011
Department of Defense budget. See Our Market
Opportunity. We expect that substantially all of our
March 31, 2011 backlog will be recognized as revenue prior
to December 31, 2011.
We define backlog as funded orders we have received that we have
not yet delivered. Funded orders are those for which funding
currently is appropriated and allocated to the contract by the
purchasing agency or unit or otherwise authorized for payment by
the customer upon receipt of specified products. The receipt and
timing of future net sales is subject to various contingencies,
many of which are beyond our control. The actual recognition of
revenue on sales included in backlog may never occur or may
change because a sale could be canceled, a contract could be
modified or canceled or products ordered may no longer be
available. In the event of a government contract cancellation,
we receive actual expenses incurred, plus approved profit. We
believe that
period-to-period
comparisons of backlog are not necessarily indicative of future
net sales that we may receive.
Properties
Our headquarters are located in Virginia Beach, Virginia, where
we own approximately 82,250 square feet of office space. We
lease three commercial facilities and own two commercial
facilities used in connection with the various services rendered
to our customers. Upon expiration of our leases, we do not
anticipate any difficulty in obtaining renewals or alternative
space. See Certain Relationships and Related Party
Transactions.
We believe that substantially all of our property and equipment
are in good condition, subject to normal wear and tear, and that
our facilities have sufficient capacity to meet the current and
projected needs of our business.
74
Our headquarters and material facilities as of March 31,
2011 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Use
|
|
Square Feet
|
|
Owned/Leased
|
|
Virginia Beach, VA
|
|
Corporate Headquarters
|
|
|
82,250
|
|
|
|
Owned
|
(1)
|
Virginia Beach, VA
|
|
Main Warehouse
|
|
|
34,596
|
|
|
|
Leased
|
|
Virginia Beach, VA
|
|
Kitting Facility
|
|
|
80,000
|
|
|
|
Owned
|
(2)
|
San Diego, CA
|
|
West Coast Warehouse
|
|
|
24,000
|
|
|
|
Leased
|
|
Pennsauken, NJ
|
|
Office and Warehouse
|
|
|
40,000
|
|
|
|
Leased
|
|
|
|
|
(1) |
|
Our corporate headquarters are owned by Tactical Office, LLC, a
related entity under common ownership that is consolidated with
ADS in our historical financial statements. See Certain
Relationships and Related Party Transactions. |
(2) |
|
Our kitting facility is owned by Tactical Warehouse, LLC, a
related entity under common ownership that is consolidated with
ADS in our historical financial statements. See Certain
Relationships and Related Party Transactions. |
Governmental
Regulations
We are heavily regulated in most of the fields in which we
operate. We provide services and products to numerous U.S.
government agencies and entities, including all of the branches
of the U.S. military and the Department of Homeland Security.
When working with these and other U.S. government agencies and
entities, we must comply with laws and regulations relating to
the formation, administration and performance of U.S. government
contracts. Among other things, these laws and regulations:
|
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|
|
|
mandate compliance with socio-economic rules, the distribution
of costs to contracts and non-reimbursement of certain costs
such as lobbying expenses;
|
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|
require reviews by the Defense Contract Audit Agency and other
U.S. government agencies of compliance with government
accounting standards and management of internal control systems;
|
|
|
|
restrict the use and dissemination of information classified for
national security purposes and the exportation of certain
products and technical data;
|
|
|
|
require us not to compete for or to divest of work if an
organizational conflict of interest, as defined by these laws
and regulations, related to such work exists
and/or
cannot be appropriately mitigated; and
|
|
|
|
may require us to disclose contract or legal compliance issues
to the contracting officer
and/or
agency inspector general.
|
The U.S. government may revise its procurement practices or
adopt new contract rules and regulations at any time. In order
to help ensure compliance with these complex laws and
regulations, all of our employees are required to complete
ethics training and other compliance training relevant to their
position.
U.S. government contracts are, by their terms, subject to
termination by the U.S. government either for its convenience or
default by the contractor. Our U.S. government contracts are
also conditioned upon Department of Defense approval of the
amount of necessary spending. Congress usually appropriates
funds to procuring agencies, which then allocate funds for a
given program or contract on a September 30 fiscal year basis,
even though contract periods of performance may extend over many
years.
Internationally, we are subject to special U.S. government laws
and regulations, local government regulations and procurement
policies and practices (including regulations relating to
bribery of foreign officials, import-export control,
investments, exchange controls and repatriation of earnings) and
varying currency, political and economic risks.
We are subject to the applicable export control laws and
regulations of the United States and other countries. U.S. laws
and regulations that apply to us include: the Arms Export
Control Act and ITAR promulgated thereunder; EAR; and the trade
sanctions laws and regulations administered by OFAC.
As part of our ongoing export controls compliance program, we
retained an outside consulting firm, FD Associates, Inc., in
April 2009 to conduct an audit of our export compliance
practices and procedures. In response to the preliminary audit
results, which identified several potential violations of the
ITAR, we retained FD Associates to expand the scope of the audit
and to assist us in implementing FD Associates
75
recommended enhancements to our export controls compliance
program, including conducting training of relevant company
personnel. We also submitted an initial voluntary
self-disclosure of past ITAR violations to the U.S. State
Departments Directorate of Defense Trade Controls in
accordance with 22 C.F.R. § 127.12(c).
Specifically, on October 6, 2009, we filed a voluntary
self-disclosure of past ITAR violations with the Enforcement
Division of the Directorate of Defense Trade Controls, or DDTC.
This voluntary self-disclosure related to overseas shipments of
3,256 line items of ITAR-controlled products without
authorization by the Department of State, as required by the
ITAR. The shipments involved the export of ITAR-controlled
equipment and did not include the transfer of any technical data
or defense services. We identified the reason for the
self-disclosed violations and our inadvertent failure to comply
with ITAR as a lack of product classification and a mistaken
belief that the export of ITAR-controlled products shipments to
and in support of U.S. government operations overseas did not
require an export license. We have since implemented policies
and procedures designed to prevent future violations and ensure
future compliance with ITAR. On October 13, 2009, the Chief
of the Enforcement Division of the DDTC informed us that, while
it determined that violations under ITAR had occurred and that
the matter could be reopened in the future if circumstances
warranted, the case was closed and no further action would be
taken. In connection with some of the transactions listed in
this voluntary self-disclosure, on July 29, 2009, we
received a subpoena from the U.S. Customs Service requesting
information on five past exports in which we were listed as the
exporter-of-record.
We cooperated fully and provided all responsive documents to the
Customs Service.
On November 16, 2009, we filed a separate voluntary
self-disclosure
of past EAR violations with the Office of Export Enforcement,
U.S. Department of Commerce. This voluntary self-disclosure
related to overseas shipments of 36 line items of EAR-controlled
products without authorization by the Department of Commerce, as
required by the EAR. The shipments involved the export of
tactical and operational equipment and did not include the
transfer of any EAR-controlled technology. We identified the
reason for our failure to comply with the EAR as the lack of
product classification and erroneous failure to recognize the
application of the EAR to shipments of certain products in
support of the U.S. government operations overseas. We have
since implemented policies and procedures designed to prevent
future violations and ensure future compliance with the EAR. As
of the date hereof, we have not received a response from the
Department of Commerce relating to this voluntary
self-disclosure.
On November 30, 2010, we filed a voluntary
self-disclosure
with the Enforcement Division of the DDTC relating to two
incidents that may have required authorization under ITAR.
First, while we obtained an export license for the shipment of
certain defense articles to Unit 30401 of the U.S. European
Command in Germany, our freight forwarder inadvertently
delivered the items to a different unit of the U.S. European
Command in a different German location than was listed under the
terms of the license. Second, we recently determined that one of
our employees carried certain defense articles, which were his
personal property, to Afghanistan when he traveled there on
business for us. These items were exported without our knowledge
or authorization, and have been returned to the United States
and are in the possession of the ADS employee. On
December 9, 2010, the Chief of the Enforcement Division of
the DDTC informed us that, while it determined that violations
under ITAR had occurred, the case was closed and no further
action would be taken.
On April 28, 2011, we filed a voluntary self-disclosure
with the Enforcement Division of the DDTC relating to two
incidents that may have required authorization under ITAR.
First, while we obtained export licenses for two different
shipments of certain defense articles destined for Iraq and
Colombia, prior to shipment, the shipping labels for the package
destined for Iraq and the package destined for Colombia were
inadvertently switched. We confirmed that both
U.S. customers had possession of the erroneously delivered
packages and arranged for the items to be returned to the United
States. We subsequently obtained two replacement licenses from
DDTC to facilitate the export of the requested articles to the
correct U.S. government customers. The second incident
relates to the shipment of 50 pallets of defense articles from
the United States to Bagram, Afghanistan via Doha, Qatar,
pursuant to an export license. Each of the 50 pallets arrived in
Doha, but only 49 pallets were accounted for in Bagram. We
immediately placed a worldwide trace on the missing pallet and
worked diligently to locate it. The missing pallet has not been
located. We obtained a replacement license from DDTC to ship the
items contained in the missing pallet to
76
the U.S. government customer in Afghanistan. We have yet
to receive a final response from DDTC relating to this voluntary
self-disclosure.
Legal
Proceedings
From time to time we are also involved in legal proceedings
arising in the ordinary course of business. While the ultimate
liability that could result from these matters cannot be
determined presently, we believe that, in the aggregate, they
will not result in liabilities that are material to our
financial condition, results of operations, or cash flows. Our
contracts with the U.S. government are subject to various legal
and regulatory requirements and, from time to time, agencies of
the U.S. government may investigate the conduct of our
operations in accordance with these requirements. U.S.
government investigations of us, whether related to our federal
government contracts or conducted for other reasons, could
result in administrative, civil or criminal liabilities,
including repayments, fines or penalties being imposed upon us,
or could lead to suspension or debarment from future U.S.
government contracting.
77
MANAGEMENT
The following table provides information regarding our executive
officers and directors upon consummation of this offering. With
respect to our directors, each biography contains information
regarding the persons service as a director, business
experience, director positions held currently or in the past,
information regarding involvement in certain legal or
administrative proceedings, and the experience, qualifications,
attributes or skills that caused our board of directors to
determine that the person should serve as a director of the
company.
|
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Name
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Age
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Position(s)
|
|
|
|
|
|
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Luke Hillier
|
|
39
|
|
Chief Executive Officer, President, Director, Chairman of the
Board
|
|
|
|
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Daniel Clarkson
|
|
40
|
|
Chief Operating Officer, Vice President, Treasurer, Secretary,
Director
|
|
|
|
|
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Patricia Bohlen
|
|
51
|
|
Chief Financial Officer
|
|
|
|
|
|
Jason Wallace
|
|
40
|
|
Vice President of Sales and Marketing
|
|
|
|
|
|
Bruce Dressel
|
|
47
|
|
Vice President of Product and Equipment Solutions
|
|
|
|
|
|
Lieutenant General (Ret.) Robert T. Dail
|
|
58
|
|
Director*
|
|
|
|
|
|
Paul O. Hirschbiel
|
|
58
|
|
Director*
|
|
|
|
|
|
R. Scott LaRose
|
|
43
|
|
Director
|
|
|
|
|
|
William A. Roper, Jr.
|
|
65
|
|
Director
|
|
|
|
|
|
C. Arthur Brother Rutter III
|
|
47
|
|
Director*
|
|
|
|
* |
|
To be nominated and elected as directors prior to consummation
of this offering. |
Luke Hillier has served as Chairman of our board
of directors since 2000 and as our Chief Executive Officer since
2004. In 1999, Mr. Hillier co-founded Mythics, Inc., an
Oracle-based information system solutions provider, and
concurrently served as Chief Executive Officer of Mythics until
2004. Prior to founding Mythics, Mr. Hillier served as a
lead sales representative in the State and Local Government
sales division of the Oracle Corporation, where he was awarded
the Sales Representative of the Year for
Government-DMD.
Mr. Hillier started his career in the Outstanding Scholars
program in Acquisition Management for Naval Air Systems Command
in the U.S. Federal Government. Mr. Hilliers
extensive experience with the process of government contracting
and significant entrepreneurial and management experience has
proven invaluable to our board of directors.
Daniel Clarkson has served as our Chief Operating
Officer and as a member of our board of directors since 2002.
Prior to serving at ADS, Mr. Clarkson served as Regional
Manager for Sunbelt Rentals, an equipment rental company based
in South Carolina and owned by U.K.-based Ashtead Group, from
2000 to 2002. Mr. Clarkson started his career in sales and
as Profit Center Manager for Sunbelt Rentals. As a result of his
extensive experience and leadership with the company as we have
grown over the past nine years, Mr. Clarkson has
significant institutional knowledge with respect to our
management and operations.
Patricia Bohlen has served as our Chief Financial
Officer since 2004. She oversees the companys accounting,
treasury and strategic financial planning functions. Prior to
joining ADS, from 2002 to 2004, Mrs. Bohlen was the Chief
Financial Officer of PowerPact LLC and the Chief Financial
Officer of Fresh Picks, Inc. from 1996 to 2002. Mrs. Bohlen
worked for Cadmus Communications from 1993 to 1996, first as
Director of Accounting and then as Controller. Mrs. Bohlen
began her career as an auditor for KPMG LLP.
Jason Wallace has served as our Vice President of
Sales and Marketing since 2006 and is responsible for managing
our sales team. Prior to that, Mr. Wallace served as our
Vice President of Inside Sales and Vendor
78
Relations from 2004 until 2006. Prior to joining ADS, from 1996
to 2004, Mr. Wallace served as the Vice President of Sales
and Operations for Sunbelt Rentals, where he managed a large
sales force and managed more than twenty stores.
Bruce Dressel is our Vice President of Product and
Equipment Solutions. He has been with ADS since 2004. He
oversees our Vendor Relations Team and our Product Category
Management teams. Prior to joining ADS, Mr. Dressel served
as the President and CEO of Sunbelt Rentals, a multi-location
service business, from February 1997 until July 2003. Prior to
that, he served as the Vice President of Operation for Sunbelt
Rentals from February 1996 until January 1997. Mr. Dressel
spent the first 12 years of his business career building a
privately held service business that was acquired by Sunbelt
Rentals in 1996.
Lieutenant General (Ret.) Robert T. Dail has
served as a member of our board of directors since June 2011.
Since 2009, General Dail has served as President of Supreme
Group (USA) LLC, the U.S. subsidiary of Supreme Group,
Inc., a global logistics services company. General Dail retired
from over 33 years of active service in the U.S. Army
in November 2008. From August 2006 to November 2008, General
Dail served as the Director of the Defense Logistics Agency, a
provider of logistics, acquisition and technical services to the
Army, Navy, Air Force, Marine Corps and other federal agencies.
Prior to that, General Dail served as the Deputy Commander,
United States Transportation Command, Scott Air Force Base, IL,
a Unified Command responsible to the Secretary of Defense for
the nations global defense transportation system,
commanding components of the Army, Navy and Air Force. As a
result of these and other professional experiences, General Dail
has significant expertise in operational and strategic level
logistics that is the basis for his selection to serve as a
director on our board. General Dail holds an M.S.B.A. from
Boston University, an M.M.A.S. from the United States Army
Command and General Staff College and a B.S. in business
administration from the University of Richmond.
Paul O. Hirschbiel has served as a member of our
board of directors since June 2011. Since 2004,
Mr. Hirschbiel has served as a consultant to Envest
Ventures, LLC, a private equity investment firm which he
co-founded. Mr. Hirschbiel also currently serves as
President at Eden Capital LLC, a private investment company, a
position he has held since 1998. From 1984 to 1998, he served as
a general partner in a series of private equity funds focusing
on later stage and leverage buyout investments, most recently as
a co-founder and general partner of Cornerstone Equity Investors
IV, LP from 1996 to 1998. Mr. Hirschbiels
longstanding experience in originating, evaluating and managing
investments in private and public companies provides him with
expertise in the areas of corporate accounting and finance,
strategic planning and leadership of complex organizations.
Mr. Hirschbiel holds an M.B.A. and a B.A. in psychology
from the University of North Carolina.
Mr. Hirschbiels son is employed by the company as a
supplier account representative.
R. Scott LaRose has served as a member of our
board of directors since 2002. Mr. LaRose has also served
as Chairman of the Board of Agilex Technologies, Inc. since
2009. From 2004 to 2009, Mr. LaRose served as the President
and Chief Executive Officer of Mythics, Inc., which
Mr. LaRose co-founded with Mr. Hillier in 2000. Prior
to serving at Mythics, Mr. LaRose served as the regional
manager of the state and local government division at Oracle
Corporation. Mr. LaRose has unique insights into our
business as a result of his experience with the process of
government contracting. As a result of the various leadership
positions he has held throughout his career, Mr. LaRose
brings a strong strategic vision to our board of directors.
Mr. LaRose holds a B.S. from Radford University.
William A. Roper, Jr. has served as a member of
our board of directors since February 2011. Since 2008,
Mr. Roper has served as president of Roper Capital Company,
a privately-owned equity firm. Prior to forming Roper Capital,
Mr. Roper served as president and chief executive officer
of VeriSign, Inc. from May 2007 to June 2008, and as a
member of VeriSigns board of directors from November 2003
to June 2008. From April 2000 to May 2007, Mr. Roper served
as an executive vice president of Science Applications
International Corporation (SAIC), and as senior vice president
and chief financial officer of SAIC from 1990 to 2000.
Mr. Roper serves as a member of the boards of directors of
Internet Content Management, Inc., Leap Wireless International,
Inc., Regents Bank, N.A. and SkinMedica, Inc.
Mr. Ropers current and former board memberships at
other public and private companies provide him with extensive
corporate governance knowledge and his experience as a former
chief financial officer of a public company provides him with
79
expertise in the area of corporate accounting and finance.
Mr. Roper holds a B.A. in mathematics from the University
of Mississippi.
C. Arthur Brother Rutter III has
served as a member of our board of directors since June 2011. He
is the co-managing partner of Rutter Mills, LLP, a law firm
which he joined in 1994. As a result of his management
experience, Mr. Rutter possesses particular knowledge of
corporate governance and compensation that strengthens the
boards collective qualifications in these areas.
Mr. Rutter holds a J.D. from the University of Richmond
T.C. Williams School of Law and an A.B. in English and American
Literature and Language from Harvard College.
Controlled
Company Exception
Following the consummation of this offering, our existing
stockholders, as a group, will continue to control a majority of
our outstanding common stock and voting power, which means we
will be a controlled company within the meaning of
the rules of the New York Stock Exchange. As a result, we are
not required to have a majority of independent directors on our
board of directors or have compensation and nominating/corporate
governance committees comprised of independent directors. We are
required, however, to have an audit committee with one
independent director during the
90-day
period beginning on the date of effectiveness of the
registration statement filed with the SEC in connection with
this offering and of which this prospectus is a part. After such
90-day
period and until one year from the date of effectiveness of the
registration statement, we are required to have a majority of
independent directors on our audit committee. Thereafter, we are
required to have an audit committee comprised entirely of
independent directors.
Committees
of Our Board of Directors
Audit Committee. Upon consummation of this
offering, the audit committee will consist of
Paul O. Hirschbiel, R. Scott LaRose, and C. Arthur
Brother Rutter III (of whom Mr. Hirschbiel and
Mr. Rutter have been determined to be independent pursuant
to
Rule 10A-3
of the Exchange Act by our board of directors) and
Mr. Hirschbiel will be nominated as chair of the audit
committee. The duties and responsibilities of the audit
committee will include recommending the appointment or
termination of the engagement of independent accountants,
overseeing the independent auditor relationship and reviewing
significant accounting policies and controls. We intend to
appoint additional independent directors to our audit committee
to replace R. Scott LaRose as soon as possible following the
consummation of this offering, but no later than one year after
the consummation of this offering. We have determined that
Mr. Hirschbiel satisfies the New York Stock Exchange
standard of possessing accounting or related financial
management expertise and qualifies as an independent audit
committee financial expert under the Exchange Act.
The charter of the audit committee will be available on our
website.
Compensation Committee. Upon consummation of
this offering, the compensation committee will consist of Luke
Hillier, R. Scott LaRose, William A. Roper, Jr. and
C. Arthur Brother Rutter III. Mr. LaRose
will be nominated as chair of the compensation committee. The
duties and responsibilities of the compensation committee will
include reviewing and approving the compensation of officers and
directors, except that the compensation of officers serving on
any committee is determined by our board of directors. The
compensation of all officers other than our chief executive
officer, Luke Hillier, is approved by our board of directors
based on recommendations by Mr. Hillier and the
compensation committee. Mr. Hilliers compensation is
determined by our board of directors upon the recommendation of
the compensation committee.
The charter of our compensation committee will be available on
our website.
Nominating and Corporate Governance
Committee. Upon consummation of this offering,
the nominating and corporate governance committee will consist
of Daniel Clarkson, Luke Hillier, and C. Arthur
Brother Rutter III. Mr. Rutter has been
determined to be independent pursuant to the rules of the New
York Stock Exchange by our board of directors and will be
nominated as chair of the
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nominating and corporate governance committee. The duties of
the nominating and corporate governance committee will include
identifying individuals qualified to become members of our board
of directors, consistent with criteria approved by our board of
directors; overseeing the organization of our board of directors
to discharge the boards duties and responsibilities
properly and efficiently; identifying best practices and
recommending corporate governance principles, including giving
proper attention and making effective responses to stockholder
concerns regarding corporate governance; and developing and
recommending to our board of directors a set of corporate
governance guidelines and principles applicable to us. We expect
other specific duties of the nominating and corporate governance
committee to include: annually assessing the size and
composition of our board of directors; developing membership
qualifications for our board committees; monitoring compliance
with board and board committee membership criteria; annually
reviewing and recommending directors for continued service;
coordinating and assisting management and our board in
recruiting new members to our board of directors; reviewing
governance-related stockholder proposals and recommending board
responses; and overseeing the evaluation of our board of
directors and management.
Board
Structure
Our board of directors is currently comprised of seven
directors. Upon consummation of this offering, our board of
directors will be divided into three classes, each of whose
members will serve for staggered three-year terms.
Mr. Clarkson and Mr. Rutter will serve in the class of
directors whose terms will expire at our 2012 annual meeting;
Mr. Hirschbiel; General Dail and Mr. Roper will serve
in the class of directors whose terms will expire at our 2013
annual meeting; and Mr. Hillier and Mr. LaRose will
serve in the class of directors whose terms will expire at our
2014 annual meeting. Because only one-third of our directors are
elected at each annual meeting, two annual meetings of
stockholders could be required for the stockholders to change a
majority of the board.
In addition, the existing stockholders have agreed pursuant to
the stockholders agreement to vote for all our directors as
selected pursuant to that agreement. Under the agreement, one
director will be designated by Daniel Clarkson (provided
Mr. Clarkson and his affiliates hold at least 1% of our
common stock, collectively), one director will be designated by
R. Scott LaRose (provided Mr. LaRose and his
affiliates hold at least 1% of our common stock, collectively)
and Luke Hillier may designate any number of other directors.
See Description of Capital StockStockholders
Agreement.
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past has
served, as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
who serve on our board of directors or compensation committee.
Code of
Ethics
In connection with this offering, our board of directors will
adopt a code of ethics that applies to all of our directors,
officers and employees, including our chief executive officer
and chief financial officer. The code addresses, among other
things, honesty and ethical conduct, conflicts of interest,
compliance with laws, regulations and policies, including
disclosure requirements under the federal securities laws,
confidentiality, trading on insider information and reporting of
violations to the code. Once adopted, the code of ethics will be
available on our website.
81
COMPENSATION
DISCUSSION AND ANALYSIS
The following discussion and analysis of compensation
arrangements of our named executive officers for fiscal year
2010 (as set forth in the Summary Compensation Table below)
should be read together with the compensation tables and related
disclosures set forth below. This discussion contains
forward-looking statements that are based on our current plans,
considerations, expectations and determinations regarding future
compensation programs. Actual compensation programs that we
adopt may differ materially from the currently planned programs
summarized in this discussion.
Named
Executive Officers
Our named executive officers for the fiscal year ended
December 31, 2010 were: Luke Hillier, our Chief Executive
Officer; Patricia Bohlen, our Chief Financial Officer; Daniel
Clarkson, our Chief Operating Officer; Bruce Dressel, our Vice
President of Acquisitions; and Jason Wallace, our Vice President
of Sales. Following December 31, 2010,
Mr. Dressels title was revised to be Vice President
of Product and Equipment Solutions and Mr. Wallaces
title was revised to be Vice President of Sales and Marketing.
Executive
Compensation Philosophy and Objectives
Our philosophy is that executive compensation should be
competitive in the marketplace in which we compete for executive
talent, but structured to emphasize incentive-based compensation
and determined by the achievement of both company and individual
performance objectives. In principle, we believe that:
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our compensation programs should be simple, straightforward and
clear;
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a significant portion of executive compensation should be based
on variable compensation programs measured on a quarterly,
annual or longer-term basis;
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variable compensation, including bonuses and commissions, should
be tied to the achievement of predetermined company-wide and
individual performance goals, and should create appropriate
rewards for superior performance and penalties for
under-performance;
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our compensation programs should be flexible and able to evolve
with our business;
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our compensation programs should be designed to attract,
motivate and retain exceptional executives in the markets in
which we operate; and
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following the completion of this offering, equity-based
compensation awards should be utilized to encourage an ownership
mentality by our executives and to align the interests of our
executives with our stockholders.
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Elements
of 2010 Executive Compensation
Our 2010 compensation program for our named executive officers
consisted of the following key elements: an annual base salary,
quarterly achievement bonuses, a performance-based annual bonus,
commissions for our sales personnel (including one of our named
executive officers, Jason Wallace, our Vice President of Sales),
and certain perquisites and other benefits, including
employer-paid health and welfare plan premiums and employer
matching contributions to tax qualified retirement plans. In
keeping with our philosophy of the importance of simplicity and
clarity in compensation programs, we did not maintain any
non-qualified deferred compensation programs, supplemental
retirement programs or defined benefit pension plans that cover
our named executive officers and we do not anticipate
maintaining any such plans or programs following the completion
of this offering. Historically, all of the incentive
compensation payable to our named executive officers has been
payable in cash based upon the achievement of predetermined
performance goals. We believe that this approach has best served
the interests of our company and the holders of our equity
interests by enabling us to meet the requirements of the highly
competitive environment in which we operate, while ensuring that
our named executive officers were compensated in a way that
advanced both the short-term and long-term interests of our
equity holders. We have historically been structured as a
subchapter S corporation, which has prevented us from granting
equity-
82
based compensation awards to any of our named executive
officers. The variable quarterly and annual bonuses permitted
recognition of individual performance and were based, in
significant part, on an evaluation of the contribution made by
the named executive officer to our overall performance.
In 2010, our board of directors determined the amount and form
of compensation for Luke Hillier and Daniel Clarkson. The amount
and form of each element of our other named executive
officers compensation for 2010 was determined by
Mr. Hillier and Mr. Clarkson.
2010 Base Salary. We determined base
salaries for our named executive officers based on their
position level and our evaluation of the appropriate amount of
base salary required to attract and retain executive talent in
the markets in which we operate, taking into account our
philosophy that total compensation should be weighted less
towards fixed compensation and more towards variable
performance-based compensation. Historically, we have not
benchmarked our named executive officers base
salaries against any defined peer group of companies.
2010 Incentive Compensation. For fiscal
year 2010, each of Patricia Bohlen, Bruce Dressel and Jason
Wallace was eligible to receive quarterly achievement bonuses
based on completion of specific strategic goals as determined by
our board of directors in advance of each quarter, as described
below, as well as a year-end profitability bonus based on the
companys achievement of specified profitability targets
and such named executive officers aggregate quarterly
performance levels, as described below. Messrs. Hillier and
Clarkson were not eligible to receive quarterly achievement
bonuses and year-end profitability bonuses in 2010.
Additionally, one named executive officer, Jason Wallace, was
eligible to receive sales commissions in fiscal year 2010, as
described below.
Quarterly Achievement Bonuses. For fiscal year
2010, each of Patricia Bohlen, Bruce Dressel and Jason Wallace
was eligible to receive quarterly achievement bonuses. The
quarterly achievement goals were not based on corporate
performance, but rather were based on the attainment of goals
related to the officers individual performance and the
performance of his or her direct reports during each fiscal
quarter during 2010. Each of Ms. Bohlen and
Messrs. Dressel and Wallace achieved 100% of his or her
performance goals for each quarter in 2010 and thus received the
full amount of his or her target quarterly achievement bonus in
each quarter.
Year-End Profitability Bonuses. For fiscal
year 2010, in the event that Atlantic Diving Supply, Inc.
attained a specified profitability target, each of Patricia
Bohlen, Bruce Dressel and Jason Wallace was eligible to receive
a year-end bonus. If the profitability target was not achieved
for 2010, no year-end bonus would have been paid. For fiscal
year 2010, this target profitability was $91.4 million and
Atlantic Diving Supply, Inc.s actual profitability, as
calculated for bonus purposes in December 2010, was
$92.3 million. Thus, the 2010 profitability target was
achieved and the year-end bonuses were paid. The amount of the
year-end bonus for each of Ms. Bohlen and
Messrs. Dressel and Wallace was determined by multiplying
the amount of the year-end bonus that would have been paid based
on Atlantic Diving Supply, Inc.s 2010 profitability by the
aggregate percentage of all quarterly achievement bonuses
received by the executive during the year. Since each of
Ms. Bohlen and Messrs. Dressel and Wallace achieved
100% of his or her performance goals for each quarter in 2010,
he or she received 100% of the amount of the year-end bonus he
or she was entitled to receive based on Atlantic Diving Supply,
Inc.s 2010 profitability. For purposes of determining
2010 year-end profitability bonuses, profitability was
equal to Atlantic Diving Supply, Inc.s gross profit less
its total expenses (other than depreciation, profitability
bonuses, Domestic International Sales Corporation, or DISC, and
transaction expenses).
Commissions. For fiscal year 2010, Jason
Wallace, our Vice President of Sales, was eligible to receive
sales commissions equal to 0.124% of our overall gross margin,
with a commission target of $195,920 based on our target gross
margin of $158.0 million. No other named executive officer
was eligible to receive sales commissions in fiscal year 2010.
The amount of quarterly achievement bonuses and year-end
profitability bonuses received by each of Ms. Bohlen,
Mr. Dressel and Mr. Wallace and the amount of
commissions received by Mr. Wallace are set
83
forth in the Non-Equity Incentive Plan Compensation
column of the Summary Compensation Table under Executive
CompensationSummary Compensation Table.
No 2010 Equity Awards. We have
historically been structured as a subchapter S corporation and
have not granted equity-based compensation awards to any of our
named executive officers.
2010 Perquisites and Other
Benefits. Our named executive officers are
generally eligible to participate in the same benefit plans
provided to our other salaried employees, including health and
welfare plans. In fiscal year 2010, we paid the full cost of the
medical plan premiums on behalf of our named executive officers,
and our named executive officers were entitled to participate in
and received employer contributions to our 401(k) plan. We paid
for a car or provided a car allowance to each of our named
executive officers. In addition, we have historically provided
supplementary executive perquisites to each of our founders and
principal owners, including Luke Hillier and Daniel Clarkson, as
described in greater detail in the Summary Compensation Table
and the footnotes thereto.
New
Compensation Programs in Connection with this Offering
Adoption
of Annual Bonus Plan and Equity Award Incentive
Plan
We intend to adopt the Equity Plan and the Executive Bonus Plan
in connection with this offering. For a description of these new
compensation plans, see Executive Compensation Plans
below. The purpose of these new plans will be to allow us to pay
annual bonuses (including annual performance-based bonuses) to
our named executive officers and other senior executives and to
make various equity-based compensation awards to our named
executive officers and other employees, consultants and
directors in a manner that is appropriate for a public company
and that is intended to allow us to make awards that are not
subject to the federal income tax deduction limitation set forth
in Section 162(m) of the Internal Revenue Code. See
Effect of Accounting and Tax Treatment on
Compensation Decisions.
Claw-Back
Policy
We intend to include provisions in our Executive Bonus Plan and
our Equity Plan that will provide us with the discretion after
this offering to impose the forfeiture of bonuses and equity
compensation and the recovery of bonus amounts and gains from
equity compensation awarded under those plans with respect to
individuals who engage in misconduct or gross negligence that
results in a restatement of our financial statements or as
otherwise required under applicable laws or regulations. In
addition, if an individual engages in certain other misconduct,
we intend to provide for the discretion to suspend vesting of
all or a portion of any award
and/or
require the forfeiture or disgorgement to us of any equity award
(including gains on the sale of the stock, if any) that vested,
was paid or settled in the twelve months prior to or any time
after the individual engaged in such misconduct.
Policies
on Timing of Equity Grants
We expect that following the completion of this offering it will
be our policy not to time the granting of equity awards in
relation to the release of material, non-public information.
Accordingly, we expect that regularly scheduled awards will be
permitted to be granted at times when there is material
non-public information. We expect that we will generally grant
awards to new-hires at the time of hire, promotion awards at the
time of promotion and annual awards at a specified time or
during a specified period each year. In addition, we expect that
it will be our policy not to grant equity awards with effect
from, or with an exercise price based on market conditions as
they existed on, any date prior to the date on which the party
in which granting authority is vested takes formal action to
grant them. We further expect that it will be our policy to
promptly document any equity awards that we make; we would
normally regard documenting to be prompt if we were to
communicate the terms of the awards to their recipients, and to
obtain signed award agreements governing the grants back from
them (or other electronic confirmation of such awards), within
one month of the date formal action is taken to issue them.
84
Owner-Employee
Employment Agreements
In connection with this offering, we intend to enter into
employment agreements with each of Luke Hillier and Daniel
Clarkson, our two current equity owners who are also named
executive officers. For a description of the compensation of our
owners who are named executive officers, see Executive
CompensationOwner-Employee Compensation.
Adoption
of Non-Employee Director Compensation Policy
We intend to adopt a non-employee director compensation policy
in connection with this offering. For a description of this new
policy, see Director CompensationDirector
Compensation Policies.
Effect
of Accounting and Tax Treatment on Compensation
Decisions
Section 162(m) of the Internal Revenue Code imposes a limit
on the amount of compensation that we may deduct in any one year
with respect to certain covered employees, unless
certain specific and detailed criteria are satisfied.
Performance-based compensation, as defined in the Internal
Revenue Code, is fully deductible if the programs are approved
by stockholders and meet other requirements. Pursuant to
applicable regulations, Section 162(m) will not apply to
compensation paid or stock options or restricted stock granted
under the compensation agreements and plans in existence prior
to the completion of this offering during the reliance
transition period ending on the earlier of the date the
agreement or plan is materially modified or the first
stockholders meeting at which directors are elected during 2015.
While we will continue to monitor our compensation programs in
light of Section 162(m), the compensation committee
considers it important to retain the flexibility to design
compensation programs that are in the best long-term interests
of our company and our stockholders, particularly as we continue
our transition from a private to a public company. As a result,
we have not adopted a policy requiring that all compensation be
deductible and the compensation committee may conclude that
paying compensation at levels that are not deductible under
Section 162(m) is nevertheless in the best interests of our
company and our stockholders.
Other provisions of the Internal Revenue Code can also affect
compensation decisions. Section 409A of the Internal
Revenue Code, which governs the form and timing of payment of
deferred compensation, imposes sanctions, including a 20%
penalty and an interest penalty, on the recipient of deferred
compensation that does not comply with Section 409A. The
compensation committee will take into account the implications
of Section 409A in determining the form and timing of
compensation awarded to our executives and will strive to
structure any nonqualified deferred compensation plans or
arrangements to be exempt from or to comply with the
requirements of Section 409A.
Section 280G of the Internal Revenue Code disallows a
companys tax deduction for payments received by certain
individuals in connection with a change in control to the extent
that the payments exceed an amount approximately three times
their average annual compensation, and Section 4999 of the
Internal Revenue Code imposes a 20% excise tax on those
payments. The compensation committee will take into account the
implications of Section 280G in determining potential
payments to be made to our executives in connection with a
change in control. Nevertheless, to the extent that certain
payments upon a change in control are classified as excess
parachute payments, such payments may not be deductible pursuant
to Section 280G.
Transaction
Bonuses
In connection with the offering of our senior secured notes and
this offering, certain members of senior management are eligible
to receive transaction bonuses in recognition of services and
contributions to the value of the company. In a majority of
cases, two-thirds of each individuals transaction bonus
was paid upon consummation of the senior secured notes offering,
with the remainder to be paid upon the earlier of (x) the
consummation of this offering and (y) December 31,
2011, subject to each individuals continued employment
through such payment date. The aggregate amount of all
transaction bonuses is $9.0 million, of which approximately
$6.6 million was paid upon consummation of the senior
secured notes offering. See Executive
compensationEmployment agreements.
85
EXECUTIVE
COMPENSATION
The tables listed below, which appear in the following sections
of this report, provide information required by the SEC
regarding the compensation we paid for the year ended
December 31, 2010 to our named executive officers. Except
as noted below, we have used captions and headings in these
tables in accordance with the SEC regulations requiring these
disclosures. The footnotes to these tables provide important
information to explain the values presented in the tables and
are an important part of our disclosures related to our
executive compensation for the year ended December 31, 2010.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our named executive officers for the year
ended December 31, 2010:
Summary
Compensation Table
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Non-Equity
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Incentive Plan
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All Other
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Salary
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Compensation
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Compensation
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Total
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Name and Principal Position
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($)
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($)
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($)
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($)
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Luke Hillier, Chief
Executive Officer
and President
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500,000
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51,318
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(1)
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551,318
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Patricia Bohlen, Chief
Financial Officer
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186,186
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148,965
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22,823
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(2)
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357,974
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Daniel Clarkson, Chief
Operating Officer,
Secretary and
Treasurer
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400,000
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73,540
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(3)
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473,540
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Bruce Dressel, Vice
President of
Acquisitions(4)
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315,000
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218,960
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48,538
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(5)
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582,498
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Jason Wallace, Vice
President of
Sales(6)
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254,100
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419,714
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(7)
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24,349
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(8)
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698,163
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(1) |
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This number reflects perquisites and other compensation provided
to Mr. Hillier, including: medical plan premium payments;
health and fitness expenses; 401(k) matching contributions;
life/LTD insurance premiums; personal use of a company-leased
automobile and other automobile-related expenses; and country
club dues. None of the individual perquisites had an incremental
cost in excess of the greater of $25,000 or 10% of the total
amount of Mr. Hilliers perquisites. |
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(2) |
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This number reflects perquisites and other compensation provided
to Ms. Bohlen, including: medical plan premium payments;
401(k) matching contributions; life/LTD insurance premiums; and
an automobile allowance. None of the individual perquisites had
an incremental cost in excess of the greater of $25,000 or 10%
of the total amount of Ms. Bohlens perquisites. |
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(3) |
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This number reflects perquisites and other compensation provided
to Mr. Clarkson, including: medical plan premium payments;
health and fitness expenses; 401(k) matching contributions;
life/LTD insurance premiums; personal use of a company-owned
automobile and other automobile-related expenses; and country
club dues. The aggregate incremental cost of
Mr. Clarksons personal use of a company-owned
automobile and other automobile-related expenses was $25,483.
None of the other individual perquisites had an incremental cost
in excess of the greater of $25,000 or 10% of the total amount
of Mr. Clarksons perquisites. |
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(4) |
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Following December 31, 2010, Mr. Dressels title was
revised to be Vice President of Product and Equipment Solutions. |
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(5) |
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This number reflects perquisites and other compensation provided
to Mr. Dressel, including: 401(k) matching contributions;
life/LTD insurance premiums; personal use of a company leased
automobile; |
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personal use of company aircraft; and per diem payments for
nights spent in Virginia Beach. The aggregate incremental cost
of Mr. Dressels personal use of company aircraft was
$25,014. None of the other individual perquisites had an
incremental cost in excess of the greater of $25,000 or 10% of
the total amount of Mr. Dressels perquisites. |
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(6) |
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Following December 31, 2010, Mr. Wallaces title was
revised to be Vice President of Sales and Marketing. |
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(7) |
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This number reflects Mr. Wallaces 2010 performance
bonuses of $231,931 and the actual commissions of $187,783
earned by Mr. Wallace for fiscal year 2010. |
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(8) |
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This number reflects perquisites and other compensation provided
to Mr. Wallace, including: health and welfare premiums;
401(k) matching contributions; life/LTD insurance premiums; and
personal use of a company-leased automobile. None of the
individual perquisites had an incremental cost in excess of the
greater of $25,000 or 10% of the total amount of
Mr. Wallaces perquisites. |
2010
Grants of Plan-Based Awards Table
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Estimated Future Payouts
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Under Non-Equity
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Incentive Plan
Awards(1)
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Threshold
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Target
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Max
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Name
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Type of Award
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Grant Date
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($)
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($)
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($)
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Luke Hillier
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Patricia Bohlen
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Performance Bonus
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n/a
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148,965
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Daniel Clarkson
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Bruce Dressel
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Performance Bonus
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n/a
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218,960
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Jason Wallace
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Performance Bonus
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n/a
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231,931
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Commission
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n/a
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195,920
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(1) |
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Amounts in this column for Performance Bonus awards represent
the target cash bonus amounts for 2010 under our quarterly
achievement bonus plan and year-end profitability bonus plan.
Amounts in this column for Commission awards represent the
target cash commissions for 2010 under our annual commission
plan. The foregoing plans are described more fully in
Compensation Discussion and AnalysisElements of
Executive Compensation above. Performance bonus awards and
commission awards have no minimum threshold or maximum cap on
payouts. Actual bonuses and commissions paid under the plans for
fiscal year 2010 are reflected in the Summary Compensation Table. |
Owner-Employee
Compensation
We have not entered into employment agreements with either of
Luke Hillier and Daniel Clarkson, our two current equity owners
who are also named executive officers. Owner compensation is
generally reviewed annually in 2010 and consisted of base salary
and certain perquisites and other personal benefits, as
described above in the Summary Compensation Table and related
footnotes. In addition to compensation received as executive
officers, each of our owner-employees received distributions in
his capacity as a stockholder of the company in 2010. See
Dividend Policy. In connection with this offering,
we intend to enter into employment agreements with each of Luke
Hillier and Daniel Clarkson.
Employment
Agreements
Patricia Bohlen. Effective January 1,
2010, we entered into a 2010 Executive Compensation Plan with
Patricia Bohlen, pursuant to which Ms. Bohlen was eligible
to receive an annual base salary of $186,186, quarterly
achievement bonuses of $11,250 per quarter and a year-end
profitability bonus of $103,965. In addition, the 2010 Executive
Compensation Plan provided Ms. Bohlen a monthly car
allowance of $650. Pursuant to a letter agreement dated
March 1, 2011, in connection with the offering of our
senior secured notes and this offering, Ms. Bohlen will
receive a transaction bonus of $800,000. Two-thirds of
Ms. Bohlens transaction bonus was paid upon
consummation of the offering of our senior secured notes, with
the
87
remainder to be paid upon the earlier of (x) the
consummation of this offering and (y) December 31,
2011, subject to her continued employment through such payment
date. See Compensation Discussion and
AnalysisTransaction Bonuses.
Bruce Dressel. Effective August 1, 2008,
we entered into an employment agreement with Bruce Dressel,
pursuant to which Mr. Dressel receives an annual base
salary and bonus, to be agreed upon by us and Mr. Dressel
from year to year. In addition, Mr. Dressels
employment agreement entitles him to an automobile for business
use, along with accompanying insurance and maintenance at our
expense.
Mr. Dressels employment agreement provides that, upon
a Sale of the Company (as defined below) for a
purchase price of at least $100,000,000, we will pay
Mr. Dressel a bonus equal to 0.5% of the purchase price and
we will extend his employment agreement for a two-year term from
the date of such sale. For these purposes, a Sale of the
Company will occur if either (i) any person or
persons or entity or entities (other than family members or
family trusts) who do not presently own stock in the company
acquire ownership of fifty one percent (51%) or more of the
companys stock or (ii) such persons or entities
acquire fifty one (51%) or more of the total gross fair market
value of the companys assets, during the term of
Mr. Dressels employment. This offering will not be a
Sale of the Company for purposes of
Mr. Dressels employment agreement.
In the event of Mr. Dressels termination of
employment by us without Cause or by him for
Good Reason (each such term as defined below) within
two years after the date of a Sale of the Company,
Mr. Dressel will be entitled to receive a cash amount equal
to 200% of his total compensation for the year preceding the
date of termination, payable over the
24-month
period following his termination, subject to
Mr. Dressels continued compliance with the
restrictive covenants in his employment agreement. For these
purposes, (i) Cause shall mean:
(a) Mr. Dressel shall have been indicted for a felony;
(b) Mr. Dressel shall have been convicted of (or
pleaded guilty or nolo contendre to or
shall have been found guilty of) any misdemeanor or summary
offense involving fraud, theft, misrepresentation or moral
turpitude or any other misdemeanor or summary offense that will,
in the opinion of the chief executive officer, determined in
good faith, adversely affect in any material respect the
companys prospects or reputation or
Mr. Dressels ability to perform his obligations or
duties to the company; or (c) Mr. Dressel
intentionally and continually shall have failed substantially to
perform his reasonably assigned duties with the company (other
than a failure resulting from Mr. Dressels incapacity
due to physical or mental illness or from the assignment to
Mr. Dressel of duties that would constitute Good Reason),
which failure has continued for a period of at least
30 days after a written notice of demand for substantial
performance, signed by a duly authorized member of the company,
has been delivered to Mr. Dressel; (d) willfully or
repeatedly engaged in misconduct or gross negligence in the
performance of his duties to the company that has a material
detrimental effect on the company; (e) committed an act of
fraud, theft, or dishonestly against the company or any act or
omission intended to result in the personal enrichment of
Mr. Dressel or a relative in violation of his duty of
loyalty to the company at the expense, directly or indirectly,
of the company; or (f) violates the non-compete provisions
within Mr. Dressels employment agreement, and
(ii) Good Reason shall mean the occurrence of
any of the following events without Mr. Dressels consent:
(a) assignment to Mr. Dressel of any duties
inconsistent in any material respect with
Mr. Dressels position (including titles and reporting
relationships), authority or responsibilities as contemplated by
Mr. Dressels employment agreement; (b) any
material failure by the company to comply with any of the
material provisions regarding Mr. Dressels salary,
bonus, benefits and amounts payable to Mr. Dressel under
his employment agreement; or (c) the relocation or transfer
of the Mr. Dressels principal office outside a
20 mile radius of the Mr. Dressels personal
residence location.
Under his employment agreement, Mr. Dressel is subject to
non-disclosure and non-disparagement obligations in perpetuity,
as well as certain non-competition and non-solicitation
obligations during the term of his employment and during the
two-year period and one-year period, respectively, following the
termination of his employment for any reason.
Effective January 1, 2010, we entered into a 2010 Executive
Compensation Plan with Mr. Dressel, pursuant to which
Mr. Dressel was eligible to receive an annual base salary
of $315,000, quarterly achievement bonuses of $16,250 per
quarter and a year-end profitability bonus of $153,960, as
described above.
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Pursuant to a letter agreement dated March 1, 2011, in
connection with the offering of our senior secured notes and
this offering, Mr. Dressel will receive a transaction
bonuses of $1,100,000. Two-thirds of Mr. Dressels
transaction bonuses was paid upon consummation of the offering
of our senior secured notes, with the remainder to be paid upon
the earlier of (x) the consummation of this offering and
(y) December 31, 2011, subject to his continued
employment through such payment date. See Compensation
Discussion and AnalysisTransaction Bonuses.
Jason Wallace. Effective January 1, 2010,
and as amended on July 27, 2010 we entered into a 2010
Executive Compensation Plan with Jason Wallace, pursuant to
which Mr. Wallace was eligible to receive an annual base
salary of $254,100, quarterly achievement bonuses of $17,250 per
quarter and a year-end profitability bonus of $162,931, and
commissions equal to 0.124% of our companys overall gross
margin, with a target commission for 2010 of $195,920. Pursuant
to a letter agreement dated March 1, 2011, in connection
with the offering of our senior secured notes and this offering,
Mr. Wallace will receive a transaction bonus of $1,540,000.
Two-thirds of Mr. Wallaces transaction bonus was paid
upon consummation of the offering of our senior secured notes,
with the remainder to be paid upon the earlier of (x) the
consummation of this offering and (y) December 31,
2011, subject to his continued employment through such payment
date. See Compensation Discussion and
AnalysisTransaction Bonuses.
Potential
Payments upon Termination of Employment or Change in
Control
Termination Payments. Except as described
below in Change in Control Payments, none of our
named executive officers is entitled to receive payments in
connection with any termination of employment.
Change in Control Payments. Prior to
January 1, 2011 we were party to bonus award agreements
with each of Patricia Bohlen and Jason Wallace, pursuant to
which Ms. Bohlen and Mr. Wallace would be entitled to
receive 0.25% and 0.7%, respectively, of our net
proceeds (as defined below) upon a change in control prior
to January 1, 2011. For purposes of the bonus award
agreements, (i) net proceeds is defined as the
aggregate value of all cash, securities or other assets or
property to be received by the companys stockholders
pursuant to a Sale of the Company and with respect to their
company capital stock (other than any balance sheet adjustment)
after payment or satisfaction of (a) any company
transaction costs and legal and brokers fees and expenses
incurred in connection with such Sale of the Company,
(b) any indebtedness for borrowed money or other long term
liability, (c) the value of any employment, non-compete or
other agreements entered into with individuals in connection
with the Sale of the Company, and (d) the amount of any
employee incentive, retention or other bonuses payable in
connection with a Sale of the Company; and (ii) Sale
of the Company is defined as the consummation of any of
the following prior to January 1, 2011: (a) a sale,
disposition or other transfer of all or substantially all of the
assets of the company to a third party unaffiliated with the
company, (b) a merger or consolidation of the company with
any unaffiliated third party, other than a merger or
consolidation effected solely to change the state of
incorporation of the company or in which the stockholders of the
company immediately prior to such merger or consolidation
continue to hold at least 51% of the voting power of the
outstanding securities of the surviving entity immediately after
such merger or consolidation, or (c) a sale to an
unaffiliated third party of at least 51% of the then issued and
outstanding shares of capital stock of the company. Assuming we
had experienced a change in control as of December 31,
2010, Ms. Bohlen and Mr. Wallace would respectively
have been entitled to receive approximately
$
and
$
pursuant to their bonus award agreements (calculated assuming
that our net proceeds would have been
$ ,
which is equal to the aggregate equity value of the company
based on an initial offering price of
$
per share, the midpoint of the price range set forth on the
cover of this prospectus). The actual amounts that would have
been received could only have been determined at the time of an
actual change in control based on the actual net proceeds
received in connection with such change in control which likely
would have varied from the amounts provided above. The bonus
award agreements terminated pursuant to their terms on
January 1, 2011 and were not replaced. No payments will be
made under these agreements.
As described above in Employment Agreements, Bruce
Dressel would be entitled to the payment of a bonus in
connection with a change in control if such change in control
constitutes a Sale of the Company for a purchase price of at
least $100,000,000. Assuming we had experienced a change in
control on December 31,
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2010, Mr. Dressel would have been entitled to receive
approximately (calculated assuming that our net proceeds would
have been
$ ,
which is equal to the aggregate equity value of the company
based on an initial offering price of
$
per share, the midpoint of the price range set forth on the
cover of this prospectus). The actual amount that would have
been received could only have been determined at the time of an
actual Sale of the Company based on the actual net proceeds
received in connection with such Sale of the Company which
likely would have varied from the amount provided above. In
addition, if Mr. Dressel is terminated without Cause or
resigns for Good Reason within two years following a Sale of the
Company, he would be entitled to receive certain severance
payments during the 24 months following such termination,
as described above. This offering is not a Sale of the Company
for purposes of Mr. Dressels 2010 employment
agreement. On March 1, 2011, we amended and restated
Mr. Dressels employment agreement and on May 1,
2011, we further amended and restated Mr. Dressels
employment agreement to provide that the change of control
provision relating to a Sale of the Company will cease to apply
upon and following the consummation of this offering.
None of our other named executive officers is entitled to
receive payments in connection with a change in control.
New
Executive Compensation Plans
In connection with this offering, we intend to adopt certain new
executive compensation plans, as further described below.
2011
Equity Incentive Award Plan
Prior to completion of the offering, we intend to adopt a 2011
Equity Incentive Award Plan, or the Equity Plan. The principal
purpose of the Equity Plan will be to attract, retain and
motivate selected employees, consultants and directors through
the granting of stock-based compensation awards and cash-based
performance bonus awards. The Equity Plan will also be designed
to permit us to make equity-based awards and cash-based awards
intended to qualify as performance-based
compensation under Section 162(m) of the Code. The
principal features of the Equity Plan are summarized below.
Share Reserve. Under the Equity
Plan, shares
of our common stock will initially be reserved for issuance
pursuant to a variety of stock-based compensation awards,
including stock options, stock appreciation rights, or SARs,
restricted stock awards, restricted stock unit awards, deferred
stock awards, dividend equivalent awards, stock payment awards
and performance awards and other stock-based awards.
The following counting provisions will be in effect for the
share reserve under the Equity Plan:
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to the extent that an award terminates, expires or lapses for
any reason or an award is settled in cash without the delivery
of shares, any shares subject to the award at such time will be
available for future grants under the Equity Plan;
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to the extent shares are tendered or withheld to satisfy the
grant, exercise price or tax withholding obligation with respect
to any award under the Equity Plan, such tendered or withheld
shares will be available for future grants under the Equity Plan;
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to the extent that shares of our common stock awarded under the
Equity Plan are repurchased by us prior to vesting so that such
shares are returned to us, such shares will be available for
future grants under the Equity Plan;
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the payment of dividend equivalents in cash in conjunction with
any outstanding awards will not be counted against the shares
available for issuance under the Equity Plan; and
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to the extent permitted by applicable law or any exchange rule,
shares issued in assumption of, or in substitution for, any
outstanding awards of any entity acquired in any form of
combination by us or any of our subsidiaries will not be counted
against the shares available for issuance under the Equity Plan.
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Administration. The compensation committee of
our board of directors will administer the Equity Plan unless
our board of directors assumes authority for administration.
Except as otherwise determined by our board of directors, the
compensation committee will consist of at least two members of
our board of directors, each of whom will be intended to qualify
as an outside director, within the meaning of
Section 162(m) of the Code, a non-employee
director for purposes of
Rule 16b-3
under the Exchange Act and an independent director
within the meaning of the rules of the New York Stock Exchange
or other principal securities market on which shares of our
common stock are traded. The Equity Plan will provide that the
compensation committee may delegate its authority to grant
awards to employees other than our executive officers and
certain of our senior executives to a committee consisting of
one or more members of our board of directors or one or more of
our officers, but we expect that our compensation committee
charter will prohibit such delegation in the case of awards to
our executive officers.
Subject to the terms and conditions of the Equity Plan, the
administrator will have the authority to select the persons to
whom awards are to be made, to determine the number of shares to
be subject to awards and the terms and conditions of awards, and
to make all other determinations and to take all other actions
necessary or advisable for the administration of the Equity
Plan. The administrator will also be authorized to adopt, amend
or rescind rules relating to administration of the Equity Plan.
Our board of directors will have the authority at all times to
remove the compensation committee as the administrator and
revest in itself the authority to administer the Equity Plan.
The full board of directors will administer the Equity Plan with
respect to awards to non-employee directors.
Eligibility. The Equity Plan will provide that
options, SARs, restricted stock and all other stock-based and
cash-based awards may be granted to individuals who will then be
our officers, employees or consultants or the officers,
employees or consultants of certain of our subsidiaries. The
Equity Plan will further provide that such awards may also be
granted to our directors, but that only employees of our company
or certain of our subsidiaries may be granted incentive stock
options, or ISOs.
Awards. The Equity Plan will provide that the
administrator may grant or issue stock options, SARs, restricted
stock, restricted stock units, deferred stock, dividend
equivalents, performance awards, stock payments and other
stock-based and cash-based awards, or any combination thereof.
Each award will be set forth in a separate agreement with the
person receiving the award and will indicate the type, terms and
conditions of the award.
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Nonqualified Stock Options, or NQSOs, will provide for
the right to purchase shares of our common stock at a specified
price which may not be less than fair market value on the date
of grant, and usually will become exercisable (at the discretion
of the administrator) in one or more installments after the
grant date, subject to the participants continued
employment or service with us
and/or
subject to the satisfaction of corporate performance targets and
individual performance targets established by the administrator.
The Equity Plan will provide that NQSOs may be granted for any
term specified by the administrator that does not exceed ten
years.
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Incentive Stock Options, or ISOs, will be designed in a
manner intended to comply with the provisions of
Section 422 of the Code and will be subject to specified
restrictions contained in the Code. Among such restrictions,
ISOs will have an exercise price of not less than the fair
market value of a share of common stock on the date of grant,
will only be granted to employees, and will not be exercisable
after a period of ten years measured from the date of grant. In
the case of an ISO granted to an individual who owns (or is
deemed to own) at least 10% of the total combined voting power
of all classes of our capital stock, the Equity Plan will
provide that the exercise price must be at least 110% of the
fair market value of a share of common stock on the date of
grant and that the ISO must not be exercisable after a period of
five years measured from the date of grant.
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Restricted Stock will be granted to any eligible
individual selected by the administrator and will be made
subject to such restrictions as may be determined by the
administrator. Restricted stock, typically, will be forfeited
for no consideration or repurchased by us at the original
purchase price if the conditions or restrictions on vesting are
not met. The Equity Plan will provide that restricted stock
generally may not be sold or otherwise transferred until
restrictions are removed or expire. Purchasers of restricted
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stock, unlike recipients of options, will have voting rights and
will have the right to receive dividends, if any, prior to the
time when the restrictions lapse; however, extraordinary
dividends will generally be placed in escrow, and will not be
released until restrictions are removed or expire.
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Restricted Stock Units will be awarded to any eligible
individual selected by the administrator, typically without
payment of consideration, but subject to vesting conditions
based on continued employment or service or on performance
criteria established by the administrator. The Equity Plan will
provide that, like restricted stock, restricted stock units may
not be sold, or otherwise transferred or hypothecated, until
vesting conditions are removed or expire. Unlike restricted
stock, stock underlying restricted stock units will not be
issued until the restricted stock units have vested, and
recipients of restricted stock units generally will have no
voting or dividend rights prior to the time when vesting
conditions are satisfied.
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Deferred Stock Awards will represent the right to receive
shares of our common stock on a future date. The Equity Plan
will provide that deferred stock may not be sold or otherwise
hypothecated or transferred until issued. Deferred stock will
not be issued until the deferred stock award has vested, and
recipients of deferred stock generally will have no voting or
dividend rights prior to the time when the vesting conditions
are satisfied and the shares are issued. Deferred stock awards
generally will be forfeited, and the underlying shares of
deferred stock will not be issued, if the applicable vesting
conditions and other restrictions are not met.
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Deferred Stock Units will be awarded to any eligible
individual selected by the administrator, typically without
payment of consideration, but may be subject to vesting
conditions based on continued employment or service or on
performance criteria established by the administrator. Each
Deferred Stock Unit shall entitle the holder thereof to receive
one share of Common Stock on the date the Deferred Stock Unit
becomes vested or upon a specified settlement date thereafter.
The Equity Plan will provide that, like deferred stock, deferred
stock units may not be sold, or otherwise transferred or
hypothecated, until vesting conditions are removed or expire.
Unlike deferred stock, deferred stock units may provide that
shares of stock underlying the deferred stock units will not be
issued until a specified date or event following the vesting
date. Recipients of deferred stock units generally will have no
voting or dividend rights prior to the time when vesting
conditions are satisfied and the shares underlying the award
have been issued to the holder.
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Stock Appreciation Rights, or SARs, will be granted in
the administrators discretion in connection with stock
options or other awards, or separately. SARs granted in
connection with stock options or other awards typically will
provide for payments to the holder based upon increases in the
price of our common stock over a set exercise price. The
exercise price of any SAR granted under the Equity Plan will be
at least 100% of the fair market value of a share of our common
stock on the date of grant. Except as required by
Section 162(m) of the Code with respect to an SAR intended
to qualify as performance-based compensation as described in
Section 162(m) of the Code, there will be no restrictions
specified in the Equity Plan on the exercise of SARs or the
amount of gain realizable therefrom, although the Equity Plan
will provide that restrictions may be imposed by the
administrator in the SAR agreements. SARs under the Equity Plan
will be settled in cash or shares of our common stock, or in a
combination of both, at the election of the administrator.
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Dividend Equivalents will represent the value of the
dividends, if any, per share paid by us, calculated with
reference to the number of shares covered by the award. The
Equity Plan will provide that dividend equivalents may be
settled in cash or shares and at such times as determined by the
compensation committee or board of directors, as applicable.
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Performance Awards will be granted by the administrator
in its discretion on an individual or group basis. Generally,
these awards will be based upon specific performance targets and
will be paid in cash or in common stock or in a combination of
both. The Equity Plan will provide that performance awards may
include phantom stock awards that provide for
payments based upon the value of our common stock and that
performance awards may also include bonuses that may be granted
by the administrator
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on an individual or group basis and which may be payable in cash
or in common stock or in a combination of both.
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Stock Payments will be authorized by the administrator in
its discretion in the form of common stock or an option or other
right to purchase common stock as part of a deferred
compensation on other arrangement in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable
in cash to the employee, consultant or non-employee director.
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Change in Control. In the event of a change in
control where the acquiror does not assume or replace granted
awards, prior to the consummation of such transaction, causing
such awards to terminate under the Equity Plan upon consummation
of the transaction, the Equity Plan or the individual award
agreement may provide that awards issued under the Equity Plan
will be subject to accelerated vesting such that 100% of such
awards will become vested and exercisable or payable, as
applicable, upon the consummation of such change in control. In
addition, the administrator will also have complete discretion
to structure one or more awards under the Equity Plan to provide
that such awards will become vested and exercisable or payable
on an accelerated basis in the event such awards are assumed or
replaced with equivalent awards but the individuals
service with us or the acquiring entity is subsequently
terminated within a designated period following the change in
control event. The Equity Plan will also provide that the
administrator may make appropriate adjustments to awards under
the Equity Plan and will be authorized to provide for the
acceleration, cash-out, termination, assumption, substitution or
conversion of such awards in the event of a change in control or
certain other unusual or nonrecurring events or transactions.
Under the Equity Plan, a change in control will generally be
defined as:
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the transfer or exchange in a single transaction or series of
related transactions by our stockholders of more than 50% of our
voting stock to a person or group;
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a change in the composition of our board of directors over a
two-year period such that 50% or more of the members of the
board of directors were elected through one or more contested
elections;
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a merger, consolidation, reorganization or business combination
in which we are involved, directly or indirectly, other than a
merger, consolidation, reorganization or business combination
which results in our outstanding voting securities immediately
before the transaction continuing to represent a majority of the
voting power of the acquiring companys outstanding voting
securities and after which no person or group beneficially owns
50% or more of the outstanding voting securities of the
surviving entity immediately after the transaction;
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the sale, exchange, or transfer of all or substantially all of
our assets; or
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stockholder approval of our liquidation or dissolution.
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Adjustments of Awards. In the event of any
stock dividend, stock split, combination or exchange of shares,
merger, consolidation, spin-off, recapitalization, distribution
of our assets to stockholders (other than normal cash dividends)
or any other corporate event affecting the number of outstanding
shares of our common stock or the share price of our common
stock that would require adjustments to the Equity Plan or any
awards under the Equity Plan in order to prevent the dilution or
enlargement of the potential benefits intended to be made
available thereunder, the Equity Plan will provide that the
administrator will make appropriate, proportionate adjustments
to:
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the aggregate number and type of shares subject to the Equity
Plan;
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the number and kind of shares subject to outstanding awards and
terms and conditions of outstanding awards (including, without
limitation, any applicable performance targets or criteria with
respect to such awards); and
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the grant or exercise price per share of any outstanding awards
under the Equity Plan.
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Amendment and Termination. The Equity Plan
will provide that our board of directors or the compensation
committee (with the approval of the board of directors) may
terminate, amend or modify
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the Equity Plan at any time and from time to time. However, the
Equity Plan will generally require us to obtain stockholder
approval:
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to increase the number of shares available under the Equity Plan
(other than in connection with certain corporate events, as
described above);
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to grant options with an exercise price that is below 100% of
the fair market value of shares of our common stock on the grant
date;
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to extend the exercise period for an option beyond ten years
from the date of grant; or
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to the extent required by applicable law, rule or regulation
(including any applicable stock exchange rule).
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The Equity Plan will provide that, notwithstanding the
foregoing, an option may be amended to reduce the per share
exercise price below the per share exercise price of such option
on the grant date and that options may be granted in exchange
for, or in connection with, the cancellation or surrender of
options having a higher per share exercise price without
receiving additional stockholder approval.
Expiration Date. The Equity Plan will expire
on, and no option or other award will be granted pursuant to the
Equity Plan after, the tenth anniversary of the effective date
of the Equity Plan. Any award that will be outstanding on the
expiration date of the Equity Plan will remain in force
according to the terms of the Equity Plan and the applicable
award agreement.
Securities Laws and U.S. Federal Income
Taxes. The Equity Plan will be designed to comply
with various securities and U.S. federal tax laws as
follows:
Securities Laws. The Equity Plan will be
designed to conform to all provisions of the Securities Act and
the Exchange Act and any and all regulations and rules
promulgated by the SEC thereunder, including without limitation,
Rule 16b-3.
The Equity Plan will be administered, and options will be
granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations.
Section 409A of the Code. The Equity Plan
will be designed to comply with the requirements of
Section 409A of the Code and, to the extent that awards
under the Equity Plan will be considered nonqualified
deferred compensation for purposes of Section 409A of
the Code and will be subject to the additional requirements
regarding the payment of deferred compensation imposed by
Section 409A of the Code, such awards will be intended to
be exempt from or to comply with Section 409A of the Code.
Section 162(m) of the Code. The Equity
Plan will be designed to provide for awards that are exempt from
the requirements of Section 162(m) of the Code which
generally provides that income tax deductions of publicly held
corporations may be limited to the extent total compensation
(including, but not limited to, base salary, annual bonus and
income attributable to stock option exercises and other
non-qualified benefits) for certain executive officers exceeds
$1,000,000 (less the amount of any excess parachute
payments as defined in Section 280G of the Code) in
any taxable year of the corporation, but provides that the
deduction limit will not apply to certain
performance-based compensation established by an
independent compensation committee that is adequately disclosed
to and approved by stockholders. In particular, stock options
and SARs will satisfy the performance-based
compensation exception if the awards are made by a
qualifying compensation committee, the Equity Plan sets the
maximum number of shares that can be granted to any person
within a specified period and the compensation is based solely
on an increase in the stock price after the grant date.
Specifically, the option exercise price must be equal to or
greater than the fair market value of the stock subject to the
award on the grant date. Under a Section 162(m) transition
rule for compensation plans of corporations that are privately
held and that subsequently become publicly held as a result of
an initial public offering, the Equity Plan will not be subject
to Section 162(m) until a specified transition date, which
is the earliest of:
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the material modification of the Equity Plan;
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the issuance of all of the shares of our common stock reserved
for issuance under the Equity Plan;
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the expiration of the Equity Plan; or
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the first stockholders meeting at which members of our board of
directors are elected during 2015.
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After the transition date, rights or awards granted under the
Equity Plan, other than options and SARs, will not qualify as
performance-based compensation for purposes of
Section 162(m) unless such rights or awards are granted or
vest upon pre-established objective performance goals, the
material terms of which have been disclosed to and approved by
our stockholders. Thus, after the transition date, we expect
that such other rights or awards under the plan will not
constitute performance-based compensation for purposes of
Section 162(m).
We intend to file with the SEC a registration statement on
Form S-8
covering the shares of our common stock issuable under the
Equity Plan.
IPO Equity Plan Awards. In connection
with this offering, we intend to grant equity awards pursuant to
the Equity Plan, to our non-employee directors and certain of
our employees (including Patricia Bohlen, Jason Wallace and
Bruce Dressel), as further described below.
All Employee Awards. On the date of the
consummation of this offering, we intend to grant restricted
stock unit awards to certain of our employees, which we refer to
herein as the All Employee Awards. Each All Employee
Award will be issued pursuant to the Equity Plan and will vest
in its entirety on the first anniversary of the consummation of
this offering, subject to the employees continued
employment through the vesting date. We expect that the
aggregate number of shares subject to All Employee Awards will
not
exceed shares.
IPO Management Awards. On the date of the
consummation of this offering, we also intend to grant
restricted stock unit awards and stock option awards to our
management employees (including Patricia Bohlen, Jason Wallace
and Bruce Dressel), which we refer to herein as the IPO
Management Awards. Each IPO Management Award will be
issued pursuant to the Equity Plan and we expect that each IPO
Management Award will consist
of %
restricted stock unit awards
and %
stock option awards (based on the number of shares subject to
each type of award). Each IPO Management Award (whether a
restricted stock unit award or a stock option award) will vest
with respect to % of the shares covered thereby on
each of the first anniversaries of
the date of the consummation of this offering, subject to the
employees continued employment through the applicable
vesting date. In addition, the exercise price per share of our
common stock subject to the IPO Management Award stock options
will be equal to the initial public offering price of our common
stock in this offering and each such stock option shall have a
maximum term of 10 years.
Non-Employee Director Awards. As described
below in Director Compensation Policies, pursuant to
the non-employee director compensation program which we intend
to adopt in connection with this offering, each of our
non-employee directors will receive an equity or equity-based
compensation award with a fair market value on the date of the
grant of $100,000 upon his or her initial election to our board
of directors. We have not granted any such awards to date and,
accordingly, as of the date of the consummation of this
offering, we intend to grant awards to each of our non-employee
directors of deferred stock units with respect to shares of our
common stock having a fair market value of $100,000 as of the
date of the consummation of this offering. We refer to these
awards herein as the IPO Non-Employee Director
Awards. Each IPO Non-Employee Director Award will be
issued pursuant to the Equity Plan and will be fully-vested as
of the date of grant, but the shares of common stock subject to
such IPO Non-Employee Director Award will not be issued to the
non-employee director until the six-month anniversary of the
date of the non-employee directors termination of
directorship.
Executive Bonus Plan. Prior to the
completion of this offering, we intend to adopt an Executive
Bonus Plan. The Executive Bonus Plan will be designed to provide
an incentive for superior work and to motivate covered key
executives toward even greater achievement and business results,
to tie their goals and interests to those of us and our
stockholders and to enable us to attract and retain highly
qualified executives.
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The Executive Bonus Plan will be a performance-based bonus plan
under which our designated key executives, including our named
executive officers, will be eligible to receive bonus payments
with respect to a specified period (for example, our fiscal
year). Bonuses will generally be payable under the Executive
Bonus Plan upon the attainment of pre-established performance
goals. Notwithstanding the foregoing, we may pay bonuses
(including, without limitation, discretionary bonuses) to
participants under the Executive Bonus Plan based upon such
other terms and conditions as the compensation committee may in
its discretion determine.
Performance goals under the Executive Bonus Plan will relate to
one or more corporate business criteria with respect to us or
any of our subsidiaries, including but not limited to: net
income or loss (either before or after interest, taxes,
depreciation
and/or
amortization), EBITDA, sales or revenue, acquisitions or
strategic transactions, operating income or loss, cash flow
(including, without limitation, operating cash flow and free
cash flow), return on capital, return on assets (including,
without limitation, return on net assets), return on
stockholders equity, economic value added, stockholder
returns, return on sales, gross or net profit margin,
productivity, expenses, margins, operating efficiency, customer
satisfaction, working capital, earnings or loss per share, price
per share of equity securities, market share and number of
customers, any of which may be measured either in absolute terms
or as compared to any incremental increase or decrease, or as
compared to results of a peer group.
The Executive Bonus Plan will be administered by the
compensation committee. The compensation committee will select
the participants in the Executive Bonus Plan and the performance
goals to be utilized with respect to the participants, establish
the bonus formulas for each participants annual bonus, and
certify whether any applicable performance goals have been met
with respect to a given performance period. The Executive Bonus
Plan will provide that we may amend or terminate the Executive
Bonus Plan at any time in our sole discretion. Any amendments to
the Executive Bonus Plan will require stockholder approval only
to the extent required by applicable law, rule or regulation.
Compensation
Risk Analysis
Prior to the completion of this offering, we intend to analyze
our compensation programs and policies to determine whether
those programs and policies are reasonably likely to have a
material adverse effect on us.
DIRECTOR
COMPENSATION
2010 Director
Compensation
None of our directors received any compensation in connection
with his services as a director in 2010. In 2010, our board of
directors was comprised of Luke Hillier, Daniel Clarkson and R.
Scott LaRose. Mr. Hillier and Mr. Clarkson were
employees of the company in 2010. For a description of their
compensation received as employees of the company please see the
Summary Compensation Table and related narrative disclosure
under Executive CompensationSummary Compensation
Table. Mr. LaRose was not an employee of the company
in 2010 and did not receive any directors fees or other
compensation for his services as a director in 2010. Although
our directors did not receive any compensation for their
services as directors in 2010, each of our directors received
distributions in his capacity as a stockholder of the company in
2010. See Dividend Policy.
Director
Compensation Policies
In connection with this offering, we intend to adopt a
non-employee director compensation program pursuant to which
each non-employee director will receive an annual cash retainer,
payable in equal quarterly installments, in the amount of
$40,000; additional annual cash retainer fees of $15,000 to
$25,000 for the chairpersons of our audit, compensation and
nominating and corporate governance committees; and of
additional annual cash retainer fees of $5,000 to $10,000 for
the non-chairperson members of such committees. In addition, we
intend that each non-employee director will receive an equity or
equity-based compensation award with a fair market value of
$100,000 upon his or her initial election to our board of
directors (pro-rated for any partial year of service) and equity
or equity-based compensation awards with a fair market value of
$80,000 each year thereafter that the individual continues to
serve as a non-employee director.
96
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table provides certain information regarding the
beneficial ownership of our outstanding capital stock as of
March 31, 2011 for:
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each of the executive officers named in the Summary Compensation
Table;
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each of our directors and director nominees;
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all of our directors and executive officers as a group;
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each person or group who beneficially owns more than 5% of our
capital stock on a fully diluted basis; and
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each of the selling stockholders.
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The percentage of ownership indicated before this offering is
based on 148,140 shares of common stock outstanding on
March 31, 2011.
Beneficial ownership of shares is determined under the rules of
the SEC and generally includes any shares over which a person
exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community
property laws, each person identified in the table possesses
sole voting and investment power with respect to all shares of
common stock held by them. Shares of common stock subject to
options currently exercisable or exercisable within 60 days
of ,
2011 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares
of the person holding these options, but are not deemed
outstanding for calculating the percentage of any other person.
Unless otherwise noted, the address for each director and
executive officer is 621 Lynnhaven Parkway, Suite 400,
Virginia Beach, Virginia 23452.
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Shares
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Shares
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Beneficially Owned
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Shares to be
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Beneficially Owned
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Prior to This Offering
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Sold in This
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After This Offering
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Name and Address of Owner
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Number
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Percent
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Offering
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Number
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Percent
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Executive Officers and Directors
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Luke
Hillier(1)*
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86,540
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58.42
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%
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Daniel
Clarkson(2)*
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24,640
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16.63
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%
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Patricia Bohlen
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Jason Wallace
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Bruce Dressel
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Lieutenant General (Ret.) Robert T. Dail
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Paul O. Hirschbiel
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R. Scott
LaRose(3)*
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36,960
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24.95
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%
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William A. Roper, Jr.
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C. Arthur Brother Rutter III
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All Executive Officers and Directors as a Group
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148,140
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100.00
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%
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* |
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Beneficial Owners of 5% or More of the Outstanding Common Stock
of ADS Tactical, Inc. |
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(1) |
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This amount includes 1,730.8 shares of our common stock
that Mr. Hillier transferred to the Luke M. Hillier
2010 Grantor Retained Annuity Trust, for which
Mr. Hillier serves as settlor and trustee. Pursuant to SEC
rules, Mr. Hillier is deemed to have beneficial ownership
of these shares. |
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(2) |
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This amount includes 492.8 shares of our common stock that
Mr. Clarkson transferred to the
Daniel J. Clarkson 2010 Grantor Retained Annuity
Trust, for which Mr. Clarkson serves as settlor and
trustee. Pursuant to SEC rules, Mr. Clarkson is deemed to
have beneficial ownership of these shares. |
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(3) |
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This amount includes 554.4 shares of our common stock that
Mr. LaRose transferred to the R. Scott LaRose
2010 Grantor Retained Annuity Trust, for which
Mr. LaRose serves as settlor and trustee. Pursuant to SEC
rules, Mr. LaRose is deemed to have beneficial ownership of
these shares. |
97
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our
Related Person Transaction Policy
In connection with this offering, our board of directors will
adopt a code of ethics that applies to all of our directors,
officers and employees, including our chief executive officer.
Our code of ethics will prohibit all conflicts of interest
unless they have been approved or ratified by a majority of the
independent directors on our board of directors (or an
authorized committee of our board of directors). This code of
ethics will be available on our website. Our board of directors,
upon the recommendation of our nominating and corporate
governance committee, will adopt a written policy with respect
to related party transactions prior to the consummation of this
offering.
Pursuant to our related person transaction policy, any Related
Person Transaction, including any arrangement or transaction
existing on the date of this offering that is expected to
continue in the future, must be approved or ratified by a
majority of the independent directors on our board of directors
and by our audit committee. In determining whether to approve or
ratify a transaction with Related Persons, our independent
directors and our audit committee may consider, among other
things: (i) whether the terms of the transaction are fair
to us and would apply on the same basis if the other party to
the transaction did not involve a Related Person;
(ii) whether there are compelling business reasons for us
to enter into the transaction; (iii) whether the
transaction would impair the independence of an otherwise
independent director; and (iv) whether the transaction
presents an improper conflict of interest, taking into account
the size of the transaction, the overall financial position of
the Related Person, the direct or indirect nature of his or her
interest in the transaction and the ongoing nature of any
proposed relationship and any other factors our board of
directors and our audit committee deem relevant.
Under our related person transaction policy, a Related
Person Transaction is any transaction, arrangement or
relationship between us or any of our subsidiaries and a Related
Person that involves or is expected to involve more than
$120,000. A Related Person is any of our executive
officers, directors or director nominees, any stockholder
beneficially owning in excess of 5% of our stock or securities
exchangeable for our stock, any immediate family member of any
of the foregoing persons, and any firm, corporation or other
entity in which any of the foregoing persons is an executive
officer, a partner or principal or in a similar position or in
which such person has a 5% or greater beneficial interest in
such entity.
Transactions
with Related Persons That We Believe Will Continue in the
Future
Below are historical transactions with Related Persons that we
believe will continue in the future, subject to our Related
Person Transaction policy and subject to approval or
ratification by a majority of the independent directors on our
board of directors and our audit committee.
Tactical
Distributors, LLC
Tactical Distributors, LLC, or Tactical
Distributors, is a wholesale distributor of tactical and
operational equipment that sells primarily to non-government
customers, including small resellers and individuals making
purchases for recreational use. From time to time, we sell
certain of our products to Tactical Distributors, which then
resells these products to its customers. Occasionally, we
purchase some of the products that we sell to our customers from
Tactical Distributors. Due to restrictions in many of the
agreements we have with certain of our vendors, we cannot sell
certain products into the commercial market using our preferred
government prices. To sell to non-government, commercial
customers, we would have to obtain different pricing terms from
our vendors, institute significant internal pricing controls and
give our vendors audit visibility into our sales records to
assure compliance with these vendor restrictions. We determined
that implementing these operational controls and procedures was
not cost-effective for the company and was not aligned with our
core business strategy. Therefore, our stockholders established
Tactical Distributors to transact these sales to non-government
customers. The items that we sell to Tactical Distributors are
limited to those that are not subject to customer restrictions
by any vendor agreement. Sales to Tactical Distributors and
purchases from Tactical Distributors have historically been at
cost. In addition, in
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the past, our staff has assisted with the accounting and
bookkeeping of Tactical Distributors in exchange for a monthly
fee of $1,000. Our staff no longer provides assistance with the
accounting and bookkeeping of Tactical Distributors.
For the years ended December 31, 2008, 2009 and 2010, we
had sales to Tactical Distributors in the amounts of $1,141,734
and $1,775,451 and $1,793,383 respectively, and purchases from
Tactical Distributors in the amounts of $147,394, $1,415,843 and
$541,834, respectively. At December 31, 2008, 2009 and
2010, we had cash advances to Tactical Distributors in the
amounts of $13,346, $39,686 and $13,804, respectively. At
December 31, 2008, 2009 and 2010, we had accounts
receivable from Tactical Distributors of $301,898, $253,214 and
$227,651, respectively, and accounts payable of $4,617, $9,409
and $3,828, respectively. For the three months ended
March 31, 2011, we had sales to and purchases from Tactical
Distributors in the amounts of $289,525 and $44,562,
respectively. At March 31, 2011, we had cash advances to
Tactical Distributors of $1,020, accounts receivable from and
accounts payable to Tactical Distributors of $376,827 and
$18,183, respectively. As of the date of this prospectus, all
advances to Tactical Distributors have been repaid. In 2008,
Tactical Distributors was owned by Daniel Clarkson, Luke
Hillier, Michael Hillier, Jr. and R. Scott LaRose, in the
amounts of 16.64%, 50.08%, 16.64% and 16.64%, respectively. From
2009 to the date of this prospectus, Tactical Distributors has
been owned by Daniel Clarkson, Luke Hillier and R. Scott LaRose
in the amounts of 16.63%, 58.42% and 24.95%, respectively.
Daniel Clarkson is our Chief Operating Officer and a member of
our board of directors. Luke Hillier is our Chief Executive
Officer and chairman of our board of directors. Michael
Hillier, Jr. is Luke Hilliers brother. R. Scott
LaRose is a member of our board of directors.
Arrangements
Relating to Aircraft
Tactical
Air, LLC
We lease three aircraft from Tactical Air, LLC, or
Tactical Air. Tactical Air owns the aircraft that we
lease in order to facilitate our compliance with Federal
Aviation Administration rules and regulations. ADS and Mythics
are the only entities that lease aircraft from Tactical Air. We
believe the fees that we paid to Tactical Air were favorable as
compared to the fees and expenses that would have been incurred
for comparable services from an independent third-party
provider. For the years ended December 31, 2008, 2009 and
2010, we purchased $255,190, $201,786 and $158,954 of services
from Tactical Air, respectively. At December 31, 2008, 2009
and 2010, we had accounts payable to Tactical Air of $45,790,
$670 and $43,108, respectively. At December 31, 2009, we
had cash advances due from Tactical Air of $16,400 for an
invoice that we paid on behalf of Tactical Air. For the three
months ended March 31, 2011, we had purchases of $61,267
from Tactical Air. At March 31, 2011, we had accounts
payable to Tactical Air of $10,034. At December 31, 2010,
we did not have any cash advances due from Tactical Air. We also
had transactions with Tactical Air for each of the years ended
December 31, 2008 and 2009 that we treated as of
compensation to certain of our executive officers. In 2008, each
of Luke Hillier, Michael Hillier, Jr. and R. Scott LaRose owned
33% of Tactical Air. In 2009, Tactical Air was owned 50% by Luke
Hillier and 50% by R. Scott LaRose. From January 1, 2010 to
the date of this prospectus, Tactical Air has been owned by
Daniel Clarkson, Luke Hillier and R. Scott LaRose in the
amounts of 16.64%, 41.68% and 41.68%, respectively.
Tactical
Hawker, LLC
We lease an aircraft from Tactical Hawker, LLC, or
Tactical Hawker. Tactical Hawker owns the aircraft
that we lease in order to facilitate our compliance with Federal
Aviation Administration rules and regulations. ADS and Mythics
are the only entities that lease aircraft from Tactical Hawker.
We believe the fees that we paid to Tactical Hawker were
favorable as compared to the fees and expenses that would have
been incurred for comparable services from an independent
third-party provider. For the year ended December 31, 2008,
we had cash advances due to Tactical Hawker of $52,005. For the
years ended December 31, 2008, 2009 and 2010, we had
purchases from Tactical Hawker in the amounts of $32,149,
$443,160 and $647,513, respectively. At December 31, 2009
and 2010, we had accounts payable to Tactical Hawker of $120,625
and $7,177, respectively. For the three months ended
March 31, 2011, we had purchases from Tactical Hawker in
the amount of $177,868. At March 31, 2011, we had accounts
payable to Tactical
99
Hawker of $14,422. We also had transactions with Tactical
Hawker for each of the years ended December 31, 2008 and
2009 that we treated as compensation to certain of our executive
officers. In 2008, Tactical Hawker was owned by Daniel Clarkson,
Luke Hillier, Michael Hillier, Jr. and R. Scott LaRose
in the amounts of 16.64%, 50.08%, 16.64% and 16.64%,
respectively. From 2009 to the date of this prospectus, Tactical
Hawker has been owned by Daniel Clarkson, Luke Hillier and
R. Scott LaRose in the amounts of 16.63%, 58.42% and
24.95%, respectively.
Tactical
Pilot Operations, LLC
We purchase pilot services for chartered aircraft from Tactical
Pilot Operations, LLC, or Tactical Pilot. This
entity employs the pilots that operate the planes held by
Tactical Air and Tactical Hawker and provides maintenance and
other operational services in connection with these planes.
Tactical Pilot provides services only to ADS and to Mythics. We
believe the fees that we paid to Tactical Pilot were favorable
as compared to the fees and expenses that would have been
incurred for comparable services from an independent third-party
provider. For the years ended December 31, 2008, 2009 and
2010, we had purchases of $49,208, $134,944 and $202,201 from
Tactical Pilot, respectively. At December 31, 2008, 2009
and 2010, we had accounts payable to Tactical Pilot in the
amounts of $33,825, $19,022 and $12,287, respectively. For the
three months ended March 31, 2011, we had purchases of
$65,242 from Tactical Pilot. At March 31, 2011, we had
accounts payable to Tactical Pilot of $5,668. We also had
transactions with Tactical Pilot for each of the years ended
December 31, 2008 and 2009 that we treated as compensation
to certain of our executive officers. In 2008, each of Luke
Hillier, Michael Hillier, Jr. and R. Scott LaRose
owned 33% of Tactical Pilot. In 2009, each of Luke Hillier and
R. Scott LaRose owned 50% of Tactical Pilot. From
January 1, 2010 to the date of this prospectus, Tactical
Pilot has been owned by Daniel Clarkson, Luke Hillier and
R. Scott LaRose in the amounts of 16.64%, 41.68% and
41.68%, respectively.
Arrangements
Relating to Real Property
Tactical
Warehouse, LLC
We lease our kitting facility from Tactical Warehouse, LLC, or
Tactical Warehouse, which owns the building that
houses our kitting facility. We also guarantee debt in the
amount of $8.5 million incurred by Tactical Warehouse to
purchase the building that houses our kitting facility and to
construct a new warehouse that we intend to lease for our other
operations. We believe that the rent we pay is comparable to
that which would be paid by an unaffiliated third party leasing
the same space. For the years ended December 31, 2008, 2009
and 2010, we paid rent to Tactical Warehouse in the amounts of
$223,000, $577,125 and $698,435, respectively. For the three
months ended March 31, 2011, we paid rent to Tactical
Warehouse in the amount of $149,843. In 2008, Tactical Warehouse
was owned by Daniel Clarkson, Luke Hillier, Michael
Hillier, Jr. and R. Scott LaRose in the amounts of
16.64%, 50.08%, 16.64% and 16.64%, respectively. From 2009 to
the date of this prospectus, Tactical Warehouse has been owned
by Daniel Clarkson, Luke Hillier and R. Scott LaRose in the
amounts of 16.63%, 58.42% and 24.95%, respectively. Tactical
Warehouse is consolidated with ADS in our historical financial
statements.
Tactical
Office, LLC
In the fourth quarter of 2009, we entered into a lease for
office space in our corporate headquarters with Tactical Office,
LLC, or Tactical Office, which owns and operates the
office building that contains our corporate headquarters as well
as the offices of several additional, non-affiliated third-party
tenants that are located in the same building as our corporate
headquarters. We also guarantee debt in the amount of
$6.1 million incurred by Tactical Office to purchase the
building in which our corporate headquarters resides. For the
years ended December 31, 2009 and 2010 and the three months
ended March 31, 2011, we paid rent to Tactical Office in
the amounts of $360,000, $1,392,693 and $298,806, respectively.
At December 31, 2009 and 2010, we had cash advances to
Tactical Office of $704,901 and $0, respectively. These advances
were related to an allowance for leasehold improvements, which
was provided to Tactical Office by us. The rent that we pay to
Tactical Office is slightly more per square foot than the rent
paid by the non-affiliated third-party tenants who
100
reside in the same building because our leased space was
recently improved while the other space in the building was not.
We believe that the rent that we pay to Tactical Office is
similar to that paid for comparable office space in the area. At
December 31, 2010 and March 31, 2011, we did not have
any accounts payable to Tactical Office. From 2009 to the date
of this prospectus, Tactical Office has been owned by Daniel
Clarkson, Luke Hillier and R. Scott LaRose in the amounts
of 16.63%, 58.42% and 24.95%, respectively. Tactical Office is
consolidated with ADS in our historical financial statements.
Transactions
with Related Persons That We Do Not Expect to Continue in the
Future
Tactical
Exporters, Inc.
We have utilized the services of Tactical Exporters, Inc., or
Tactical Exporters in connection with the sale of
the products and related services we offer outside of the United
States. Tactical Exporters is a DISC under the Internal Revenue
Code, which provides a tax savings for transactions that utilize
a DISC in order to encourage the export of
U.S.-made
products. Because we have historically operated as a subchapter
S corporation, the stockholders of ADS were able to realize
tax savings by effecting certain qualifying sales outside of the
United States through Tactical Exporters. The fees paid by us to
Tactical Exporters were calculated in accordance with the IRS
guidelines governing the use of DISCs and were contributed back
to ADS by the stockholders of Tactical Exporters on an annual
basis. For the years ended December 31, 2008, 2009 and
2010, we made payments to Tactical Exporters of $2,364,635,
$4,544,266 and $0, respectively, in exchange for services
provided by Tactical Exporters. In 2008, Tactical Exporters was
owned by Daniel Clarkson, Luke Hillier, Michael
Hillier, Jr. and R. Scott LaRose in the amounts of 16.64%,
50.08%, 16.64% and 16.64%, respectively. From 2009 to the date
of this prospectus, Tactical Exporters was owned by Daniel
Clarkson, Luke Hillier, and R. Scott LaRose in the amounts of
16.63%, 58.42% and 24.95%, respectively. Tactical Exporters is
consolidated with ADS in our historical financial statements for
fiscal years 2008, 2009 and 2010 and our unaudited condensed
consolidated financial statements for the three months ended
March 31, 2011. Tactical Exporters existence will
terminate upon consummation of this offering.
Mythics,
Inc.
In 2006, we purchased products and services from Mythics, Inc.,
or Mythics, in connection with the implementation of
our Oracle Enterprise Resource Planning, or Oracle
ERP, software system. Prior to engaging Mythics, we
evaluated other operational and accounting software systems and
found that our needs would be best served by implementing Oracle
ERP. In subsequent years, in order to complete the
implementation of our Oracle ERP system, we purchased additional
support services from Mythics. Our Oracle ERP-related
maintenance and support services are now provided by a
non-affiliated third party on pricing terms similar to those we
received from Mythics. For the year ended December 31,
2008, we purchased software, development and implementation
services from Mythics in the amount of $113,469, and had
accounts payable to Mythics at the end of that fiscal year in
the amount of $102,069. For the year ended December 31, 2010, we
purchased software, development and implementation services from
Mythics in the amount of $30,000. For the three months ended
March 31, 2011, we did not purchase any software,
development and implementation services from Mythics. In 2008
and 2009, each of Luke Hillier, Michael Hillier, Jr. and R.
Scott LaRose owned 33.3% of Mythics. As of the date of this
prospectus, Mythics is owned by Luke Hillier, Michael Hillier,
Jr., R. Scott LaRose and Charles Salle in the amounts of 3.33%,
33.33%, 13% and 50.33%, respectively. Charles Salle is our
General Counsel. At December 31, 2010, we had cash advances
due from Mythics of $62,462 related to payments we made on
behalf of Mythics. We did not have any cash advances due from
Mythics at March 31, 2011.
Tactical
Properties, LLC
We leased two homes from Tactical Properties, LLC, or
Tactical Properties. For each of the years ended
December 31, 2008, 2009 and 2010, we paid rent and other
fees in connection with property management services to Tactical
Properties in the amount of $180,000, $180,000 and $0,
respectively. At December 31, 2009 and 2010, we had cash
advances to Tactical Properties of $9,015 and $0, respectively.
Each
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of Daniel Clarkson, Luke Hillier, Michael Hillier, Sr.,
Michael Hillier, Jr., R. Scott LaRose and Charles Salle own
16.67% of Tactical Properties. Michael Hillier, Sr. is the
father of Luke Hillier. Our relationship with Tactical
Properties has been discontinued.
Other
From time to time, we have made payments on behalf of our
stockholders for personal expenses and on behalf of entities
owned by certain of our stockholders for expenses incurred, for
which we were subsequently reimbursed. At December 31,
2008, 2009 and 2010, we had advances due from affiliates of
$2,707,643, $635,361 and $239,687, respectively, including
advances to certain entities discussed above. All advances have
been repaid. After this offering, we do not expect to make any
advances to, or payments on behalf of, our stockholders or any
of our employees for personal expenses.
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DESCRIPTION
OF CERTAIN INDEBTEDNESS
The following is a summary of the material provisions of the
instruments evidencing our existing material indebtedness. This
summary is not a complete description of all of the terms of the
agreements governing our material indebtedness.
Senior
Secured Notes
On March 25, 2011, we issued $275.0 million of
11% senior secured notes due April 1, 2018 at an
offering price of 100% of the face value of the senior secured
notes. Interest on the senior secured notes is payable on April
1 and October 1 of each year. The proceeds from the offering of
the senior secured notes were used (1) to make a
distribution of $217.1 million to our stockholders,
(2) to repay our term loan facility, (3) to pay the
transaction bonuses and (4) to pay related transaction fees
and expenses, including discounts and commissions to the initial
purchasers of the senior secured notes. See Prospectus
SummaryRecent Transactions.
The senior secured notes are secured by a first-priority lien
(subject to certain exceptions and permitted liens) on certain
fixed and intangible assets, capital stock of certain
subsidiaries, certain intercompany loans held by us and the
guarantors of the senior secured notes, and proceeds of the
foregoing, in each case held by us and the guarantors of the
senior secured notes. The senior secured notes are also secured
by a second-priority lien (subject to certain exceptions and
permitted liens) on all accounts (other than certain notes
accounts), instruments, chattel paper and other contracts
evidencing such accounts, inventory, certain investment
property, cash (other than cash proceeds of the collateral
subject to a first-priority lien in favor of the senior secured
notes), general intangibles and instruments related to the
foregoing and proceeds of the foregoing, in each case held by us
and the guarantors of the senior secured notes.
Prior to April 1, 2014, up to 35% of the original principal
amount of the senior secured notes (including any additional
notes issued under the senior secured notes indenture) may be
redeemed with the net proceeds of certain equity offerings
completed before April 1, 2014 at 111%, provided that after
giving effect to such redemption, not less than 50% of the
senior secured notes remain outstanding. In addition, prior to
April 1, 2015, the senior secured notes may be redeemed in
part or in full at a redemption price equal to 100% of the
principal amount of the senior secured notes, plus a make-whole
premium calculated in accordance with the senior secured notes
indenture and accrued and unpaid interest, if any. On or after
April 1, 2015, the senior secured notes may be redeemed in
part or in full at the following percentages of the outstanding
principal amount prepaid: 108.250% prior to April 1, 2016;
105.500% on or after April 1, 2016, but prior to
April 1, 2017; and 100% on or after April 1, 2017.
In the event of a Change in Control (as defined in
the senior secured notes indenture and described in the
following sentence), we will be required to offer to repurchase
the senior secured notes at a price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any, to
the date of repurchase. Change in Control under the
senior secured notes indenture means the occurrence of any of
the following: (1) any person or group (other than
Permitted Holders (as defined in the senior secured notes
indenture) or a direct or indirect parent entity) becomes the
beneficial owner, directly or indirectly, of a majority of the
total voting power of the Voting Stock (as defined in the senior
secured notes indenture), (2) a sale or transfer of all or
substantially all of our assets or (3) a change in the
majority of our board of directors in certain circumstances. In
addition, we will be required to offer to repurchase the senior
secured notes at a price equal to 100% of the principal amount,
plus accrued and unpaid interest, if any, with Net Proceeds (as
defined in the senior secured notes indenture) from certain
asset sales (including collateral securing the senior secured
notes) as defined under the senior secured notes indenture, if
such proceeds have not otherwise been used in certain specified
manners within 365 days of the date of the asset sale.
The senior secured notes indenture contains customary covenants
and restrictions on the activities of us and our restricted
subsidiaries, including, but not limited to, the incurrence of
additional indebtedness; pay dividends or make distributions or
redeem our capital stock; pay or redeem or purchase certain
indebtedness; make certain loans and investments; sell assets;
create liens on certain assets to secure debt; enter into
agreements restricting our subsidiaries ability to pay
dividends; consolidate, merge, sell or otherwise dispose
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of all or substantially all of our assets; and engage in
transactions with affiliates. Certain of these covenants will be
suspended if the senior secured notes are assigned an investment
grade rating by both Standard & Poors Rating
Services and Moodys Investor Service, Inc. and no default
has occurred or is continuing. If either such rating on the
senior secured notes should subsequently decline to below
investment grade, the suspended covenants will be reinstated.
Events of default under senior secured notes indenture include,
but are not limited to, (1) failure to pay principal or
interest when due; (2) failure to comply with the terms of
the senior secured notes indenture after 60 days notice;
(3) a default with respect to other indebtedness for
failure to pay amounts due or which results in the acceleration
of such indebtedness if the aggregate amount of such
indebtedness is $20.0 million or greater; (4) certain
bankruptcy events; (5) failure to pay final non-appealable
judgments entered by a court aggregating in excess of
$20.0 million within 60 days; and (6) subject to
certain exceptions, the documents evidencing our obligations
pursuant to the senior secured notes and the senior secured
revolving credit facility cease to be in effect or are denied or
disaffirmed by us or any of the guarantors thereunder.
All obligations under the senior secured notes are
unconditionally guaranteed on a senior secured basis by all of
our existing and future direct and indirect subsidiaries that
borrow under or guarantee any obligation under our senior
secured revolving credit facility or any other indebtedness of
us or any other guarantor of the senior secured notes.
The senior secured notes will not be registered under the
Securities Act.
Senior
Secured Revolving Credit Facility
On February 18, 2010, we refinanced our then-existing
credit facility by entering into a $180.0 million senior
secured revolving credit facility (including an optional
increase in commitments of up to $25.0 million) among
Atlantic Diving Supply, Inc. as borrower, ADS Tactical, Inc. and
MAR-VEL as guarantors and Wells Fargo Bank, National Association
(successor by merger to Wachovia Bank, National Association), as
administrative agent (as defined therein) and the other parties
thereto. On October 22, 2010, we amended our senior secured
revolving credit facility to permit us to enter into our term
loan facility. In connection with the refinancing transactions
in March 2011, we further amended and restated the senior
secured revolving credit facility to, among other things, repay
our term loan facility, provide for up to $200.0 million in
borrowings with an optional increase in commitments of up to
$50.0 million, and permit the offering of the senior
secured notes and the distributions to our equity holders. The
amended and restated senior secured revolving credit facility
became effective concurrently with the completion of the
offering of the senior secured notes. In connection with the
amendment and restatement of our senior secured revolving credit
facility, we refinanced our senior secured revolving credit
facility with certain lenders, Wells Fargo Bank, National
Association, as administrative agent, Wells Fargo Capital
Finance, LLC, as sole lead arranger, manager and bookrunner and
each of Suntrust Bank, RBS Business Capital (a division of RBS
Asset Finance, Inc., a subsidiary of RBS Citizens, N.A.) and
Bank of America, N.A. as co-syndication agents and added ADS
Tactical, Inc. as a borrower.
The senior secured revolving credit facility, as amended and
restated, matures on March 25, 2016 and provides senior
secured financing of up to $200.0 million, subject to a
borrowing base. The senior secured revolving credit facility
allows for an optional increase in commitments up to an
additional $50.0 million. Atlantic Diving Supply,
Inc.s future domestic subsidiaries may become co-borrowers
with us and Atlantic Diving Supply, Inc., or co-guarantors with
MAR-VEL, under the senior secured revolving credit facility.
Availability under the senior secured revolving credit facility
is subject to the assets of Atlantic Diving Supply, Inc. and any
co-borrowers that are available to collateralize the borrowing
and is reduced by reserves established by the administrative
agent from
time-to-time.
As of March 31, 2011, we had $66.1 million drawn under
the senior secured revolving credit facility. As of
March 31, 2011, after taking into account borrowing base
limitations and outstanding letters of credit, we would have had
commitments under the senior secured revolving credit facility
available to us of $83.9 million. As of March 31,
2011, we had $6.7 million letters of credit outstanding.
The borrowing base for the senior secured revolving credit
facility at any time is expected to equal the (a) sum of
90% of eligible government accounts receivable, plus 85% of
eligible commercial
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accounts receivable, plus the lesser of (i) 65% of the
value of eligible inventory, (ii) 85% of the net recovery
percentage of the value of eligible inventory and
(iii) $80.0 million and minus (b) reserves
established and modified from time to time. The senior secured
revolving credit facility includes borrowing capacity available
for letters of credit up to $50.0 million and for swingline
loans up to $10.0 million, with
same-day
notice for borrowings under the senior secured revolving credit
facility and swingline loans, and is available in
U.S. dollars.
The senior secured revolving credit facility, as amended,
provides us with the right to request up to $50.0 million
of additional commitments under this facility. The lenders under
the senior secured revolving credit facility are not under any
obligation to provide any such additional commitments under this
facility, and any increase in commitments is subject to
customary conditions precedent. If we were to request any such
additional commitments and the existing lenders or new lenders
were to agree to provide such commitments, we expect that the
facility size could be increased to up to $250.0 million,
but our ability to borrow under this facility would still be
limited by the amount of the borrowing base.
Borrowings under the senior secured revolving credit facility
bear interest at a rate per annum equal to, at our option,
either (a) with respect to base rate loans and swingline
loans, a base rate determined by reference to the highest of
(1) the prime rate of Wells Fargo Bank, National
Association, (2) the federal funds effective rate plus
0.50% and (3) a LIBOR rate determined by reference to the
costs of funds for U.S. dollar deposits for an interest
period of one month adjusted for certain additional costs, plus
1.00% or (b) with respect to Eurodollar rate loans, a LIBOR
rate determined by reference to the costs of funds for
U.S. dollar deposits for the interest period relevant to
such borrowing adjusted for certain eurocurrency liabilities
established by the Federal Reserve Board, in each case plus an
applicable margin ranging from 1.25% to 2.75%. At March 21,
2011, the applicable margin was 1.50%. Commencing with the
completion of the first calendar quarter after June 30,
2011, the applicable margin for borrowings thereunder will be
subject to adjustment each fiscal quarter, based on the average
excess availability. Interest-only payments are due monthly.
In addition to paying interest on outstanding principal under
our senior secured revolving credit facility, we are required to
pay a commitment fee in respect of the unutilized commitments
thereunder, which we initially expect to be equal to 0.5%.
Commencing with the completion of the first calendar quarter
after June 30, 2011, the commitment fee will range between
0.375% to 0.500% and be subject to adjustment based on the
amount of unutilized commitments. We must also pay customary
letter of credit fees and agency fees.
If at any time the aggregate amount of all loans, special agent
advances (i.e. advances that the agent is entitled to charge to
the borrowers account to preserve the collateral),
unreimbursed letter of credit drawings and undrawn letters of
credit under our senior secured revolving credit facility
exceeds the lesser of (a) the aggregate commitment amount
and (b) the borrowing base, we are required to repay the
amount of the excess. We are required to prepay loans with 100%
of the proceeds of the sale of, or insurance recoveries in
respect of, our assets constituting collateral, provided that
any such proceeds in respect of assets constituting collateral
other than collateral securing a first-priority lien on the
senior secured revolving credit facility, so long as no event of
default has occurred and is occurring, such mandatory prepayment
shall be subject to our option to reinvest such proceeds in
assets useful to our business for a period of 365 days
(which period shall be extended by 180 days if we enter
into a legally binding commitment to reinvest such proceeds
within such 365 day period).
We may voluntarily reduce the unutilized portion of the
commitments under the senior secured revolving credit facility,
in whole or in part, with prior written notice to the
administrative agent. Prepayments of loans may be made without
premium or penalty other than customary breakage
costs with respect to Eurodollar rate loans.
There is no scheduled amortization under our senior secured
revolving credit facility. The principal amount outstanding of
the loans under the senior secured revolving credit facility is
due and payable in full on the fifth anniversary of the closing
date, except for swingline loans, which are payable on demand.
105
All obligations under our senior secured revolving credit
facility are unconditionally guaranteed by MAR-VEL and our
future domestic subsidiaries are required to guarantee or become
a co-borrower under our senior secured revolving credit facility.
The senior secured revolving credit facility is secured by first
priority security interests in the all of our accounts
receivable, inventory, cash (other than cash proceeds of the
collateral securing a first-priority lien on the senior secured
notes), general intangibles and instruments related to the
foregoing and proceeds of the foregoing and by second priority
security interests in the collateral securing a first-priority
lien on the senior secured notes, which includes all equipment,
real estate, intellectual property, certain capital stock,
general intangibles and instruments related to the foregoing and
proceeds of the foregoing. See Senior Secured
Notes.
Our senior secured revolving credit facility contains a number
of covenants that, among other things and subject to certain
exceptions, restrict our ability and the ability of our
subsidiaries to incur additional indebtedness and alter, modify
or make payments on certain indebtedness; incur additional
liens; make investments, including: purchase of obligations or
securities, capital contributions, loans, deposits, guarantees,
or acquisitions; consolidate, merge, dissolve or liquidate; pay
dividends on our or our subsidiaries capital stock or
redeem, repurchase or retire such capital stock or our other
indebtedness; create restrictions on the payment of dividends or
other amounts to us; engage in transactions with our affiliates;
make accounting changes or amendments to organizational
documents; modify material contracts; alter the business we
conduct; and sell or transfer assets, including capital stock of
our subsidiaries.
Each of the covenants limiting dividends and other restricted
payments, investments, loans and acquisitions, incurrence of
unsecured debt, and prepayments or redemptions of certain
indebtedness are expected to permit the restricted actions so
long as certain payment conditions are satisfied, including
certain specified excess availability and fixed charge coverage
tests. In addition, we are required to maintain, on a monthly
basis, a fixed charge coverage ratio of not less than 1.1 to 1.0
if either an event of default has occurred and is continuing or
the undrawn availability under our senior secured revolving
credit facility is less than 12.5% of our aggregate commitment,
which requirement shall no longer apply after such conditions
cease to apply for a period of 90 days. The loan and
security agreement contains certain customary representations
and warranties, affirmative covenants and collateral reporting
and covenants.
Events of
Default
The senior secured revolving credit facility includes customary
events of default, including, but not limited to, payment
defaults; material misrepresentations; breaches of certain
covenants; bankruptcy; change of control; material judgments;
certain Employee Retirement Income Security Act of 1974, as
amended (ERISA) related breaches; and cross-defaults
to material indebtedness.
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DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material terms of our
amended and restated certificate of incorporation and bylaws. We
refer you to our amended and restated certificate of
incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement relating to this
offering.
Upon completion of this offering, there will
be
shares of common stock outstanding and no shares of preferred
stock outstanding.
Common
Stock
Pursuant to our amended and restated certificate of
incorporation, we will be authorized to issue up
to shares
of common stock, par value $0.01 per share. Holders of
common stock will be entitled to one vote for each share held on
all matters submitted to a vote of stockholders and will not
have cumulative voting rights. Accordingly, a plurality of the
votes of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing
for election. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by our board
of directors out of funds legally available therefor, subject to
any preferential dividend rights of outstanding preferred stock.
Upon our liquidation, dissolution or winding up, the holders of
common stock are entitled to receive ratably our net assets
available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us hereby
will be, when issued and paid for, fully paid and nonassessable.
If we issue any preferred stock, the rights, preferences and
privileges of holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of our
preferred stock. See Preferred Stock.
Preferred
Stock
Pursuant to the terms of our amended and restated certificate of
incorporation, we will be authorized to issue up
to shares
of preferred stock, par value $0.01 per share. Our board of
directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue such
shares of preferred stock in one or more series. Each such
series of preferred stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by our board of directors.
The purpose of authorizing our board of directors to issue
preferred stock and determine its rights and preferences is to
eliminate delays associated with a stockholder vote on specific
issuances. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging
a third party from attempting to acquire, a majority of our
outstanding voting stock. The existence of the authorized but
undesignated preferred stock may have a depressive effect on the
market price of our common stock.
Stockholders
Agreement
Upon consummation of this offering, our existing stockholders,
Luke Hillier, Daniel Clarkson and R. Scott LaRose, will
enter into a stockholders agreement. The stockholders agreement
will provide that so long as Messrs. Hillier, Clarkson and
LaRose, along with each of their respective affiliates, hold at
least 50% of our outstanding common stock, each of
Messrs. Hillier, Clarkson and LaRose, and each of their
respective affiliates, will vote their shares of common stock in
favor of one director designated by Mr. Clarkson (provided
Mr. Clarkson and his affiliates hold at least 1% of our
outstanding common stock, collectively), one director designated
by Mr. LaRose (provided Mr. LaRose and his affiliates
hold at least 1% of our outstanding common stock, collectively)
and such other directors as may be designated by
Mr. Hillier. There is no limit on the number of directors
that Mr. Hillier may designate. Upon consummation of this
offering, the parties to the stockholders agreement will
continue to own approximately % of
our common stock, collectively.
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The stockholders agreement will also include customary
limitations on transfer such that the parties to the agreement
will not be permitted to transfer their shares, other than
pursuant to a registered public offering or a sale through a
broker-dealer pursuant to Rule 144 of the Securities Act,
unless they have first made the offer to sell such shares to the
other stockholders party to the stockholders agreement.
Under the terms of the stockholders agreement, we will agree to
register the shares of our common stock owned by
Messrs. Hillier, Clarkson and LaRose and their respective
affiliates under the following circumstances:
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Demand Rights. At any time after the
expiration of the lock-up agreements that we signed with the
underwriters, upon the written request from any of the parties
to the stockholders agreement, we will register shares of our
common stock specified in such request for resale under an
appropriate registration statement filed and declared effective
by the SEC. We may defer a demand registration by up to
180 days in any twelve month period if our board of
directors determines it would be detrimental to us to file a
registration statement.
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Piggyback Rights. If at any time we file a
registration statement for the purposes of making a public
offering of our common stock, or register outstanding shares of
our common stock for resale on behalf of any holder of our
common stock, the parties to the stockholders agreement may
elect to include in such registration statement any shares of
common such person holds. The managing underwriter in the
contemplated offering may exclude all or a part of the shares
according to market factors pursuant to an order of priority set
forth in the stockholders agreement.
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Certain
Corporate Anti-Takeover Provisions
Our amended and restated certificate of incorporation and bylaws
will contain a number of provisions relating to corporate
governance and to the rights of stockholders. Certain of these
provisions may be deemed to have a potential
anti-takeover effect in that such provisions may
delay, defer or prevent a change of control of the company.
These provisions include:
Preferred Stock. Our board of directors has
authority to issue series of preferred stock with such voting
rights and other powers as the board of directors may determine,
as described above.
Classified Board. Our board of directors will
be classified into three classes. Each director will serve a
three year term and will stand for re-election once every three
years.
Removal of Directors, Vacancies. Our
stockholders will be able to remove directors only for cause and
only by the affirmative vote of the holders of a majority of the
outstanding shares of our capital stock entitled to vote in the
election of directors. Vacancies on our board of directors may
be filled only by a majority of our board of directors.
No Cumulative Voting. Our amended and restated
certificate of incorporation will provide that stockholders do
not have the right to cumulative votes in the election of
directors. Cumulative voting rights would have been available to
the holders of our common stock if our amended and restated
certificate of incorporation had not negated cumulative voting.
No Stockholder Action by Written Consent; Calling of Special
Meetings of Stockholders. Our amended and
restated certificate of incorporation will not permit
stockholder action without a meeting by consent except for the
unanimous consent of all holders of our common stock. They also
will provide that special meetings of our stockholders may be
called only by our board of directors, and business transacted
in a special meeting will be limited to the matters related to
the purposes stated in the notice.
Amendment of Bylaws. Our bylaws will provide
that approval by the holders of at least two-thirds of the
outstanding shares of capital stock entitled to vote in the
election of directors is required to amend our bylaws.
Advance Notice Requirements for Stockholder Proposals and
Director Nominations. Our bylaws will provide
that stockholders seeking to nominate candidates for election as
directors or to bring business before an annual meeting of
stockholders must provide timely notice of their proposal in
writing to the corporate secretary.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before
the meeting by or at the direction of our board of directors or
by a stockholder of
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record on the record date for the meeting, who is entitled to
vote at the meeting and who has delivered timely written notice
in proper form to our secretary of the stockholders
intention to bring such business before the meeting.
Section 203 of the Delaware General Corporation
Law. We are subject to Section 203 of the
Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any
interested stockholder for a period of three years after the
date that such stockholder became an interested stockholder,
with the following exceptions:
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before such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
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upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction began,
excluding for purposes of determining the voting stock
outstanding (but not the outstanding voting stock owned by the
interested stockholder) those shares owned (i) by persons
who are directors and also officers and (ii) employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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on or after such date, the business combination is approved by
the board of directors and authorized at an annual or special
meeting of the stockholders, and not by written consent, by the
affirmative vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
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In general, Section 203 defines business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loss, advances, guarantees, pledges or other financial benefits
by or through the corporation.
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In general, Section 203 defines an interested
stockholder as an entity or person who, together with the
persons affiliates and associates, beneficially owns, or
within three years prior to the time of determination of
interested stockholder status did own, 15% or more of the
outstanding voting stock of the corporation.
Limitation
on Directors Liability and Indemnification
Section 145 of the Delaware General Corporation Law grants
each corporation organized thereunder the power to indemnify any
person who is or was a director, officer, employee or agent of a
corporation or enterprise, against expenses, including
attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the
corporation, by reason of being or having been in any such
capacity, if he acted in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. A similar standard of care is applicable in the case
of expenses, including attorneys fees, in actions by or in
the right of the corporation, except that no indemnification may
be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware
Court of Chancery or the court in which such action was brought
determines that, despite
109
adjudication of liability, but in view of all of the
circumstances of the case, the person is fairly and reasonably
entitled to indemnity for expenses that the Delaware Court of
Chancery or other court shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law
enables a corporation in its certificate of incorporation, or an
amendment thereto, to eliminate or limit the personal liability
of a director to the corporation or its stockholders of monetary
damages for violations of the directors fiduciary duty of
care as a director, except (i) for any breach of the
directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the Delaware
General Corporation Law (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transaction from which a
director derived an improper personal benefit.
Our amended and restated bylaws will indemnify the directors and
officers to the full extent of the Delaware General Corporation
Law and also allow our board of directors to indemnify all other
employees. Such indemnification extends to the payment of
judgments against such officers and directors and to
reimbursement of amounts paid in settlement of such claims or
actions and may apply to judgments in favor of the corporation
or amounts paid in settlement to the corporation. Such
indemnification also extends to the payment of counsel fees and
expenses of such officers and directors in suits against them
where successfully defended by them or where unsuccessfully
defended, if there is no finding or judgment that the claim or
action arose from the gross negligence or willful misconduct of
such officers or directors. Such right of indemnification is not
exclusive of any right to which such officer or director may be
entitled as a matter of law and shall extend and apply to the
estates of deceased officers and directors.
We will maintain a directors and officers insurance
policy. The policy will insure directors and officers against
unindemnified losses arising from certain wrongful acts in their
capacities as directors and officers and will reimburse us for
those losses for which we have lawfully indemnified the
directors and officers. The policy contains various exclusions
that are normal and customary for policies of this type.
The foregoing summaries are subject to the complete text of our
amended and restated certificate of incorporation and amended
and restated bylaws and the Delaware General Corporation Law and
are qualified in their entirety by reference thereto.
We believe that our amended and restated certificate of
incorporation and amended and restated bylaws and insurance are
necessary to attract and retain qualified persons as directors
and officers. The limitation of liability and indemnification
provisions in our amended and restated certificate of
incorporation and amended and restated bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. They may also reduce the
likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us
and other stockholders. Furthermore, a stockholders
investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and
officers as required or allowed by these indemnification
provisions.
Transfer
Agent and Registrar
The transfer agent and registrar for the common stock is
American Stock Transfer & Trust Company, LLC.
Exchange
Listing
We will apply for listing of our common stock on the New York
Stock Exchange under the symbol ADSI.
110
SHARES ELIGIBLE
FOR FUTURE SALE
We cannot predict what effect, if any, market sales of shares of
common stock or the availability of shares of common stock for
sale will have on the market price of our common stock.
Nevertheless, sales of substantial amounts of common stock in
the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of
our common stock and could impair our future ability to raise
capital through the sale of our equity or equity-related
securities at a time and price that we deem appropriate.
Upon the closing of this offering, we will have outstanding an
aggregate of
approximately shares
of common stock. Of the outstanding shares, the shares sold in
this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any
shares held by our affiliates, as that term is
defined under Rule 144 of the Securities Act, may be sold
only in compliance with the limitations described below. The
remaining outstanding shares of common stock will be deemed
restricted securities as that term is defined under
Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule 144 under the Securities Act,
which are summarized below.
Rule 144. The availability of
Rule 144 will vary depending on whether restricted shares
are held by an affiliate or a non-affiliate. Under Rule 144
as in effect on the date of this prospectus, once we have been a
reporting company subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act for
90 days, an affiliate who has beneficially owned restricted
shares of our common stock for at least six months would be
entitled to sell within any three-month period a number of
shares that does not exceed the greater of either of the
following:
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1% of the number of shares of common stock then outstanding,
which will
equal shares
immediately after this offering; and
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the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
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However, the six month holding period increases to one year in
the event we have not been a reporting company for at least
90 days. In addition, any sales by affiliates under
Rule 144 are also limited by manner of sale provisions and
notice requirements and the availability of current public
information about us.
The volume limitation, manner of sale and notice provisions
described above will not apply to sales by non-affiliates. For
purposes of Rule 144, a non-affiliate is any person or
entity who is not our affiliate at the time of sale and has not
been our affiliate during the preceding three months. Once we
have been a reporting company for 90 days, a non-affiliate
who has beneficially owned restricted shares of our common stock
for six months may rely on Rule 144 provided that certain
public information regarding us is available. The six month
holding period increases to one year in the event we have not
been a reporting company for at least 90 days. However, a
non-affiliate who has beneficially owned the restricted shares
proposed to be sold for at least one year will not be subject to
any restrictions under Rule 144 regardless of how long we
have been a reporting company.
Rule 701. Under Rule 701, common
stock acquired upon the exercise of certain currently
outstanding options or pursuant to other rights granted under
our stock plans may be resold, to the extent not subject to
lock-up
agreements, (1) by persons other than affiliates, beginning
90 days after the effective date of this offering, subject
only to the
manner-of-sale
provisions of Rule 144, and (2) by affiliates, subject
to the
manner-of-sale,
current public information and filing requirements of
Rule 144, in each case, without compliance with the
one-year holding period requirement of Rule 144.
Form S-8
Registration Statements. We intend to file one or
more registration statements on
Form S-8
under the Securities Act following this offering to register our
shares of common stock that are issuable pursuant to our equity
compensation plans. These registration statements are expected
to become effective upon filing. Shares covered by these
registration statements will then be eligible for sale in the
public markets, subject to any applicable
lock-up
agreements and to Rule 144 limitations applicable to
affiliates.
111
Lock-Up
Agreements. We, our officers, directors and
certain of our existing security holders have agreed with the
underwriters not to sell, dispose of or hedge any of their
common stock or securities convertible into or exchangeable for
shares of common stock, during the period from the date of this
prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent
of the representatives of the underwriters.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, in which case, the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event. See
Underwriting.
Registration Rights. Upon consummation of this
offering, our existing stockholders, Luke Hillier, Daniel
Clarkson and R. Scott LaRose, will enter into stockholders
agreement, which under certain circumstances, will provide them
and their respective affiliates with registration rights. See
Description of Capital StockStockholders
Agreement.
112
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-UNITED
STATES HOLDERS OF OUR COMMON STOCK
The following is a general discussion of certain material United
States federal income tax consequences relating to the ownership
and disposition of our common stock by a
non-United
States holder (as defined below) that acquires our common stock
in this offering and holds such common stock as a capital asset
for United States federal income tax purposes (generally,
property held for investment). This discussion is not a complete
analysis of all the potential tax consequences relating to the
ownership and disposition of our common stock and does not
constitute tax advice. For purposes of this discussion, a
non-United
States holder is any beneficial owner of our common stock (other
than an entity or arrangement that is treated as a partnership
for United States federal income tax purposes) that is not, for
United States federal income tax purposes, a United States
person. For purposes of this discussion, the term United
States person means:
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an individual citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for
United States federal income tax purposes) created or organized
in the United States or under the laws of the United States or
any state thereof, including the District of Columbia;
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an estate whose income is subject to United States federal
income tax regardless of its source; or
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a trust (x) if a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust or
(y) which has made a valid election to be treated as a
United States person under applicable United States
Treasury Regulations.
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If a partnership (or an entity treated as a partnership for
United States federal income tax purposes) holds our common
stock, the tax treatment of a partner will generally depend on
the status of the partner and upon the activities of the
partnership. Partnerships which hold our common stock and
partners in such partnerships should consult their own tax
advisors.
This discussion does not address all aspects of United States
federal income taxation that may be relevant in light of a
non-United
States holders special tax status or special
circumstances. Former citizens or residents of the United
States, insurance companies, tax-exempt organizations,
partnerships or other pass-through entities for United States
federal income tax purposes, dealers in securities, banks or
other financial institutions and investors that hold our common
stock as part of a hedge, straddle or conversion transaction are
among those categories of potential investors that are subject
to special rules not covered in this discussion. Furthermore,
this discussion does not address any aspects of United States
federal estate or gift taxation or tax consequences arising
under the laws of any state, local or
non-United
States taxing jurisdiction.
This discussion is based on the Internal Revenue Code of 1986,
as amended, or the Code, and Treasury Regulations
and administrative and judicial interpretations thereof, all as
in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. No ruling has been or
will be sought from the Internal Revenue Service, or the
IRS, with respect to the matters discussed below,
and there can be no assurance that the IRS will not take a
contrary position regarding the tax consequences of the
ownership or disposition of our common stock, or that any such
contrary position would not be sustained by a court. Each
non-United
States holder should consult its own tax advisors regarding the
United States federal, state, local and
non-United
States income and other tax consequences of acquiring, holding
and disposing of our common stock.
Distributions
on common stock
Distributions on our common stock generally will constitute
dividends for United States federal income tax purposes to the
extent paid from our current or accumulated earnings and
profits, as determined under United States federal income tax
principles. To the extent those distributions exceed our current
and accumulated earnings and profits, they will constitute a
return of capital and will first reduce a holders adjusted
tax basis in the common stock, but not below zero, and then the
excess, if any, will be treated as gain from the sale of the
common stock, subject to treatment as described below under
Gain on disposition of common stock.
113
As discussed under Dividend Policy above, we do not
currently expect to pay dividends. In the event we do pay
dividends, dividends paid to a
non-United
States holder generally will be subject to withholding of United
States federal income tax either at a rate of 30% of the gross
amount of the dividends or such lower rate as may be specified
by an applicable income tax treaty. In order to receive a
reduced treaty rate, a
non-United
States holder must provide to us or our paying agent prior to
the payment of dividends a valid IRS
Form W-8BEN
or other successor form certifying qualification for the reduced
rate.
Dividends received by a
non-United
States holder that are effectively connected with a United
States trade or business conducted by the
non-United
States holder (and, if a treaty applies, attributable to the
non-United
States holders United States permanent establishment or
fixed base) are exempt from such withholding tax. In order to
obtain this exemption, a
non-United
States holder must provide a valid IRS
Form W-8ECI
or other successor form properly certifying such exemption.
However, such effectively connected dividends are generally
taxed on a net income basis at the same graduated rates that
would be applicable if the
non-United
States holder were a United States person, subject to an
applicable treaty providing otherwise. In addition to the
graduated tax, dividends received by a corporate
non-United
States holder that are effectively connected with a United
States trade or business of such holder may also be subject to a
branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A non-United
States holder may obtain a refund of any excess amounts withheld
if an appropriate claim for refund is filed timely with the IRS.
If a
non-United
States holder holds our common stock through a foreign
partnership or a foreign intermediary, the foreign partnership
or foreign intermediary will also be required to comply with
additional certification requirements under applicable Treasury
Regulations.
Gain on
disposition of common stock
A non-United
States holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other
disposition of our common stock unless:
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the gain is effectively connected with a United States trade or
business of the
non-United
States holder and, if a tax treaty applies, is attributable to a
United States permanent establishment or fixed base maintained
by such
non-United
States holder;
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the
non-United
States holder is an individual who is present in the United
States for a period or periods aggregating 183 days or more
during the taxable year in which the sale or other disposition
occurs and other conditions are met; or
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our common stock constitutes a United States real property
interest by reason of our status as a United States real
property holding corporation (USRPHC) for
United States federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the
holders holding period for our common stock.
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Gain described in the first bullet point above is generally
taxed on a net income basis at the same graduated rates that
would be applicable if the
non-United
States holder were a United States person. In addition to the
graduated tax, gain realized by a corporate
non-United
States holder that is effectively connected with a United States
trade or business of such holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty. Gain described in the
second bullet point above (which may be offset by United States
source capital losses) will be subject to a flat 30% United
States federal income tax.
Non-United
States holders should consult any applicable income tax treaties
that may provide for different rules.
With respect to the third bullet point above, we believe that we
are not currently and do not anticipate becoming a USRPHC.
However, because the determination of whether we are a USRPHC
depends on the fair market value of our United States real
property interests relative to the fair market value of our
other business assets and our
non-United
States real property interests, there can be no assurance that
we will not become a USRPHC in the future. Even if we become a
USRPHC, as long as our common stock is regularly traded on an
established securities market, within the meaning of the
applicable Treasury Regulations, such common stock will be
treated as a United States real property interest with respect
to a particular
non-United
114
States holder only if such
non-United
States holder actually or constructively holds more than
5 percent of such regularly traded common stock during the
applicable period.
Backup
withholding and information reporting
Generally, we must report annually to the IRS and to each
non-United
States holder the amount of any dividends paid, the name and
address of the recipient, and the amount of any tax withheld.
These information reporting requirements apply even if
withholding was not required because the dividends were
effectively connected dividends or withholding was reduced or
eliminated by an applicable tax treaty. Pursuant to tax treaties
or other agreements, the IRS may make its reports available to
tax authorities in the recipients country of residence.
Backup withholding will generally not apply to payments of
dividends to a
non-United
States holder if the holder has properly certified to us or our
paying agent that it is not a United States person, such as by
providing a valid IRS
Form W-8BEN
or W-8ECI,
or has otherwise established an exemption, provided we or the
paying agent have no actual knowledge or reason to know that the
beneficial owner is a United States person.
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale or other disposition of our common stock by a
non-United
States holder outside the United States through a foreign office
of a foreign broker that does not have certain specified
connections to the United States. However, payment of the
proceeds from a disposition by a
non-United
States holder of common stock made by or through the United
States office of a broker may be subject to information
reporting and backup withholding will apply unless the
non-United
States holder certifies as to its
non-United
States holder status under penalties of perjury or otherwise
establishes an exemption from information reporting and backup
withholding, provided that the broker has no knowledge or reason
to know that the beneficial owner is a United States person.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against a
non-United
States holders United States federal income tax liability
provided the required information is furnished timely to the IRS.
New
Legislation
Newly enacted legislation may impose withholding taxes on
certain types of payments made to foreign financial
institutions and certain other
non-United
States entities. Under this legislation, the failure to comply
with additional certification, information reporting and other
specified requirements could result in withholding tax being
imposed on payments of dividends and sales proceeds to foreign
intermediaries and certain
non-United
States holders. The legislation imposes a 30% withholding tax on
dividends on, or gross proceeds from the sale or other
disposition of, our common stock paid to a foreign financial
institution or to a foreign non-financial entity, unless
(i) the foreign financial institution undertakes certain
diligence and reporting obligations or (ii) the foreign
non-financial entity either certifies it does not have any
substantial United States owners or furnishes identifying
information regarding each substantial United States owner. If
the payee is a foreign financial institution, it must enter into
an agreement with the United States Treasury requiring, among
other things, that it undertake to identify accounts held by
certain United States persons or United States-owned foreign
entities, annually report certain information about such
accounts, and withhold 30% on payments to account holders whose
actions prevent it from complying with these reporting and other
requirements. The legislation would apply to payments made after
December 31, 2012. Prospective investors should consult
their tax advisors regarding this legislation.
THE PRECEDING DISCUSSION OF UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX
ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX
ADVISORS REGARDING THE PARTICULAR UNITED STATES FEDERAL, STATE,
LOCAL, AND
NON-UNITED
STATES TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF
OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED
CHANGE IN APPLICABLE LAWS.
115
UNDERWRITERS
Under the terms and subject to the conditions in an underwriting
agreement dated the date of this prospectus, between us, the
selling stockholders and the underwriters named below, for whom
J.P. Morgan Securities LLC (J.P. Morgan) and
Morgan Stanley & Co. LLC (Morgan Stanley)
are acting as representatives, the underwriters have severally
agreed to purchase and we and the selling stockholders have
agreed to sell to them, severally, the number of shares
indicated below:
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Name
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Number of Shares
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J.P. Morgan Securities LLC
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Morgan Stanley & Co. LLC
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Total
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The underwriters and the representatives are collectively
referred to as the underwriters and the
representatives, respectively. The underwriters are
offering the shares of common stock subject to their acceptance
of the shares from the us and the selling stockholders and
subject to prior sale. The underwriting agreement provides that
the obligations of the several underwriters to pay for and
accept delivery of the shares of common stock offered by this
prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any such shares
are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters
over-allotment option described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the offering price
listed on the cover page of this prospectus and part to certain
dealers. After the initial offering of the shares of common
stock, the offering price and other selling terms may from time
to time be varied by the representatives.
The selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate
of
additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions, to cover over-allotments. The
underwriters may exercise this option if they sell more shares
than the total number of shares set forth in the table above. To
the extent the option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase about the
same percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table.
If the underwriters option is exercised in full, the total
price to the public of all the shares of common stock sold would
be $ , the total underwriting
discounts and commissions would be
$ and the total proceeds to the
selling stockholders would be $ .
The following table shows the per share and total public
offering price, underwriting discounts and commissions, and
proceeds before expenses to us and the selling stockholders.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase up to an
additional shares
of common stock.
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Total
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Per Share
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No Exercise
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Full Exercise
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Public offering price
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$
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$
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$
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Underwriting discounts and commissions to be paid by us
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$
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$
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$
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Underwriting discounts and commissions to be paid by the selling
stockholders
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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$
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The estimated offering expenses payable by us, exclusive of the
underwriting discounts and commissions, are approximately
$ , which includes legal,
accounting and printing costs and various other fees associated
with registration and listing of our common stock.
116
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
We intend to apply to list our common stock on the New York
Stock Exchange under the trading symbol ADSI.
We and our directors and executive officers, the holders of all
of our outstanding stock and certain holders of our outstanding
restricted stock units and stock options have agreed that,
without the prior written consent of J.P. Morgan and Morgan
Stanley on behalf of the underwriters, we and they will not,
during the period ending 180 days after the date of this
prospectus:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase lend or otherwise
transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable
or exchangeable for shares of common stock;
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file any registration statement with the SEC relating to the
offering of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common
stock; or
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock,
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whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. In addition, we and each such person agrees that,
without the prior written consent of J.P. Morgan and Morgan
Stanley on behalf of the underwriters, it will not, during the
period ending 180 days after the date of this prospectus,
make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for common stock.
The restrictions described in the immediately preceding
paragraph to do not apply to:
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the sale of shares to the underwriters;
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transactions by any person other than us relating to shares of
common stock or other securities acquired in open market
transactions after the completion of the offering of the shares;
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transfers of any shares of common stock or any security
convertible into common stock as a bona fide gift, provided
certain requirements are met;
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dispositions to any trust or partnership for the benefit of a
director, executive officer or holder of our outstanding common
stock or any immediate family member thereof, provided certain
requirements are met;
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the transfer of common stock to another corporation,
partnership, limited liability company or other business entity
so long as the transferee is an affiliate of a director,
executive officer or holder of our outstanding common stock and
such transfer is not for value, provided certain requirements
are met;
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distributions of shares of common stock or any security
convertible into common stock to limited partners or
stockholders of such directors, executive officers and the
holders of all of our outstanding stock and stock options
referred to above, provided certain requirements are met;
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the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of shares of common
stock;
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the filing of a Form S-8 relating to the offering of
securities in accordance with the terms of an equity incentive
plan in effect on the date hereof;
|
|
|
|
the grant of restricted stock, options, long-term incentive
units or other securities pursuant to an equity incentive plan
in effect on the date hereof, provided certain requirements are
met; or
|
117
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|
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|
|
the issuance of up to 5% of the total number of outstanding
shares of common stock in connection with bona fide mergers or
acquisitions, joint ventures, commercial relationships or other
strategic transactions, provided certain requirements are met.
|
The 180 day restricted period described in the preceding
paragraph will be automatically extended if:
|
|
|
|
|
during the last 17 days of the 180 day restricted
period we issue an earnings release or announce material news or
a material event relating to us occurs, or
|
|
|
|
prior to the expiration of the 180 day restricted period,
we announce that we will release earnings results during the
16 day period beginning on the last day of the 180 day
period,
|
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18 day period beginning on the issuance of the earnings
release or the announcement of the material news or material
event.
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering. As an
additional means of facilitating this offering, the underwriters
may bid for, and purchase, shares of common stock in the open
market to stabilize the price of the common stock. These
activities may raise or maintain the market price of the common
stock above independent market levels or prevent or retard a
decline in the market price of the common stock. The
underwriters are not required to engage in these activities and
may end any of these activities at any time.
We, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act or to contribute to
payments the underwriters may be required to make because of any
of those liabilities.
A prospectus in electronic format may be made available on
websites maintained by one or more underwriters, or selling
group members, if any, participating in this offering. The
representatives may agree to allocate a number of shares of
common stock to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the
representatives to underwriters that may make Internet
distributions on the same basis as other allocations.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, investment
research, principal investment, hedging, financing, cash
management and brokerage activities. The underwriters and their
affiliates have performed and will continue to perform
investment banking, commercial banking, hedging, cash management
and advisory services for us and our affiliates from time to
time, including as acting as initial purchasers, book-runners or
underwriters in our past offerings, for which they have received
or may receive customary fees and expenses. In particular,
affiliates of certain underwriters are lenders under our senior
secured revolving credit facility, for which they would be
entitled to receive their pro rata portion of the proceeds of
this offering that are used to repay such facility, as well as
certain customary breakage fees with respect to Eurodollar rate
loans in connection with such repayment. In addition, certain of
the underwriters acted as initial purchasers in the issuance of
our senior secured notes, for which they received customary
discounts and commissions. See Description of Certain
Indebtedness.
118
Pricing
of the Offering
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
by negotiations between us and the representatives. Among the
factors considered in determining the initial public offering
price were our future prospects and those of our industry in
general, our sales, earnings and certain other financial and
operating information in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities, and
certain financial and operating information of companies engaged
in activities similar to ours.
Directed
Share Program
At our request, the underwriters will reserve up to
five percent of the shares of common stock to be issued by
the company and offered by this prospectus for sale, at the
initial public offering price, to directors, officers,
employees, business associates and related persons of ADS, Inc.
If purchased by these persons, these shares will be subject to a
180-day
lock-up
restriction. The
lock-up
period will be extended if, during the last 17 days of the
lock-up
period we issue a release about earnings or material news or
events relating to us occurs; or, prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, in which case the restrictions described above will
continue to apply until the expiration of the
18-day
period beginning on the issuance of the release or the
occurrence of the material news or material event. The number of
shares of common stock available for sale to the general public
will be reduced to the extent these individuals purchase such
reserved shares. Any reserved shares that are not so purchased
will be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus. We
have agreed to
indemnify in
connection with the directed share program including for the
failure of any participant to pay for its shares.
Notice to
Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State) an offer to the public of any
shares which are the subject of the offering contemplated by
this Prospectus (the Shares) may not be made in that
Relevant Member State, except that an offer to the public in
that Relevant Member State of any Shares may be made at any time
under the following exemptions under the Prospectus Directive,
if they have been implemented in that Relevant Member State:
(a) to any legal entity which is a qualified investor as
defined in the Prospectus Directive;
(b) to fewer than 100 or, if the Relevant Member State has
implemented the relevant provision of the 2010 PD Amending
Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted
under the Prospectus Directive, subject to obtaining the prior
consent of the representatives for any such offer; or
(c) in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of Shares shall result in a requirement for the
publication by us or any underwriter of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any Shares in any
Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer
and any Shares to be offered so as to enable an investor to
decide to purchase any Shares, as the same may be varied in that
Member State by any measure implementing the Prospectus
Directive in that Member State, the expression Prospectus
Directive means Directive 2003/71/EC (and amendments
thereto, including the 2010 PD Amending Directive, to the extent
implemented in the Relevant Member State), and includes any
relevant implementing measure in the Relevant Member State, and
the expression 2010 PD Amending Directive means
Directive 2010/73/EU.
119
Notice to
Prospective Investors in the United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the Shares in
circumstances in which Section 21(1) of the FSMA does not
apply to us; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the Shares in, from or otherwise involving the
United Kingdom.
Notice to
Prospective Investors in Switzerland
The shares of common stock may not be publicly offered in
Switzerland and will not be listed on the SIX Swiss Exchange
(SIX) or on any other stock exchange or regulated
trading facility in Switzerland. This document has been prepared
without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of
Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules
of any other stock exchange or regulated trading facility in
Switzerland. Neither this document nor any other offering or
marketing material relating to the shares of common stock or the
offering may be publicly distributed or otherwise made publicly
available in Switzerland.
Neither this document nor any other offering or marketing
material relating to the offering, us or the shares of common
stock have been or will be filed with or approved by any Swiss
regulatory authority. In particular, this document will not be
filed with, and the offer of shares of common stock will not be
supervised by, the Swiss Financial Market Supervisory Authority
FINMA, and the offer of shares of common stock has not been and
will not be authorized under the Swiss Federal Act on Collective
Investment Schemes (CISA). The investor protection
afforded to acquirers of interests in collective investment
schemes under the CISA does not extend to acquirers of the
shares of common stock.
Notice to
Prospective Investors in Hong Kong
This prospectus has not been approved by or registered with the
Securities and Futures Commission of Hong Kong or the Registrar
of Companies of Hong Kong. The shares of common stock will not
be offered or sold in Hong Kong other than (i) to
professional investors as defined in the Securities
and Futures Ordinance (Cap. 571) of Hong Kong and any rules
made under that Ordinance; or (ii) in other circumstances
which do not result in the document being a
prospectus as defined in the Companies Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer
to the public within the meaning of that Ordinance. No
advertisement, invitation or document relating to the shares of
common stock which is directed at, or the contents of which are
likely to be accessed or read by, the public of Hong Kong
(except if permitted to do so under the securities laws of Hong
Kong) has been issued or will be issued in Hong Kong or
elsewhere other than with respect to shares of common stock
which are or are intended to be disposed of only to persons
outside Hong Kong or only to professional investors
as defined in the Securities and Futures Ordinance and any rules
made under that Ordinance.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares of common stock may not be circulated or distributed, nor
may the shares of common stock be offered or sold, or be made
the subject of an invitation for subscription or purchase,
whether directly or indirectly, to persons in Singapore other
than (i) to an institutional investor under
Section 274 of the Securities and Futures Act
(Chapter 289) (the SFA), (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA. Where the shares of common stock are
subscribed or purchased
120
under Section 275 by a relevant person which is:
(a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each
of whom is an accredited investor; or (b) a trust (where
the trustee is not an accredited investor) whose sole purpose is
to hold investments and each beneficiary is an accredited
investor, then shares, debentures and units of shares and
debentures of that corporation or the beneficiaries rights
and interest in that trust shall not be transferable for
6 months after that corporation or that trust has acquired
the shares under Section 275 except: (i) to an
institutional investor under Section 274 of the SFA or to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA; (ii) where no consideration is
given for the transfer; or (iii) by operation of law.
121
LEGAL
MATTERS
The validity of the shares sold in this offering will be will be
passed upon for us by Latham & Watkins LLP, New York,
New York. Certain legal matters will be passed upon for the
underwriters by Davis Polk & Wardwell LLP, New York,
New York.
EXPERTS
The consolidated financial statements of ADS Tactical, Inc. and
subsidiary as of December 31, 2009 and December 31,
2010 and for each of the years in the three-year period ended
December 31, 2010 have been included herein in reliance
upon the report of KPMG LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on
Form S-1
that we have filed with the SEC under the Securities Act
covering the common stock we are offering. As permitted by the
rules and regulations of the SEC, this prospectus omits certain
information contained in the registration statement. For further
information with respect to us and our common stock, you should
refer to the registration statement and to its exhibits and
schedules. We make reference in this prospectus to certain of
our contracts, agreements and other documents that are filed as
exhibits to the registration statement. For additional
information regarding those contracts, agreements and other
documents, please see the exhibits attached to this registration
statement.
You can read and copy the registration statement and the
exhibits and schedules filed with the registration statement or
any reports, statements or other information we have filed or
file, at the public reference facilities maintained by the SEC
at 100 F Street, N.E., Washington, D.C. 20549.
You may also obtain copies of the documents from such offices
upon payment of the prescribed fees. You may call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. You may also request copies of the documents upon payment
of a duplicating fee by writing to the SEC. In addition, the SEC
maintains a web site that contains reports and other information
regarding registrants (including us) that file electronically
with the SEC, which you can access at
http://www.sec.gov.
In addition, you may request copies of this filing and such
other reports as we may determine or as the law requires at no
cost, by telephone at
(757) 481-7758,
or by mail to ADS, Inc., 621 Lynnhaven Parkway, Suite 400,
Virginia Beach, Virginia 23452. Our website address is
http://www.adsinc.com.
Information on our website is not considered part of this
prospectus.
122
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Page
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F-2
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Consolidated Financial Statements:
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|
|
|
|
|
F-3
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|
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|
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F-4
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F-5
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F-6
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|
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F-7
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|
Unaudited Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21
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|
|
F-22
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|
F-23
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|
F-1
When the transaction referred to in note 13(b) of the
notes to consolidated financial statements has been consummated,
we will be in a position to render the following report.
/s/ KPMG LLP
Report of
Independent Registered Public Accounting Firm
The Board of Directors
ADS Tactical, Inc.:
We have audited the accompanying consolidated balance sheets of
ADS Tactical, Inc. and subsidiary (the Company) as of
December 31, 2009 and 2010, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the years in the three-year period ended
December 31, 2010. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of ADS Tactical, Inc. and subsidiary as of
December 31, 2009 and 2010, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles.
Norfolk, Virginia
March 12, 2011, except as to note 13(a), which is as
of April 5, 2011
and note 13(b), which is as
of ,
2011
F-2
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|
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|
|
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|
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2009
|
|
|
2010
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,355,414
|
|
|
|
2,810,093
|
|
Accounts receivable, net
|
|
|
119,863,686
|
|
|
|
171,353,312
|
|
Inventories
|
|
|
60,844,076
|
|
|
|
87,345,649
|
|
Prepaid expenses and other current assets
|
|
|
2,100,513
|
|
|
|
2,276,871
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
184,163,689
|
|
|
|
263,785,925
|
|
Property and equipment, net
|
|
|
16,884,085
|
|
|
|
19,212,282
|
|
Due from affiliates
|
|
|
635,361
|
|
|
|
239,687
|
|
Other assets
|
|
|
246,307
|
|
|
|
2,861,606
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
201,929,442
|
|
|
|
286,099,500
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
23,175,000
|
|
|
|
90,154,626
|
|
Current portion of long-term debt
|
|
|
9,297,072
|
|
|
|
21,097,261
|
|
Accounts payable
|
|
|
86,130,676
|
|
|
|
115,067,593
|
|
Accrued expenses
|
|
|
5,173,515
|
|
|
|
6,680,454
|
|
Deferred revenue
|
|
|
504,411
|
|
|
|
139,036
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
124,280,674
|
|
|
|
233,138,970
|
|
Long-term debt, excluding current portion
|
|
|
12,193,322
|
|
|
|
37,573,067
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
136,473,996
|
|
|
|
270,712,037
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|
|
|
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|
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|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock (no par value; 300,000 shares authorized;
outstanding 148,140 shares)
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
63,324
|
|
|
|
63,324
|
|
Retained earnings
|
|
|
63,097,764
|
|
|
|
11,368,460
|
|
|
|
|
|
|
|
|
|
|
Total equity attributable to ADS Tactical, Inc.
|
|
|
63,161,088
|
|
|
|
11,431,784
|
|
Noncontrolling interests
|
|
|
2,294,358
|
|
|
|
3,955,679
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
65,455,446
|
|
|
|
15,387,463
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
201,929,442
|
|
|
|
286,099,500
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
|
|
|
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|
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|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net sales
|
|
$
|
660,535,126
|
|
|
|
932,177,116
|
|
|
|
1,330,839,600
|
|
Cost of goods sold
|
|
|
572,992,387
|
|
|
|
809,116,969
|
|
|
|
1,166,391,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
87,542,739
|
|
|
|
123,060,147
|
|
|
|
164,448,445
|
|
Selling, general, and administrative expenses
|
|
|
44,322,361
|
|
|
|
60,897,157
|
|
|
|
80,944,623
|
|
Intangible asset impairment
|
|
|
|
|
|
|
2,996,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
43,220,378
|
|
|
|
59,166,965
|
|
|
|
83,503,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
225,129
|
|
|
|
84,211
|
|
|
|
127,306
|
|
Interest expense
|
|
|
(1,481,896
|
)
|
|
|
(1,401,361
|
)
|
|
|
(5,388,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,256,767
|
)
|
|
|
(1,317,150
|
)
|
|
|
(5,260,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
41,963,611
|
|
|
|
57,849,815
|
|
|
|
78,243,047
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(46,576
|
)
|
|
|
141,292
|
|
|
|
961,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS Tactical, Inc.
|
|
$
|
42,010,187
|
|
|
|
57,708,523
|
|
|
|
77,281,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to ADS Tactical, Inc. and net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS Tactical, Inc.
|
|
$
|
42,010,187
|
|
|
|
57,708,523
|
|
|
|
77,281,726
|
|
Pro forma provision for income taxes (unaudited)
|
|
|
16,594,024
|
|
|
|
22,794,867
|
|
|
|
30,912,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to ADS Tactical, Inc.
(unaudited)
|
|
$
|
25,416,163
|
|
|
|
34,913,656
|
|
|
|
46,369,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share after giving effect to stock
split (note 13(b)):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (unaudited)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding after giving
effect to stock split (unaudited) (note 13(b))
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
attributable
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Retained
|
|
|
to ADS
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
Tactical, Inc.
|
|
|
interests
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
|
148,140
|
|
|
$
|
|
|
|
|
63,324
|
|
|
|
18,212,333
|
|
|
|
18,275,657
|
|
|
|
|
|
|
|
18,275,657
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,010,187
|
|
|
|
42,010,187
|
|
|
|
(46,576
|
)
|
|
|
41,963,611
|
|
Distributions declared to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,268,989
|
)
|
|
|
(23,268,989
|
)
|
|
|
|
|
|
|
(23,268,989
|
)
|
Capital contributionsnoncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215,554
|
|
|
|
1,215,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
148,140
|
|
|
|
|
|
|
|
63,324
|
|
|
|
36,953,531
|
|
|
|
37,016,855
|
|
|
|
1,168,978
|
|
|
|
38,185,833
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,708,523
|
|
|
|
57,708,523
|
|
|
|
141,292
|
|
|
|
57,849,815
|
|
Distributions declared to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,564,290
|
)
|
|
|
(31,564,290
|
)
|
|
|
|
|
|
|
(31,564,290
|
)
|
Capital contributionsnoncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
984,088
|
|
|
|
984,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
148,140
|
|
|
|
|
|
|
|
63,324
|
|
|
|
63,097,764
|
|
|
|
63,161,088
|
|
|
|
2,294,358
|
|
|
|
65,455,446
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,281,726
|
|
|
|
77,281,726
|
|
|
|
961,321
|
|
|
|
78,243,047
|
|
Distributions paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129,011,030
|
)
|
|
|
(129,011,030
|
)
|
|
|
|
|
|
|
(129,011,030
|
)
|
Capital contributionsnoncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
148,140
|
|
|
$
|
|
|
|
|
63,324
|
|
|
|
11,368,460
|
|
|
|
11,431,784
|
|
|
|
3,955,679
|
|
|
|
15,387,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,963,611
|
|
|
|
57,849,815
|
|
|
|
78,243,047
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,049,355
|
|
|
|
2,140,410
|
|
|
|
974,476
|
|
Amortization of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
537,143
|
|
Intangible asset impairment
|
|
|
|
|
|
|
2,996,025
|
|
|
|
|
|
Loss (gain) on sale of property and equipment
|
|
|
|
|
|
|
(52,439
|
)
|
|
|
53,580
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12,093,694
|
)
|
|
|
(53,052,113
|
)
|
|
|
(51,489,626
|
)
|
Inventories
|
|
|
(21,467,717
|
)
|
|
|
(8,497,009
|
)
|
|
|
(26,501,573
|
)
|
Prepaid expenses and other assets
|
|
|
(394,646
|
)
|
|
|
(76,941
|
)
|
|
|
(153,505
|
)
|
Accounts payable
|
|
|
7,923,746
|
|
|
|
32,058,689
|
|
|
|
28,936,917
|
|
Accrued expenses
|
|
|
1,463,664
|
|
|
|
1,420,598
|
|
|
|
1,506,939
|
|
Deferred revenue
|
|
|
(3,551,190
|
)
|
|
|
504,411
|
|
|
|
(365,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,893,129
|
|
|
|
35,291,446
|
|
|
|
31,742,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,297,070
|
)
|
|
|
(9,181,467
|
)
|
|
|
(3,386,682
|
)
|
Proceeds from sale of property and equipment
|
|
|
11,500
|
|
|
|
523,161
|
|
|
|
44,100
|
|
Advances from (to) affiliated companies and stockholders
|
|
|
(1,852,352
|
)
|
|
|
2,072,282
|
|
|
|
395,674
|
|
Purchase of subsidiary, net of cash acquired of $750,387
|
|
|
(4,749,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,887,535
|
)
|
|
|
(6,586,024
|
)
|
|
|
(2,946,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from line of credit
|
|
|
21,539,000
|
|
|
|
1,636,000
|
|
|
|
66,979,626
|
|
Proceeds from long-term debt
|
|
|
6,290,612
|
|
|
|
6,400,000
|
|
|
|
51,489,436
|
|
Principal payments on long-term debt
|
|
|
(3,072,903
|
)
|
|
|
(5,339,135
|
)
|
|
|
(14,309,502
|
)
|
Cash paid for debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(3,188,966
|
)
|
Cash distributions to stockholders
|
|
|
(25,480,689
|
)
|
|
|
(33,227,590
|
)
|
|
|
(129,011,030
|
)
|
Capital contributions from stockholdersnoncontrolling
interests
|
|
|
1,215,554
|
|
|
|
984,088
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
491,574
|
|
|
|
(29,546,637
|
)
|
|
|
(27,340,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,497,168
|
|
|
|
(841,215
|
)
|
|
|
1,454,679
|
|
Cash and cash equivalents, beginning of year
|
|
|
699,461
|
|
|
|
2,196,629
|
|
|
|
1,355,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,196,629
|
|
|
|
1,355,414
|
|
|
|
2,810,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during year
|
|
$
|
1,482,994
|
|
|
|
1,388,288
|
|
|
|
4,533,373
|
|
See accompanying notes to consolidated financial statements.
F-6
ADS
TACTICAL, INC. AND SUBSIDIARY
December 31,
2008, 2009, and 2010
|
|
(1)
|
Organization
and Nature of Business
|
On October 2, 2009, Tactical Holdcorp, Inc., a Virginia
corporation having no separate operations, acquired all the
stock of Atlantic Diving Supply, Inc. (ADS, Inc.) at which time
ADS, Inc. became a wholly owned subsidiary of Tactical Holdcorp,
Inc. The stockholders of Tactical Holdcorp, Inc. are the same as
the stockholders of ADS, Inc. In June 2010, Tactical Holdcorp,
Inc. changed its name to ADS Tactical, Inc.
ADS, Inc., a Virginia corporation, was incorporated in 1997 and
commenced operations on September 18, 1997 and is a leading
provider of value-added logistics and supply chain solutions
specializing in tactical and operational equipment. ADS, Inc.
operates between a fragmented base of vendors and a
decentralized group of customers. Most of ADS, Inc.s
customers are within the Department of Defense and the
Department of Homeland Security. The products ADS, Inc. offers
include apparel, expeditionary equipment, optical equipment,
communications equipment, emergency medical supplies, lighting,
eyewear, and other items.
On June 7, 2008, all of the outstanding stock of Mar-Vel
International, Inc. (Mar-Vel) was purchased by ADS, Inc.
Mar-Vel, a New Jersey corporation and wholly owned subsidiary of
ADS, Inc., sells underwater equipment to environmental,
commercial, and retail customers, principally in the United
States.
Tactical Exporters, Inc., a Delaware corporation, was
incorporated in 2008 to facilitate the foreign distribution of
products.
ADS Tactical, Inc., ADS, Inc., Mar-Vel, Tactical Exporters,
Inc., and the consolidated variable interest entities (VIEs)
discussed in note 11 are collectively referred to as ADS or
the Company.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
(a) Basis
of Consolidation
The consolidated financial statements include the accounts of
ADS Tactical, Inc. and its direct and indirect subsidiaries. In
accordance with the Variable Interest Entity Subsections of
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Subtopic
810-10,
ConsolidationOverall (FASB Interpretation No.
46(R), Consolidation of Variable Interest Entities), the
Company also consolidates any VIEs of which it is the primary
beneficiary, as defined. All material intercompany transactions
and balances have been eliminated in the preparation of these
consolidated financial statements.
(b) Revenue
Recognition
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of
the relevant receivable is probable, persuasive evidence of an
arrangement exists, and sales price is fixed and determinable.
Revenue is recognized under contracts only when funding
authorization from the U.S. government has been received.
Shipping and transportation costs charged to customers are
recorded in both sales and selling, general, and administrative
expenses.
The Company evaluates whether it is appropriate to record
product sales and related costs on a gross or net basis in
accordance with
ASC 605-45,
Principal Agent Considerations. Management uses judgment
in its consideration, including whether the Company is primarily
obligated in a transaction, subject to inventory risk, has
latitude in establishing prices and suppliers, and other factors
or indicators that support the determination of whether it has
acted as a principal or agent in the related transaction.
Sales taxes collected from customers and remitted to
governmental authorities are accounted for on a net basis and
are therefore excluded from net sales in the consolidated
statements of operations.
F-7
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
Substantially all of the Companys revenues are derived
from net sales of a single major product group, tactical and
operational equipment. Disclosure of additional information
regarding aggregate sales of individual products or categories
of similar products within this major product group is
impracticable.
(c) Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
remaining maturity of three months or less at the time of
purchase to be cash equivalents. These cash equivalents consist
primarily of term deposits and certificates of deposit. Cash
equivalents are stated at cost, which approximates market value.
Outstanding checks in excess of funds on deposit (book
overdrafts) totaled $7,828,561 and $19,520,370 at
December 31, 2009 and 2010, respectively, and are included
in accounts payable in the Companys consolidated balance
sheets. Changes in the Companys book overdraft are
included in net cash provided by operating activities in the
consolidated statements of cash flows.
(d) Credit
Risk
At various times during the year, the Company has cash deposits
in financial institutions in excess of the amount insured by
agencies of the federal government. In assessing this credit
risk, the Company periodically evaluates the stability of these
financial institutions.
(e) Business
Concentration
The Companys revenues are dependent upon the government
renewing contracts with the Company and the Companys
ability to obtain new contracts. Approximately 95% of the
Companys net sales are derived from multiple federal,
state, and local government agencies under various contracts
that terminate at various times through 2015.
(f) Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and do
not bear interest. Amounts collected on trade accounts
receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. In
determining whether an allowance for doubtful accounts is
required, management considers the customers financial
condition, the current receivables aging, and current payment
patterns. Past due balances over 90 days and over a
specified amount are reviewed individually for collectibility.
The allowance for doubtful accounts was $0 and $400,000 at
December 31, 2009 and 2010, respectively. The Company does
not have any off-balance-sheet credit exposure related to its
customers.
(g) Inventories
Inventories consist of tactical and operational equipment
produced and manufactured by other parties and are stated at the
lower of cost or market. Cost is determined by the
first-in,
first-out basis.
(h) Property
and Equipment
Property and equipment are stated at cost. Expenditures for
repairs and maintenance are charged to expense as incurred.
Additions and betterments are capitalized. The cost and related
accumulated depreciation on property and equipment sold or
otherwise disposed of are removed from the accounts, and any
gain or loss is reported as current year revenue or expense.
F-8
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
Depreciation is generally provided for using the straight-line
method over the estimated useful lives as follows for the major
classes of assets:
|
|
|
Software
|
|
3 years
|
Transportation equipment
|
|
5 years
|
Office equipment, furniture, and fixtures
|
|
5-10 years
|
Building and improvements
|
|
5-39 years
|
(i) New
Accounting Pronouncements
In June 2009, the FASB issued updated guidance, which amends
guidance for determining whether an entity is a VIE and requires
the performance of a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE. Under
this guidance, an entity would be required to consolidate a VIE
if it has (i) the power to direct the activities that most
significantly impact the entitys economic performance and
(ii) the obligation to absorb losses of the VIE or the
right to receive benefits from the VIE that could be significant
to the VIE. The Companys adoption of this guidance on
January 1, 2010 did not have a material impact on the
consolidated financial statements.
(j) Fair
Value of Financial Instruments
During 2008 and 2009, the Company adopted guidance for
accounting for fair value measurements of financial assets and
financial liabilities and for fair value measurements of
nonfinancial items that are recognized or disclosed at fair
value in the consolidated financial statements. The guidance
establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to
measurements involving significant unobservable inputs
(Level 3 measurements). The three levels of the fair value
hierarchy are as follows:
|
|
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date.
|
|
|
|
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly.
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or
liability.
|
The level in the fair value hierarchy within which a fair value
measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its
entirety.
Fair value is the price that would be received for an asset or
paid to transfer a liability (an exit price) in the
Companys principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date.
Management of the Company believes that the carrying amount of
its financial instruments, including cash and cash equivalents,
accounts receivable, prepaid expenses and other assets, accounts
payable, and accrued expenses, approximate fair value due to the
relative short maturity of these instruments. Borrowings under
the line of credit bear a variable interest rate, and therefore,
the carrying amounts of these borrowings approximate fair value.
Fair values for long-term debt arrangements are not readily
available, but the Company estimates that the carrying values
for these arrangements approximate fair value based on
discounted cash flows using current market interest rates for
debt with similar terms.
F-9
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
(k) Long-Lived
Assets
Long-lived assets, such as property and equipment, and purchased
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be
tested for possible impairment, the Company first compares the
undiscounted cash flows expected to be generated by that asset
or asset group to its carrying value. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment
charge is recognized equal to the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets
to be disposed of are not depreciated and are reported at the
lower of the carrying amount or fair value, less costs to sell.
(l) Selling,
General, and Administrative Expenses
Selling, general, and administrative expenses include wages,
rent, insurance, utilities, delivery costs, warehouse
distribution costs, repairs and maintenance of equipment, and
other general administrative expenses.
Shipping and handling costs and expenses related to freight of
$6,280,480, $7,082,717, and $11,762,205 for December 31,
2008, 2009, and 2010, respectively, are included in
selling, general, and administrative expenses.
During 2008, 2009, and 2010, the Company incurred costs of $0,
$874,135, and $7,838,379, which principally consisted of
professional fees in connection with a proposed initial public
offering of common stock and the pursuit of other strategic
opportunities and financings. These costs are included in
selling, general, and administrative expenses.
(m) Advertising,
Marketing, and Promotional Costs
The Company follows the policy of charging the costs of
advertising, marketing, and promotions to expense as incurred.
These costs were $1,873,463, $2,244,845, and $3,700,087 in 2008,
2009, and 2010, respectively, and are included in selling,
general, and administrative expenses.
(n) Use
of Estimates
The preparation of consolidated financial statements in
accordance with U.S. GAAP 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 consolidated financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates and may have an impact on future periods.
(o) Income
Taxes
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay federal or state income
taxes on its taxable income. Instead, the stockholders are
liable for individual federal and state income taxes on their
respective share of the Companys income or loss.
(p) Subsequent
Events
In preparing these consolidated financial statements, the
Company has evaluated events and transactions for potential
recognition or disclosure through April 5, 2011, the date
the consolidated
F-10
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
financial statements were available to be issued, and determined
that, except as described herein, there are no other items to
disclose.
|
|
(3)
|
Property
and Equipment
|
Property and equipment consist of the following at
December 31, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Building and improvements
|
|
$
|
12,833,560
|
|
|
|
13,467,834
|
|
Land
|
|
|
2,979,892
|
|
|
|
2,979,892
|
|
Software
|
|
|
2,575,371
|
|
|
|
2,646,001
|
|
Transportation equipment
|
|
|
98,658
|
|
|
|
183,208
|
|
Office equipment, furniture, and fixtures
|
|
|
1,992,520
|
|
|
|
2,923,036
|
|
Construction in progress
|
|
|
|
|
|
|
1,454,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,480,001
|
|
|
|
23,654,366
|
|
Lessaccumulated depreciation
|
|
|
(3,595,916
|
)
|
|
|
(4,442,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,884,085
|
|
|
|
19,212,282
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1,212,776, $1,274,983, and $974,476
for 2008, 2009, and 2010, respectively.
On June 7, 2008, the Company purchased 100% of the stock of
Mar-Vel. The aggregate purchase price was $5,500,000. The
Company purchased Mar-Vel primarily to obtain available contract
capacity under its largest contract. The acquisition was
accounted for using the purchase price method of accounting in
accordance with accounting standards governing FASB ASC Topic
805, Business Combinations. The Companys final
purchase allocation related to the Mar-Vel acquisition is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of tangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,043,987
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
5,182
|
|
|
|
|
|
|
|
|
|
Fair value of intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable sales contract
|
|
|
4,698,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,747,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,110,360
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
136,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,247,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For financial reporting purposes, the intangible asset sales
contract of $4,698,031 was being amortized over the remaining
38 months (including renewal option) of the contract term.
Amortization expense was $836,579, $865,427, and $0 for 2008,
2009, and 2010, respectively. In 2009, ADS, Inc. was awarded a
similar contract; consequently, the renewal option on the sales
contract obtained in the Mar-Vel acquisition was not exercised.
Therefore, the remaining unamortized portion of the Mar-Vel
sales contract of $2,996,025 has been recorded as an impairment
loss included in operating expenses in 2009.
F-11
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
ADS, Inc. had a bank operating line of credit providing for
borrowings of up to $45,000,000, bearing interest at LIBOR plus
2.00% (2.23% at December 31, 2009) and due on demand.
The note had a stated maturity of October 13, 2009 and was
temporarily extended through February 28, 2010. The note
was secured by a general security agreement covering all the
assets of ADS, Inc., the carrying value of which totaled
$188,863,034 at December 31, 2009. The outstanding balance
on this line of credit was $23,175,000 at December 31,
2009. The agreement, among other things, required the
maintenance of certain specified financial ratios. At
December 31, 2009, the Company was in compliance with its
financial covenants.
On February 18, 2010, the Company entered into a senior
secured revolving credit facility, which replaced the previous
line of credit. The new facility has a credit limit of
$180,000,000 with an optional increase in commitments of up to
an additional $25,000,000. The facility bears interest at
variable rates based on the Eurodollar rate or the banks
base rate, and in each case includes an applicable margin
ranging from 1.25% to 3.25% depending on the average excess
availability. Interest-only payments are due monthly. The
facility matures on February 18, 2013 and was used to repay
the outstanding balance on the previous line of credit, retire
long-term debt (note 6), and is available to fund future
operating cash needs of the Company. The facility and certain
other debt obligations of the Company require the maintenance of
certain specified financial ratios and provide restrictive
covenants that impose other significant operating restrictions,
including, but not limited to additional indebtedness and
distributions to the Companys stockholders. The Company
was in compliance with its financial covenants at
December 31, 2010. The facility is secured by a general
security agreement covering all the assets of the Company. The
borrowing capacity under this facility is generally limited to
90% of government accounts receivable, 85% of commercial
accounts receivable, and 65% of inventory, in each case subject
to certain limitations. On October 22, 2010, the facility
was amended to allow the Company to enter into a senior secured
term loan (note 6). As of December 31, 2010, and after
taking into account outstanding letters of credit of $6,011,589,
the Company could have borrowed up to an additional $68,788,785
under this facility.
F-12
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Note payable to bank; monthly interest-only payments at LIBOR
plus 2.00% (2.23% at December 31, 2009); fully repaid in
2010 (note 5)
|
|
$
|
9,000,000
|
|
|
|
|
|
Senior secured term loan; monthly principal and interest
payments beginning December 31, 2010; first principal
payment of $5,000,000 with subsequent monthly payments of
$1,730,769, plus interest; variable interest rate at Eurodollar
rate or banks base rate plus an applicable margin of 4.00%
or 3.00%, respectively; secured by all assets of ADS, Inc.; due
February 18, 2013
|
|
|
|
|
|
|
45,000,000
|
|
Mortgage payable to bank on Tactical Office; monthly principal
and interest payments of $36,000; variable interest rate at
LIBOR plus 2.00% subject to a 4.50% minimum and a 7.85%
maximum (4.50% at December 31, 2010); secured by the
property with a carrying value of $7,149,969 at
December 31, 2010; due February 2034
|
|
|
6,281,495
|
|
|
|
6,135,398
|
|
Mortgage payable to bank on Tactical Warehouse; monthly
principal and interest payments of $41,000; fixed interest rate
at 6.03%; secured by the property with a carrying value of
$8,370,445 at December 31, 2010; due July 2033
|
|
|
6,132,141
|
|
|
|
6,012,890
|
|
Mortgage payable to bank on Tactical Warehouse; monthly interest
payments calculated on the outstanding note balance for the
first twelve months, with monthly principal and interest
payments of $23,000 thereafter; fixed interest rate at 7.28%;
secured by the property with a carrying value of $8,370,445 at
December 31, 2010; due July 2036
|
|
|
|
|
|
|
1,489,436
|
|
Capital lease obligation payable in monthly installments of
$3,174 including imputed interest at 8.40%; matures in December
2012
|
|
|
76,758
|
|
|
|
32,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,490,394
|
|
|
|
58,670,328
|
|
Less current portion
|
|
|
(9,297,072
|
)
|
|
|
(21,097,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,193,322
|
|
|
|
37,573,067
|
|
|
|
|
|
|
|
|
|
|
Estimated future maturities of long-term debt are as follows:
|
|
|
|
|
2011
|
|
$
|
21,097,261
|
|
2012
|
|
|
21,109,807
|
|
2013
|
|
|
3,823,370
|
|
2014
|
|
|
382,536
|
|
2015
|
|
|
404,468
|
|
Thereafter
|
|
|
11,852,886
|
|
|
|
|
|
|
|
|
$
|
58,670,328
|
|
|
|
|
|
|
F-13
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
ADS, Inc. sponsors a 401(k) retirement plan, which covers
substantially all employees, as defined in the plan document.
The Company matches 50% of an employees contribution on
the first 4% of salary. The Company made contributions of
$188,813, $260,362, and $313,741 for 2008, 2009, and 2010,
respectively.
Mar-Vel has a defined contribution 401(k) profit sharing plan.
Participants make elective deferrals and
catch-up
contributions, subject to statutory limits. A safe harbor
contribution may be made by Mar-Vel based on an annual decision
and, if made, is required to be 3% of eligible compensation. The
profit sharing contribution is discretionary and is computed
using a
class-based
formula. Employees with one year of service and having attained
the age of 21 are eligible to participate. The Company
contributed $55,631, $0, and $0 to the Mar-Vel plan in 2008,
2009, and 2010, respectively.
(a) Common
Stock
On May 13, 2010, the Company approved a
200-for-1
stock split of the Companys no par value common stock and
concurrently increased the number of authorized shares from
5,000 shares to 300,000 shares. As a result, these
consolidated financial statements have been retroactively
adjusted to reflect this stock split.
(b) Noncontrolling
Interests
On January 1, 2009, the Company adopted FASB Statement
No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
(included in FASB ASC Topic 810, Consolidation),
which requires certain changes to the presentation of the
consolidated financial statements. This amendment requires
noncontrolling interests (previously referred to as minority
interests) to be classified in the consolidated statements of
operations as part of consolidated net income (loss) of
$(46,576), $141,292, and $961,321 for the years ended
December 31, 2008, 2009, and 2010, respectively, and to
include the accumulated amount of noncontrolling interests in
the consolidated balance sheets as part of stockholders
equity of $2,294,358 and $3,955,679 at December 31, 2009
and 2010, respectively. The amount previously reported as net
income is now presented as net income attributable to ADS
Tactical, Inc. If a change in ownership of a consolidated
subsidiary results in a loss of control and deconsolidation, any
retained ownership interests are remeasured with the gain or
loss reported in net income.
(c) Subsequent
Distributions Made to Stockholders
During January 2011, the Company declared and made distributions
to stockholders aggregating $10,648,716, primarily for income
taxes. These distributions were funded by the Companys
senior secured revolving credit facility (note 5).
F-14
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
|
|
(9)
|
Commitments
and Contingencies
|
(a) Leases
The Company leases various office and warehouse space under
noncancelable operating leases expiring at various dates through
2015. Future lease payments due under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) are as follows:
|
|
|
|
|
2011
|
|
$
|
703,586
|
|
2012
|
|
|
377,687
|
|
2013
|
|
|
389,020
|
|
2014
|
|
|
256,449
|
|
2015
|
|
|
229,536
|
|
|
|
|
|
|
|
|
$
|
1,956,278
|
|
|
|
|
|
|
Rent expense under all leases was $1,364,719, $1,500,726, and
$776,248 for 2008, 2009, and 2010, respectively.
(b) Guarantees
Mar-Vel is a guarantor on two mortgages totaling approximately
$2,000,000 at December 31, 2010 held by one of the entities
from which the Company leases office and warehouse space.
(c) Employment
Agreement
The Company has an employment agreement in place that provides
for a bonus to an employee in connection with a change in
control if such change in control is the sale of the company for
at least $100,000,000. The bonus payable under the agreement is
0.5% of the purchase price over any amounts paid or payable to
the employee pursuant to the terms of the Transaction Bonus
Agreement (note 13(a)).
(d) Legal
Proceedings
The Company is involved in various claims and legal actions
arising in the ordinary course of business. When management
concludes that it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated, it
is accrued through a charge to earnings. While the ultimate
amount of liability incurred in any of these claims and legal
actions is dependent on future developments, in
managements opinion, the ultimate disposition of these
matters will not have a material adverse effect on the
Companys financial position, results of operations, or
liquidity.
|
|
(10)
|
Related
Party Transactions
|
ADS, Inc. sells products to a related wholesale company having
common ownership, Tactical Distributors, LLC (Tactical
Distributors), which are sold to nongovernmental customers.
Occasionally, the Company purchases some of its products from
Tactical Distributors. ADS, Inc. had sales of $1,141,734,
$1,775,451, and $1,793,383 to Tactical Distributors in 2008,
2009, and 2010, respectively, and purchases from Tactical
Distributors of $147,394, $1,415,843, and $541,834 in 2008,
2009, and 2010, respectively. The Company had accounts
receivable of $253,214 and $227,651 and accounts payable of
$9,409 and $3,828 with Tactical Distributors at
December 31, 2009 and 2010, respectively.
ADS, Inc. is charged for airplane usage, pilots, fuel, and other
incidental costs from three related companies, Tactical Air, LLC
(Tactical Air), Tactical Hawker, LLC (Tactical Hawker), and
Tactical Pilot
F-15
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
Operations, LLC (Tactical Pilot), each of which have common
ownership. ADS, Inc. purchased $336,547, $779,890, and
$1,008,668 of services from these three related companies in
2008, 2009, and 2010, respectively. These amounts are included
in selling, general, and administrative expenses. The Company
had accounts payable of $140,317 and $62,572 to these three
related companies at December 31, 2009 and 2010,
respectively.
ADS, Inc. purchased software from a related software reseller
having common ownership, Mythics, Inc. (Mythics), and hired this
software company to implement and manage a software conversion.
ADS, Inc. incurred costs of $113,469, $0, and $30,000 for
software, development, and implementation services with Mythics
in 2008, 2009, and 2010, respectively.
At times, ADS, Inc. may make short-term advances to Company
stockholders and entities owned by Company stockholders.
Advances to the stockholders and related affiliates do not bear
interest and are generally settled on a quarterly basis. ADS,
Inc. had advances included in due from affiliates of $635,361
and $239,687 at December 31, 2009 and 2010, respectively,
as a result of these advances.
|
|
(11)
|
Variable
Interest Entities
|
The Company evaluates its related parties and other affiliated
companies to determine whether such entities may be a VIE, and,
if a VIE, whether the Company is the primary beneficiary.
Generally, an entity is determined to be a VIE when either
(1) the equity investors (if any) lack one or more of the
essential characteristics of a controlling financial interest,
(2) the equity investment at risk is insufficient to
finance that entitys activities without additional
subordinated financial support, or (3) the equity investors
have voting rights that are not proportionate to their economic
interests and the activities of the entity involve or are
conducted on behalf of an investor with a disproportionately
small voting interest. The primary beneficiary is the entity
that has both (1) the power to direct matters that most
significantly impact the VIEs economic performance and
(2) the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the
VIE. The Company considers a variety of factors in identifying
the entity that holds the power to direct matters that most
significantly impact the VIEs economic performance
including, but not limited to, the ability to direct financing,
the nature and terms of leasing arrangements, and other
operating decisions and activities. The obligation to absorb
losses and the right to receive benefits when a reporting entity
is affiliated with a VIE may be based on ownership, contractual,
and/or other
pecuniary interests in that VIE.
The Company has determined that, although it has no voting
interest in Tactical Warehouse and Tactical Office, these
entities, which have common ownership with the Company, are
VIEs. Their assets consist primarily of land and buildings
leased to, and used in the operations of the Company, and their
liabilities consist primarily of mortgage debt related to such
land and buildings, which is guaranteed by the Company. The
assets of the VIEs can be used only to settle the VIEs
obligations.
The Company determined that the guarantees of the related
mortgage debt and the present value of the minimum lease
payments in relation to the fair values of the respective assets
exposes it to a majority of the risk of the leased assets over
their remaining economic life and, accordingly, the VIEs are
consolidated and
F-16
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
reflected in the accompanying consolidated financial statements.
A summary of the VIEs at December 31, 2009 and 2010 and for
the years then ended follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Cash and cash equivalents
|
|
$
|
317,453
|
|
|
|
503,220
|
|
Accounts receivable
|
|
|
4,857
|
|
|
|
1,628
|
|
Property and equipment, net
|
|
|
15,308,105
|
|
|
|
15,718,716
|
|
Other assets
|
|
|
126,114
|
|
|
|
1,599,361
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,756,529
|
|
|
|
17,822,925
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
192,021
|
|
|
|
90,485
|
|
Due to ADS, Inc.
|
|
|
704,901
|
|
|
|
|
|
Deferred revenue
|
|
|
151,614
|
|
|
|
139,037
|
|
Long-term debt
|
|
|
12,413,635
|
|
|
|
13,637,724
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,462,171
|
|
|
|
13,867,246
|
|
Equity
|
|
|
2,294,358
|
|
|
|
3,955,679
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
15,756,529
|
|
|
|
17,822,925
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,689,529
|
|
|
|
2,759,358
|
|
Operating expenses
|
|
|
916,059
|
|
|
|
1,123,249
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
773,470
|
|
|
|
1,636,109
|
|
Other expenses
|
|
|
632,178
|
|
|
|
674,788
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
141,292
|
|
|
|
961,321
|
|
|
|
|
|
|
|
|
|
|
ADS, Inc. incurred $937,000 and $2,091,000 in lease expense to
Tactical Warehouse and Tactical Office for the years ended
December 31, 2009 and 2010, respectively. These expenses
and the related income on Tactical Warehouse and Tactical Office
have been eliminated in consolidation.
Management has evaluated its other related party transactions
(note 10) and determined that Tactical Air, Tactical
Hawker, and Tactical Pilot are VIEs; however, the Company is not
the primary beneficiary and consolidation is not required as the
Company does not control these related entities.
|
|
(12)
|
Pro Forma
Information (Unaudited)
|
(a) Income
Taxes
The pro forma net income attributable to ADS Tactical, Inc. was
computed under the assumption that the Company will convert from
S Corporation status to a taxable C Corporation. Prior to
such conversion, the Company was not subject to income taxes.
The pro forma net income attributable to ADS Tactical, Inc.,
therefore, includes adjustments for income tax expense as if the
Company had been a taxable corporation at an effective tax rate
of 39.5% in 2008 and 2009 and 40.0% in 2010.
(b) Net
Income Per Share
Basic and diluted net income per common share are computed using
the weighted average number of common shares outstanding during
the year. For the years ended December 31, 2008, 2009, and
2010, the Company had no dilutive securities outstanding, and
therefore, diluted net income per share is equal to basic net
income per share for each year.
F-17
ADS
TACTICAL, INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements(Continued)
December 31,
2008, 2009, and 2010
(a) Debt
Transactions & Transaction Bonus
Agreements
On March 25, 2011, the Company issued $275,000,000 of
11.00% senior secured notes due 2018. The net proceeds of
the offering were used to make distributions to stockholders of
$217,126,251, to repay the existing term loan facility
(note 6), and to pay cash bonuses (Transaction Bonuses) in
recognition of services and contributions of certain members of
management of the Company pursuant to agreements entered into on
March 1, 2011. The aggregate amount of all Transaction
Bonuses expected to be paid is $9,000,000. Approximately
$6,600,000 was payable upon consummation of the debt offering,
with the remaining $2,400,000 payable upon the earlier of
(x) the consummation of a proposed initial public offering
of common stock and (y) December 31, 2011.
On March 25, 2011, the Company amended and restated its
senior secured revolving credit facility increasing the existing
credit limit to $200,000,000, with an optional increase in
commitments of up to an additional $50,000,000, and extending
the maturity date to March 25, 2016. The amended facility
bears interest at variable rates based on the Eurodollar rate or
the banks base rate, and in each case includes an
applicable margin ranging from 1.25% to 2.75% depending on the
average excess availability.
(b) Stock
Split
The consolidated financial statements give retroactive effect to
the
for
stock split of the Companys common stock in connection
with an initial public offering.
F-18
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,810,093
|
|
|
|
1,937,590
|
|
Accounts receivable, net
|
|
|
171,353,312
|
|
|
|
147,714,490
|
|
Inventories
|
|
|
87,345,649
|
|
|
|
72,968,834
|
|
Prepaid expenses and other current assets
|
|
|
2,276,871
|
|
|
|
4,717,891
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
263,785,925
|
|
|
|
227,338,805
|
|
Property and equipment, net
|
|
|
19,212,282
|
|
|
|
20,114,426
|
|
Due from affiliates
|
|
|
239,687
|
|
|
|
94,504
|
|
Deferred financing costs
|
|
|
2,616,063
|
|
|
|
11,736,240
|
|
Other assets
|
|
|
245,543
|
|
|
|
242,309
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
286,099,500
|
|
|
|
259,526,284
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
90,154,626
|
|
|
|
66,055,726
|
|
Current portion of long-term debt
|
|
|
21,097,261
|
|
|
|
334,921
|
|
Accounts payable
|
|
|
115,067,593
|
|
|
|
102,021,771
|
|
Accrued expenses
|
|
|
6,680,454
|
|
|
|
4,825,832
|
|
Deferred revenue
|
|
|
139,036
|
|
|
|
143,168
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
233,138,970
|
|
|
|
173,381,418
|
|
Long-term debt, excluding current portion
|
|
|
37,573,067
|
|
|
|
289,307,115
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
270,712,037
|
|
|
|
462,688,533
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock (no par value; 300,000 shares authorized;
outstanding 148,140 shares)
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
63,324
|
|
|
|
63,324
|
|
Retained earnings (accumulated deficit)
|
|
|
11,368,460
|
|
|
|
(207,324,385
|
)
|
|
|
|
|
|
|
|
|
|
Total equity (deficit) attributable to ADS Tactical, Inc.
|
|
|
11,431,784
|
|
|
|
(207,261,061
|
)
|
Noncontrolling interests
|
|
|
3,955,679
|
|
|
|
4,098,812
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
15,387,463
|
|
|
|
(203,162,249
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
286,099,500
|
|
|
|
259,526,284
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
F-19
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Net Sales
|
|
$
|
292,282,837
|
|
|
|
343,917,613
|
|
Cost of goods sold
|
|
|
258,852,966
|
|
|
|
302,691,177
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,429,871
|
|
|
|
41,226,436
|
|
Selling, general, and administrative expenses
|
|
|
15,567,593
|
|
|
|
28,121,354
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
17,862,278
|
|
|
|
13,105,082
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
46,720
|
|
|
|
28,043
|
|
Interest expense
|
|
|
(780,339
|
)
|
|
|
(2,341,613
|
)
|
Write-off of deferred financing costs upon extinguishment and
refinancing of debt
|
|
|
|
|
|
|
(1,536,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(733,619
|
)
|
|
|
(3,849,827
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,128,659
|
|
|
|
9,255,255
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
392,147
|
|
|
|
143,133
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS Tactical, Inc.
|
|
$
|
16,736,512
|
|
|
|
9,112,122
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to ADS Tactical, Inc. and net
income per share information:
|
|
|
|
|
|
|
|
|
Net income attributable to ADS Tactical, Inc.
|
|
$
|
16,736,512
|
|
|
|
9,112,122
|
|
Pro forma provision for income taxes (note 9)
|
|
|
6,610,922
|
|
|
|
3,553,728
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income attributable to ADS Tactical, Inc.
|
|
$
|
10,125,590
|
|
|
|
5,558,394
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share after giving effect to stock
split (notes 9 and 10):
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding after giving
effect to stock split (notes 9 and 10)
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
F-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
earnings
|
|
|
attributable
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
(accumulated
|
|
|
to ADS
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit)
|
|
|
Tactical , Inc.
|
|
|
interests
|
|
|
Total
|
|
|
BalanceJanuary 1, 2011
|
|
|
148,140
|
|
|
$
|
|
|
|
|
63,324
|
|
|
|
11,368,460
|
|
|
|
11,431,784
|
|
|
|
3,955,679
|
|
|
|
15,387,463
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,112,122
|
|
|
|
9,112,122
|
|
|
|
143,133
|
|
|
|
9,255,255
|
|
Distributions paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,804,967
|
)
|
|
|
(227,804,967
|
)
|
|
|
|
|
|
|
(227,804,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceMarch 31, 2011
|
|
|
148,140
|
|
|
$
|
|
|
|
|
63,324
|
|
|
|
(207,324,385
|
)
|
|
|
(207,261,061
|
)
|
|
|
4,098,812
|
|
|
|
(203,162,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,128,659
|
|
|
|
9,255,255
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
248,782
|
|
|
|
469,170
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
41,988
|
|
|
|
301,853
|
|
|
|
|
|
Write-off of deferred financing costs
|
|
|
|
|
|
|
1,536,257
|
|
|
|
|
|
Loss on sale of property and equipment
|
|
|
82,292
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10,500,253
|
|
|
|
23,638,822
|
|
|
|
|
|
Inventories
|
|
|
(6,384,473
|
)
|
|
|
14,376,815
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(1,054,744
|
)
|
|
|
(2,437,786
|
)
|
|
|
|
|
Accounts payable
|
|
|
(6,205,076
|
)
|
|
|
(13,045,822
|
)
|
|
|
|
|
Accrued expenses
|
|
|
(1,688,739
|
)
|
|
|
(2,282,009
|
)
|
|
|
|
|
Deferred revenue
|
|
|
(158,734
|
)
|
|
|
4,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,510,208
|
|
|
|
31,816,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(780,660
|
)
|
|
|
(1,371,314
|
)
|
|
|
|
|
Advances from (to) affiliated companies
|
|
|
(739,285
|
)
|
|
|
145,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,519,945
|
)
|
|
|
(1,226,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (repayments of) line of credit
|
|
|
49,853,851
|
|
|
|
(24,098,900
|
)
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
276,052,899
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(9,077,718
|
)
|
|
|
(45,081,191
|
)
|
|
|
|
|
Cash paid for debt issuance costs
|
|
|
(1,511,583
|
)
|
|
|
(10,530,900
|
)
|
|
|
|
|
Cash distributions to stockholders
|
|
|
(50,329,995
|
)
|
|
|
(227,804,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,065,445
|
)
|
|
|
(31,463,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(75,182
|
)
|
|
|
(872,503
|
)
|
|
|
|
|
Cash and cash equivalentsbeginning of period
|
|
|
1,355,414
|
|
|
|
2,810,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of period
|
|
$
|
1,280,232
|
|
|
|
1,937,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
$
|
379,206
|
|
|
|
1,466,548
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
F-22
ADS
TACTICAL, INC. AND SUBSIDIARY
December 31,
2010 and March 31, 2011
|
|
(1)
|
Organization
and Nature of Business
|
On October 2, 2009, Tactical Holdcorp, Inc., a Virginia
corporation having no separate operations, acquired all the
stock of Atlantic Diving Supply, Inc. (ADS, Inc.) at which time
ADS, Inc. became a wholly owned subsidiary of Tactical Holdcorp,
Inc. The stockholders of Tactical Holdcorp, Inc. are the same as
the stockholders of ADS, Inc. In June 2010, Tactical Holdcorp,
Inc. changed its name to ADS Tactical, Inc.
ADS, Inc., a Virginia corporation, was incorporated in 1997 and
commenced operations on September 18, 1997. ADS, Inc. is a
leading provider of value-added logistics and supply chain
solutions specializing in tactical and operational equipment.
ADS, Inc. operates between a fragmented base of vendors and a
decentralized group of customers. Most of ADS, Inc.s
customers are within the Department of Defense and the
Department of Homeland Security. The products ADS, Inc. offers
include apparel, expeditionary equipment, optical equipment,
communications equipment, emergency medical supplies, lighting,
eyewear, and other items.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Interim
Condensed Financial Information
|
The accompanying unaudited condensed consolidated financial
statements of ADS Tactical, Inc. and its direct and indirect
subsidiaries (the Company) have been prepared in accordance with
U.S. generally accepted accounting principles for interim
financial information and are presented in accordance with the
requirements of Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting
principles for complete financial statements. The unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2010 contained
herein. The results of operations for the three months ended
March 31, 2011 are not necessarily indicative of the
results to be expected for the entire year ending
December 31, 2011.
In the Companys opinion, the unaudited condensed
consolidated financial statements contain all adjustments
(consisting of those of a normal recurring nature) considered
necessary for a fair presentation of its financial position as
of March 31, 2011 and the results of its operations and
cash flows for the periods presented. The December 31, 2010
balance sheet information was derived from the audited
consolidated financial statements as of that date.
The preparation of consolidated financial statements in
accordance with U.S. 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 condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and may have an
impact on future periods.
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay federal or state income
taxes on its taxable income. Instead, the stockholders are
liable for individual federal and state income taxes on their
respective share of the Companys income or loss.
F-23
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
In preparing these unaudited condensed consolidated financial
statements, the Company has evaluated events and transactions
for potential recognition or disclosure through June 20,
2011, the date the unaudited condensed consolidated financial
statements were available to be issued, and determined that,
except as described herein, there are no other items to disclose.
Certain financial statement line items on the December 31,
2010 balance sheet have been reclassified to conform to the
current periods presentation for deferred financing costs
capitalized in connection with the issuance of the senior
secured notes and amendment of the senior secured revolving
credit facility (notes 4 and 5).
|
|
(f)
|
Selling,
General, and Administrative Expenses
|
During the three months ended March 31, 2010 and 2011, the
Company incurred costs of approximately $100,000 and $1,800,000,
which principally consisted of professional fees and other
related costs in connection with a proposed initial public
offering of common stock and the pursuit of other strategic
opportunities and financings. These costs are included in
selling, general, and administrative expenses.
|
|
(3)
|
Fair
Value of Financial Instruments
|
Management of the Company believes the carrying amounts of cash
and cash equivalents, accounts receivable, prepaid expenses and
other assets, accounts payable, and accrued expenses,
approximate fair value due to the relative short maturity of
these instruments. Borrowings under the line of credit bear a
variable interest rate, and therefore, the carrying amount of
these borrowings approximate fair value. Fair values for
long-term debt arrangements other than the senior secured notes
are not readily available, but the Company estimates that the
carrying values for these arrangements approximate fair value
based on discounted cash flows using current market interest
rates for debt with similar terms. Fair value of the
Companys senior secured notes is $282,562,500 and is
valued within the Level 2 hierarchy based on comparable
issuances and other observable market information.
On February 18, 2010, the Company entered into a senior
secured revolving credit facility with a credit limit of
$180,000,000 with an optional increase in commitments of up to
an additional $25,000,000. The facility bore interest at
variable rates based on the Eurodollar rate or the banks
base rate, and in each case included an applicable margin
ranging from 1.25% to 3.25% depending on the average excess
availability. Interest-only payments were due monthly. The
facility had a maturity date of February 18, 2013. The
facility required the maintenance of certain specified financial
ratios and provided restrictive covenants that imposed other
significant operating restrictions, including, but not limited
to additional indebtedness and distributions to the
Companys stockholders. The facility was secured by a
general security agreement covering all the assets of the
Company. The borrowing capacity under this facility was
generally limited to 90% of government accounts receivable, 85%
of commercial accounts receivable, and 65% of inventory, in each
case subject to certain limitations.
On March 25, 2011, the Company amended and restated its
senior secured revolving credit facility increasing the existing
credit limit to $200,000,000 with an optional increase in
commitments of up to an additional $50,000,000, and extending
the maturity date to March 25, 2016. The amended and
restated facility also provides for up to $50,000,000 of letters
of credit. Amounts drawn under letters of credit reduce amounts
F-24
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
available for borrowing under the facility. The amended and
restated facility bears interest at variable rates based on the
Eurodollar rate or the banks base rate, and in each case
includes an applicable margin ranging from 1.25% to 2.75% (1.50%
at March 31, 2011) depending on the average excess
availability. Interest-only payments are due monthly.
The facility requires the maintenance of certain specified
financial ratios and provides restrictive covenants that impose
other significant operating restrictions, including but not
limited to additional indebtedness and distributions to the
Companys stockholders. Distributions to the Companys
stockholders are limited to distributions for income taxes up to
42% of net income provided the Company is a subchapter
S corporation, plus one additional distribution annually
provided there is no resulting event of default and subject to
borrowing base availability levels and a fixed charge coverage
ratio of at least 1.25 to 1.00 after giving pro forma effect to
the distribution. The Company was in compliance with its
financial covenants at March 31, 2011.
The facility is secured by a general security agreement covering
all of the assets of the Company. The borrowing capacity under
this facility is generally limited to 90% of government accounts
receivable, 85% of commercial accounts receivable, and 65% of
inventory, in each case subject to certain limitations. As of
March 31, 2011, and after taking into account outstanding
letters of credit of $6,702,648, the Company could have borrowed
up to an additional $83,904,964 under this facility.
On March 25, 2011, the Company issued $275,000,000 of
11% senior secured notes due April 1, 2018 at an
offering price of 100% of the face value of the senior secured
notes. Interest on the senior secured notes is payable on April
1 and October 1 of each year. Proceeds from the offering of the
senior secured notes were used to make a distribution of
$217,126,251 to the Companys stockholders, to repay the
outstanding balance of the senior secured term loan, to pay
transaction bonuses of $6,576,668 (note 7), and to pay
related transaction fees and expenses.
The senior secured notes are secured by a first priority lien
subject to certain exceptions and permitted liens, on certain
fixed and intangible assets, capital stock of certain
subsidiaries, certain intercompany loans held by the Company and
the guarantors of the senior secured notes, and proceeds of the
foregoing, in each case held by the Company and the guarantors
of the senior secured notes. The senior secured notes also are
secured by a second priority lien subject to certain exceptions
and permitted liens, on all accounts, other than certain note
accounts, instruments, chattel paper, and other contracts
evidencing such accounts, inventory, certain investment
property, cash other than proceeds of the collateral subject to
a first priority lien in favor of the senior secured notes,
general intangibles, and instruments related to the foregoing
and proceeds of the foregoing, in each case held by the Company
and the guarantors of the senior secured notes.
Prior to April 1, 2015, the senior secured notes may be
redeemed in part or in full at a redemption price equal to 100%
of the principal amount of the senior secured notes, plus a
make-whole premium calculated in accordance with the senior
secured notes indenture and accrued and unpaid interest, if any.
In addition, prior to April 1, 2014, up to 35% of the
original principal amount of the senior secured notes, including
any additional notes issued under the senior secured notes
indenture, may be redeemed with the net proceeds of certain
equity offerings completed before April 1, 2014 at 111%,
provided that after giving effect to such redemption, not less
than 50% of the senior secured notes remain outstanding. On or
after April 1, 2015, the senior secured notes may be
redeemed in part or in full at the following percentages of the
outstanding principal amount prepaid: 108.25% prior to
April 1, 2016; 105.500% on or after April 1, 2016, but
prior to April 1, 2017; and 100% on or after April 1,
2017.
F-25
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
In the event of a Change in Control, as defined in
the senior secured notes indenture, the Company will be required
to offer to repurchase the senior secured notes at a price equal
to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase. In addition, the
Company will be required to offer to repurchase the senior
secured notes at a price equal to 100% of the principal amount,
plus accrued and unpaid interest, if any, with net proceeds, as
defined in the senior secured notes indenture, from certain
asset sales including collateral securing the senior secured
notes as defined under the senior secured notes indenture, if
such proceeds have not otherwise been used in certain specified
manners within 365 days of the date of the asset sale.
The senior secured notes indenture contains customary covenants
and restrictions on the activities of the Company including but
not limited to the incurrence of additional indebtedness; pay
dividends or make distributions or redeem capital stock; pay or
redeem or purchase certain indebtedness; make certain loans and
investments; sell assets; create liens on certain assets to
secure debt; enter into agreements restricting the
Companys subsidiaries ability to pay dividends;
consolidate, merge, sell, or otherwise dispose of all or
substantially all of the Companys assets; and engage in
transactions with affiliates. The Company was in compliance with
its financial covenants at March 31, 2011.
F-26
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Senior secured notes; semi-annual interest only payments at
11.00% beginning October 1, 2011; secured by a first lien
on certain fixed and intangible assets with a carrying value of
$10,833,110 at March 31, 2011; and a second lien on all
remaining assets of ADS, Inc.; due April 1, 2018
|
|
$
|
|
|
|
|
275,000,000
|
|
Senior secured term loan; monthly principal and interest
payments beginning December 31, 2010; first principal
payment of $5,000,000 with subsequent monthly payments of
$1,730,769, plus interest; variable interest rate at Eurodollar
rate or banks base rate plus an applicable margin of 4.00%
or 3.00%, respectively; secured by all assets of ADS, Inc.; due
February 18, 2013; fully repaid on March 25, 2011
|
|
|
45,000,000
|
|
|
|
|
|
Mortgage payable to bank on Tactical Office; monthly principal
and interest payments of $36,000; variable interest rate at
LIBOR plus 2.00% subject to a 4.50% minimum and a 7.85%
maximum (4.50% at March 31, 2011); secured by the property
with a carrying value of $7,190,341 at March 31, 2011; due
February 2034
|
|
|
6,135,398
|
|
|
|
6,096,882
|
|
Mortgage payable to bank on Tactical Warehouse; monthly
principal and interest payments of $41,000; fixed interest rate
at 6.03%; secured by the property with a carrying value of
$9,492,787 at March 31, 2011; due July 2033
|
|
|
6,012,890
|
|
|
|
5,980,405
|
|
Mortgage payable to bank on Tactical Warehouse; monthly interest
payments calculated on the outstanding note balance for the
first twelve months, with monthly principal and interest
payments of $23,000 thereafter; fixed interest rate at 7.28%;
secured by the property with a carrying value of $9,492,787 at
March 31, 2011; due July 2036
|
|
|
1,489,436
|
|
|
|
2,542,335
|
|
Capital lease obligation payable in monthly installments of
$3,174 including imputed interest at 8.40%; matures in December
2012
|
|
|
32,604
|
|
|
|
22,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,670,328
|
|
|
|
289,642,036
|
|
Less current portion
|
|
|
(21,097,261
|
)
|
|
|
(334,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,573,067
|
|
|
|
289,307,115
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2011, the Company
declared and made distributions to stockholders aggregating
$10,678,716 primarily for income taxes. On March 25, 2011,
the Company declared and made special distributions to
stockholders aggregating $217,126,251 with a portion of the
proceeds from the issuance of the senior secured notes
(note 5).
Subsequent to March 31, 2011, in April and June 2011 the
Company declared and made tax distributions to stockholders of
$5,650,000 and $3,461,939, respectively.
F-27
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
|
|
(7)
|
Commitments
and Contingencies
|
Mar-Vel, a subsidiary of the Company, is a guarantor on two
mortgages totaling approximately $2,000,000 at March 31,
2011. The Company leases the related properties for use as
office and warehouse space.
The Company has an employment agreement in place that provides
for a bonus to an employee in connection with a change in
control if such change in control is the sale of the Company for
at least $100,000,000. The bonus payable under the agreement is
0.5% of the purchase price over any amounts paid or payable to
the employee pursuant to the terms of the Transaction Bonus
Agreement consummated as part of the senior secured notes
offering (note 5).
|
|
(c)
|
Transaction
Bonus Agreements
|
In connection with the issuance of the senior secured notes and
proposed initial public offering, certain members of the
Companys senior management are eligible to receive
transaction bonuses in recognition of services and contributions
to the value of the Company. In a majority of cases, two-thirds
of each individuals transaction bonus was paid upon
consummation of the senior secured notes offering, with the
remainder to be paid upon the earlier of (x) the
consummation of an initial public offering and
(y) December 31, 2011, subject to each
individuals continued employment through such payment
date. The aggregate amount of all transaction bonuses is
$9,000,000, of which $6,576,668 was paid upon consummation of
the senior secured notes offering and is included in selling,
general, and administrative expenses as of March 31, 2011.
The Company is involved in various claims and legal actions
arising in the ordinary course of business. When management
concludes that it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated, it
is accrued through a charge to earnings. While the ultimate
amount of liability incurred in any of these claims and legal
actions is dependent on future developments, in
managements opinion, the ultimate disposition of these
matters will not have a material adverse effect on the
Companys financial position, results of operations, or
liquidity.
|
|
(8)
|
Variable
Interest Entities
|
The Company evaluates its related parties and other affiliated
companies to determine whether such entities may be a VIE, and,
if a VIE, whether the Company is the primary beneficiary.
Generally, an entity is determined to be a VIE when either
(1) the equity investors (if any) lack one or more of the
essential characteristics of a controlling financial interest,
(2) the equity investment at risk is insufficient to
finance that entitys activities without additional
subordinated financial support or (3) the equity investors
have voting rights that are not proportionate to their economic
interests and the activities of the entity involve or are
conducted on behalf of an investor with a disproportionately
small voting interest. The primary beneficiary is the entity
that has both (1) the power to direct matters that most
significantly impact the VIEs economic performance and
(2) the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the
VIE. The Company considers a variety of factors in identifying
the entity that holds the power to direct matters that most
significantly impact the VIEs economic performance
including, but not limited to, the ability to direct financing,
the nature and terms of leasing arrangements, and other
operating decisions and activities. The obligation to absorb
losses and the right to receive benefits when a
F-28
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
reporting entity is affiliated with a VIE may be based on
ownership, contractual,
and/or other
pecuniary interests in that VIE.
The Company has determined that, although it has no voting
interest in Tactical Warehouse and Tactical Office, these
entities, which have common ownership with the Company, are
VIEs. Their assets consist primarily of land and buildings
leased to, and used in the operations of the Company, and their
liabilities consist primarily of mortgage debt related to such
land and buildings, which is guaranteed by the Company. The
assets of the VIEs can be used only to settle the VIEs
obligations.
The Company determined that the guarantees of the related
mortgage debt and the present value of the minimum lease
payments in relation to the fair values of the respective assets
exposes it to a majority of the risk of the leased assets over
their remaining economic life and, accordingly, the VIEs are
consolidated and reflected in the accompanying condensed
consolidated financial statements. A summary of the VIEs is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Cash and cash equivalents
|
|
$
|
503,220
|
|
|
|
643,300
|
|
Accounts receivable
|
|
|
1,628
|
|
|
|
1,998
|
|
Property and equipment, net
|
|
|
15,718,716
|
|
|
|
16,683,128
|
|
Other assets
|
|
|
1,599,361
|
|
|
|
1,632,842
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,822,925
|
|
|
|
18,961,268
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
90,485
|
|
|
|
99,666
|
|
Deferred revenue
|
|
|
139,037
|
|
|
|
143,168
|
|
Long-term debt
|
|
|
13,637,724
|
|
|
|
14,619,622
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,867,246
|
|
|
|
14,862,456
|
|
Equity
|
|
|
3,955,679
|
|
|
|
4,098,812
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
17,822,925
|
|
|
|
18,961,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Operating income
|
|
$
|
849,850
|
|
|
|
608,743
|
|
Operating expenses
|
|
|
294,853
|
|
|
|
268,196
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
554,997
|
|
|
|
340,547
|
|
Other expenses
|
|
|
162,849
|
|
|
|
197,414
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
392,148
|
|
|
|
143,133
|
|
|
|
|
|
|
|
|
|
|
ADS, Inc. incurred $703,083 and $448,648 in lease expense to
Tactical Warehouse and Tactical Office for the three months
ended March 31, 2010 and 2011, respectively. These expenses
and the related income as included in the above summary have
been eliminated in consolidation.
F-29
ADS
TACTICAL, INC. AND SUBSIDIARY
Unaudited
Condensed Consolidated Financial Statements(Continued)
December 31,
2010 and March 31, 2011
(9) Pro
Forma Information (Unaudited)
The pro forma net income attributable to ADS Tactical, Inc. was
computed under the assumption that the Company will convert from
S Corporation status to a taxable C Corporation. Prior to
such conversion, the Company was not subject to income taxes.
The pro forma net income attributable to ADS Tactical, Inc.,
therefore, includes adjustments for income tax expense as if the
Company had been a taxable corporation at an effective tax rate
of 39.5% and 39.0% for the three months ended March, 31, 2010
and 2011, respectively.
Basic and diluted net income per common share are computed using
the weighted average number of common shares outstanding during
the year. For the three months ended March 31, 2010 and
2011, the Company had no dilutive securities outstanding, and
therefore, diluted net income per share is equal to basic net
income per share for each period.
The consolidated financial statements give retroactive effect to
the
for
stock split of the Companys common stock in connection
with an initial public offering.
F-30
© 2010 ADS, Inc. The ADS Logo is a registered trademark of ADS, Inc. |
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
|
|
ITEM 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth all expenses other than the
underwriting discount, payable by the Registrant in connection
with the sale of the common shares being registered. All amounts
shown are estimates except for the SEC registration fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
11,610
|
|
FINRA fee
|
|
$
|
10,500
|
|
Legal fees and expenses
|
|
$
|
*
|
|
Printing and engraving expenses
|
|
$
|
*
|
|
Blue sky fees
|
|
$
|
*
|
|
NYSE fees
|
|
$
|
*
|
|
Transfer agent fees
|
|
$
|
*
|
|
Accounting fees and expenses
|
|
$
|
*
|
|
Miscellaneous
|
|
$
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
* |
|
To be provided by amendment. |
|
|
ITEM 14.
|
Indemnification
of Officers and Directors.
|
ADS Tactical, Inc. is incorporated under the laws of the state
of Delaware.
Section 145 of the Delaware General Corporation Law, or the
DGCL, provides that a corporation may indemnify any
person, including an officer or director, who was or is, or is
threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such
person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best
interests of such corporation, and, with respect to any criminal
actions and proceedings, had no reasonable cause to believe that
his conduct was unlawful. A Delaware corporation may indemnify
any person, including an officer or director, who was or is, or
is threatened to be made, a party to any threatened, pending or
contemplated action or suit by or in the right of such
corporation, under the same conditions, except that such
indemnification is limited to expenses (including
attorneys fees) actually and reasonably incurred by such
person, and except that no indemnification is permitted without
judicial approval if such person is adjudged to be liable to
such corporation. Where an officer or director of a corporation
is successful, on the merits or otherwise, in the defense of any
action, suit or proceeding referred to above, or any claim,
issue or matter therein, the corporation must indemnify that
person against the expenses (including attorneys fees)
which such officer or director actually and reasonably incurred
in connection therewith.
The amended and restated certificate of incorporation of ADS
Tactical, Inc. will provide for the indemnification of
directors, officers and employees to the fullest extent
permitted by the DGCL. In addition, as permitted by the DGCL,
the amended and restated certificate of incorporation of ADS
Tactical, Inc. will provide that none of its directors will be
personally liable to it or its stockholders for monetary damages
for breach of fiduciary duty as a director, except to the extent
such exemption from liability or limitation thereof is not
permitted under the DGCL as currently in effect or as the same
may hereafter be amended.
II-1
The amended and restated bylaws of ADS Tactical, Inc. will
provide for the indemnification of all of their respective
current and former directors and current or former officers to
the fullest extent permitted by the DGCL.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Not applicable
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
See the Exhibit Index beginning on
page II-5,
which follows the signature pages hereof and is incorporated by
reference.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted as to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 14, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless
in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus as filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each
post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(3) That, for the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
II-2
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(4) Each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other
than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness.
Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-3
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 3 to this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Virginia
Beach, State of Virginia, on June 20, 2011.
ADS Tactical, Inc.
Luke M. Hillier
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Luke
M. Hillier
Luke
M. Hillier
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Chief Executive Officer, President and Director
(Principal Executive Officer)
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June 20, 2011
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*
Daniel
J. Clarkson
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Chief Operating Officer, Vice President, Treasurer, Secretary
and Director
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June 20, 2011
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*
Patricia A. Bohlen
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Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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June 20, 2011
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*
R.
Scott LaRose
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Director
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June 20, 2011
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*
William
A. Roper, Jr.
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Director
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June 20, 2011
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Luke M. Hillier, as Attorney-In-Fact
II-4
EXHIBIT INDEX
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Exhibit
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No.
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Description of Exhibit
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1
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.1*
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Form of Underwriting Agreement.
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3
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.1+
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Certificate of Incorporation of ADS Tactical, Inc.
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3
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.2+
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Bylaws of ADS Tactical, Inc.
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3
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.3
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Form of Amended and Restated Certificate of Incorporation of ADS
Tactical, Inc.
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3
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.4
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Form of Amended and Restated Bylaws of ADS Tactical, Inc.
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4
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.1
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Specimen Common Stock Certificate of ADS Tactical, Inc.
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4
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.2+
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Senior Secured Notes Indenture, dated as of March 25, 2011,
among ADS Tactical, Inc., the Guarantors named therein,
Wilmington Trust FSB, as Trustee and Wilmington Trust FSB, as
Collateral Trustee.
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4
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.3+
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Form of 11.00% Senior Secured Note due 2018 (included in Exhibit
4.2 above).
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5
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.1
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Opinion of Latham & Watkins LLP, special counsel to
ADS Tactical, Inc.
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10
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.1+
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Loan and Security Agreement, dated as of February 18, 2010,
among ADS Tactical, Inc. (f/k/a Tactical HoldCorp, Inc.),
Atlantic Diving Supply, Inc., Mar-Vel International, Inc., a New
Jersey corporation, the lenders party thereto, Wachovia Bank,
National Association, as Administrative Agent, SunTrust Bank,
RBS Business Capital, a division of RBS Asset Finance, Inc., a
subsidiary of RBS Citizens, NA, and Bank of America, N.A., each
as a Syndication Agent, and Wells Fargo Capital Finance, LLC as
Sole Lead Arranger, Manager and Bookrunner.
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10
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.2+
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First Amendment to Loan and Security Agreement, as of dated
October 22, 2010, among ADS Tactical, Inc. (formerly known
as Tactical HoldCorp, Inc.), a Delaware corporation, Atlantic
Diving Supply, Inc. (d/b/a ADS, Inc.), a Virginia corporation,
the Subsidiaries of the Company identified as
Borrowers on the signature pages thereto, Mar-Vel
International, Inc., a New Jersey corporation, the lenders party
thereto, and Wells Fargo Bank, National Association, as
Administrative Agent.
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10
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.3+
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Amended and Restated Loan and Security Agreement, dated as of
March 25, 2011, among ADS Tactical, Inc. and Atlantic
Diving Supply, Inc., as Borrowers, Certain other Subsidiaries of
the Company, as Subsidiary Guarantors, the lenders from time to
time party thereto and Wells Fargo Bank, National Association,
as Administrative Agent, Suntrust Bank, RBS Business Capital, a
division of RBS Asset Finance, Inc., a subsidiary of RBS
Citizens, NA and Bank of America, N.A., each, as a Syndication
Agent and Wells Fargo Capital Finance, LLC, as Sole Lead
Arranger, Manager and Bookrunner.
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10
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.4
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Form of Stockholders Agreement among Luke Hillier, Daniel
Clarkson, R. Scott LaRose and ADS Tactical, Inc.
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10
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.5
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Employment Agreement, dated as
of ,
2011, between Luke Hillier and ADS Tactical, Inc.
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10
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.6
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Employment Agreement, dated as
of ,
2011, between Daniel Clarkson and ADS Tactical, Inc.
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10
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.7+
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2010 Compensation Plan Details for Patricia Bohlen.
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10
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.8*
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Employment Agreement, dated as of May 1, 2011, between
Bruce Dressel and Atlantic Diving Supply, Inc.
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10
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.9+
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2010 Compensation Plan Details for Bruce Dressel.
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10
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.10+
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2010 Compensation Plan Details for Jason Wallace.
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10
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.11+
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Lease Agreement, dated as of August 1, 2009, between
Tactical Office, LLC and Atlantic Diving Supply, Inc.
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10
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.12+
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Lease Agreement, dated as of May 22, 2007, between Kettler
Realty Corp. and ADS, Inc.
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10
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.13+
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Lease Addendum for Temporary Space, dated as of December 1,
2009, between Kettler Realty Corp. and ADS, Inc.
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II-5
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Exhibit
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No.
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Description of Exhibit
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10
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.14+
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Lease Agreement, dated as of July 23, 2008, between
Tactical Warehouse, LLC and Atlantic Diving Supply, Inc.
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10
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.15+
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Lease Agreement, dated as of November 18, 2010, between
SEBCO, Inc. and Atlantic Diving Supply, Inc.
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10
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.16+
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Flex Lease Agreement, dated as of November 30, 2005,
between 7115 Airport Highway, LLC and Mar-Vel International,
Inc., as amended.
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10
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.17+
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2011 Compensation Plan Details for Bruce Dressel.
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10
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.18+
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2011 Compensation Plan Details for Patricia Bohlen.
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10
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.19+
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2011 Compensation Plan Details for Jason Wallace.
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10
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.20+
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Form of Indemnification Agreement between ADS Tactical, Inc. and
its directors and executive officers.
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10
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.21+
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Transaction Bonus Letter Agreement for Bruce Dressel.
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10
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.22+
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Transaction Bonus Letter Agreement for Patricia Bohlen.
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10
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.23+
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Transaction Bonus Letter Agreement for Jason Wallace.
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21
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.1+
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Subsidiaries of the Registrant.
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23
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.1
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Consent of Latham & Watkins LLP, special counsel to
ADS Tactical, Inc. (included in Exhibit 5.1).
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23
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.2*
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Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
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23
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.3+
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Power of Attorney (included on signature pages attached hereto).
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99
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.1*
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Consent of Lieutenant General (Ret.) Robert T. Dail.
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99
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.2*
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Consent of Paul O. Hirschbiel.
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99
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.3*
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Consent of C. Arthur Brother Rutter III.
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* |
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Filed herewith. |
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To be filed by amendment. |
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Previously filed. |
II-6