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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number
-----------------
STEVEN MYERS & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0080929
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4695 MACARTHUR COURT, EIGHTH FLOOR, NEWPORT BEACH, CA 92660
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(Address of principal executive offices)
(949) 975-1550
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Outstanding at
Class June 30, 1998
------------ --------------
Common Stock 15,819,743
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STEVEN MYERS & ASSOCIATES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Earnings for the three months and six
months ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
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STEVEN MYERS & ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 16,217 $ 150
Accounts receivable, net allowance for doubtful accounts 9,636 4,245
Costs and estimated earnings in excess of billings
on contracts in progress, net of allowance 2,011 --
Inventory 198 --
Other accounts receivable 72 8
Prepaid expenses and other current assets 684 414
-------- --------
Total current assets 28,818 4,817
Goodwill, net 13,859 --
Notes receivable, officers 1,124 --
Property and equipment, net 1,346 378
Other assets 822 136
-------- --------
Total assets $ 45,969 $ 5,331
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable $ 1,065 $ 280
Current portion of long-term debt 11 786
Accrued salaries, wages, and payroll taxes 4,332 2,574
Accrued bonuses 815 736
Income taxes payable 841 53
Other liabilities 31 287
-------- --------
Total current liabilities 7,095 4,716
Deferred rents 52 --
Deferred tax liability 161 --
Other deferreds 492 --
Long-term debt, excluding current portion 534 6,943
-------- --------
Total liabilities 8,334 11,659
Shareholders' equity (deficit):
Common stock, no par value 158 5
Additional paid in capital 39,953 316
Due from stockholder -- (679)
Accumulated deficit (2,476) (5,970)
-------- --------
Total shareholders' equity (deficit) 37,635 (6,328)
-------- --------
Total liabilities and shareholders' equity (deficit) $ 45,969 $ 5,331
======== ========
</TABLE>
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STEVEN MYERS & ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues $ 13,462 $ 8,544 $ 24,121 $ 15,773
Cost of Revenues 7,511 4,792 13,499 8,657
-------- -------- -------- --------
Gross Profit 5,951 3,752 10,622 7,116
Selling, general and administrative expenses 2,891 1,582 4,637 2,763
-------- -------- -------- --------
Operating income 3,060 2,170 5,985 4,353
Other (income) expense:
Interest expense (4) 124 66 248
Other income, net (1,081) (24) (1,220) (198)
-------- -------- -------- --------
Earnings before income taxes 4,145 2,070 7,139 4,303
Income tax expense 1,691 28 2,936 28
-------- -------- -------- --------
Net earnings $ 2,454 $ 2,042 $ 4,203 $ 4,275
======== ======== ======== ========
Earnings per common share:
Basic $ 0.16 $ 0.28
Diluted 0.16 0.28
======== ========
Weighted average common shares used computing per
share amounts:
Basic 15,297 14,825
Diluted 15,630 15,042
======== ========
- -----------------------------------------------------------------------------------------------------------
Pro forma supplemental data:
Earnings before income taxes, as reported $ 4,145 $ 2,070 $ 7,139 $ 4,303
Pro forma adjustment to selling, general and
administrative expenses -- 236 -- 562
-------- -------- -------- --------
Pro forma earnings before income tax expense 4,145 1,834 7,139 3,741
Pro forma income tax expense 1,691 734 2,936 1,496
-------- -------- -------- --------
Pro forma net earnings $ 2,454 $ 1,100 $ 4,203 $ 2,245
======== ======== ======== ========
Pro forma earnings per common share:
Basic $ 0.16 $ 0.08 $ 0.28 $ 0.17
Diluted 0.16 0.08 0.28 0.17
======== ======== ======== ========
Weighted average common shares used in computing
pro forma per share amounts:
Basic 15,297 12,948 14,825 12,948
Diluted 15,630 12,948 15,042 12,948
======== ======== ======== ========
</TABLE>
The pro forma adjustments include the elimination of salaries and
bonuses paid to three principal executive officers (which have historically
been included in selling, general and administrative expenses) in excess or less
than $2.7 million ($675,000 per quarter) in the aggregate (the maximum salaries
and bonuses payable for 1998 under the Executive Compensation Program) and
adjustments for Federal and state income taxes as if the Company had been taxed
as a C corporation rather than an S corporation.
Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and Series B common stock of the Company into an
aggregate of 12.9 million shares of common stock effected upon the consummation
of the initial public offering.
Supplemental earnings per share has been computed by dividing
supplemental net earnings by the weighted average number of shares of common
stock outstanding during the period. Supplemental net earnings per share
information is calculated under Statement of Financial Accounting Standard No.
128 "Earnings per Share."
Historic earnings per share for 1997 is not presented because it is not
meaningful.
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STEVEN MYERS & ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
June 30, 1998 June 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Earnings $ 4,203 $ 4,275
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for doubtful accounts 2 --
Depreciation and amortization 140 62
Gain on sale of fixed assets (821) (137)
Changes in assets and liabilities:
Accounts receivable (553) (1,287)
Prepaid expenses and other current assets (439) (391)
Other assets 83 (10)
Accounts payable (1,178) (266)
Accrued salaries, wages, and payroll taxes 280 (1,432)
Accrued bonuses 79 190
Income taxes payable 789 --
Deferred tax liability 161 --
Other deferreds (40) --
Other liabilities (463) (47)
-------- --------
Net cash provided by operating activities 2,243 957
Cash flows from investing activities:
Acquisition, net of cash acquired (17,134) --
Net purchases of property and equipment (95) (102)
Net proceeds form sale of property and equipment -- 6
Repayment from stockholder 679 (768)
-------- --------
Net cash used in investing activities (16,550) (864)
Cash flows from financing activities:
Proceeds from issuance of common stock 39,790 51
Advances (repayments) of long-term debt (8,706) 5,271
Distributions to shareholders (710) (1,230)
Common stock repurchase -- (5,863)
-------- --------
Net cash provided by (used in) financing activities 30,374 (1,771)
Net increase (decrease) in cash and cash equivalents 16,067 (1,678)
-------- --------
Cash at beginning of period 150 1,927
Cash at end of period $ 16,217 $ 249
======== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $ 149 $ 159
Income taxes 1,967 28
======== ========
</TABLE>
Supplemental schedule of noncash investing activity:
In May 1998, the Company acquired Space Applications Corporation in a
stock for stock reverse triangular merger. The acquisition was accounted for as
a purchase. The table below gives summary to the effect of the purchase as
follows:
<TABLE>
<S> <C>
Assets acquired at fair value $ 10,537
Costs in excess of net assets acquired 12,575
Liabilities assumed at fair value (5,755)
--------
Total acquisition costs 17,357
Less cash acquired (223)
--------
Total acquisition costs, net cash acquired $ 17,134
========
</TABLE>
In June 1998, the Company sold the Turbo Commander aircraft to an affiliate
of the Company's principal shareholder for $880,000. Terms of payment included a
note receivable for the total sales price of $880,000.
In January 1997, the Company sold the Hawker Jet to an affiliate of the
Company's principal shareholder for $5,635,000. Terms of payment included $5,000
cash and transfer of the related long-term notes payable of $5,630,000.
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STEVEN MYERS & ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Steven Myers & Associates, Inc. (the "Company") have been prepared pursuant to
the rules of the Securities and Exchange Commission for quarterly Reports on
Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. The information furnished
herein includes all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair presentation of
results for these interim periods.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1998.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. As discussed in Note 5, during the three months
ended June 30, 1998, the Company acquired Space Applications Corporation
("SAC"). This transaction was accounted for as a purchase and, accordingly, the
consolidated financial statements include the financial results of SAC from the
effective date of this event. SAC provides systems engineering, scientific
research, program management support, and military operations support services
to the nation's military and civilian space programs, the national intelligence
community, and the national defense sector.
In addition, these financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto for the year
ended December 31, 1997. Supplementary information which includes the historical
pro-forma financial statements of the Company prior to its initial public
offering is included in Form S-1 filed by the Company with the Securities and
Exchange Commission on January 28, 1998 as amended (the "S-1"). Due to the
Company converting from an S corporation to a C corporation, the information
found in the S-1 filing includes pro forma operating results. These pro formas
reflect an adjustment of salaries and bonuses paid to three principal executive
officers (which have historically been included in selling, general, and
administrative expenses) in excess or less than $2.7 million ($675,000 per
quarter) in the aggregate (the maximum salaries and bonuses payable for 1998
under the Company's Executive Compensation Program) and adjustments for Federal
and state income taxes as if the Company had been taxed as a C corporation
rather than an S corporation during such period.
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
NOTE 2. INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of Common Stock
during January 1998. Of the 3,150,000 shares of Common Stock sold in the IPO,
1,050,000 were sold by existing shareholders and 2,100,000 were sold by the
Company, generating $23,436,000 in proceeds to the Company, net of offering
expenses of $1,764,000.
The Company made cash payments of S corporation distributions (the "S
Corporation Dividend") to shareholders totaling $710,000 which were accrued
January 28, 1998 and paid February 5, 1998. The S Corporation Dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. Cash provided from the operating
activities of the Company prior to the IPO was used to fund the dividend
payment.
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\NOTE 3. INCOME TAX PROVISION AND PRO FORMA FINANCIAL DATA
Prior to the IPO, the Company and its shareholders elected to be treated
as an S corporation under the Internal Revenue Code of 1986, as amended (the
"Code"). Under the provisions of the Code, the Company's shareholders included
their pro rata share of the Company's income on their personal tax returns.
Accordingly, the Company was not subject to Federal and most state income taxes.
Historical pro forma figures and pro forma net income per share figures
are presented as if the Company had been taxed as a C corporation for the
periods presented. The pro forma tax provision has been calculated assuming a
40% combined effective tax rate.
In January 1998, the Company still operated as an S corporation; thus,
the consolidated income statement presentation for the six months ended June 30,
1998, includes only appropriate Federal and state income taxes for the period in
which the Company had been a C corporation. Upon termination of the S
corporation status on January 28, 1998, the Company recorded a tax expense
resulting from the establishment of net deferred tax liabilities of
approximately $510,000, which was based upon temporary book to tax differences
existing at the date of termination of the Company's S corporation status.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET EARNINGS PER SHARE
Basic net earnings per common share is computed based on weighted
average common shares outstanding during the period. Diluted net earnings per
common share is computed based on weighted average common shares and common
equivalent shares (stock options) outstanding during the period. The Company
currently has 15,819,743 shares of common stock outstanding. As of December 31,
1997, there were 12,900,000 shares of common stock outstanding.
Pursuant to Statement of Financial Accounting Standards No. 128, basic
and diluted earnings per share have been included. Basic earnings per share is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period and shares repurchased during the period are weighted
for the portion of the period that they were outstanding. Diluted earnings per
share is consistent with that of basic earnings per share while giving effect to
all dilutive potential common shares that were outstanding during the period.
The Company's diluted earnings per share is calculated by arriving at basic
earnings per share and factoring in the dilutive effect of the 790,000 options
issued in January 1998 under the Company's 1997 Stock Option Plan (using the
treasury stock method and the average common stock price per share), plus the
175,925 options granted to SAC employees and associates in May 1998, at a 20-day
trailing price per share from the issuance date. The dilutive effect of the
options was insignificant. Basic earnings per common share is equal to diluted
earnings per common share.
NOTE 5. BUSINESS COMBINATION
On May 29, 1998, the Company issued 819,743 shares of common stock
valued at approximately $14,700,000, and stock options with a fair value of
$2.6 million for substantially all the outstanding common stock of SAC. This
transaction was accounted for as a purchase and, accordingly, the consolidated
financial statements include the financial results of SAC from May 18, 1998, the
date the definitive agreement was approved by all relevant parties, and the date
of the private placement memorandum for SAC.
The Company recorded goodwill of approximately $12,575,000 as a result
of the SAC purchase. The Company incurred significant costs and expenses in
connection with this acquisition, including legal and accounting, and other
various expenses. Eligible costs will be capitalized as part of goodwill in
accordance with generally accepted accounting principles (GAAP). The assets
acquired, including the costs in excess of net assets acquired, and liabilities
assumed in the acquisition of SAC are as follows:
(Dollars in thousands)
- -----------------------------------------------------
Assets acquired at fair value $ 10,537
Costs in excess of net assets acquired 12,575
Liabilities assumed at fair value (5,755)
--------
Total acquisition costs $ 17,357
========
On July 22, 1998, the Company entered into an Agreement and Plan of
Merger and Reorganization ("Merger Agreement") to acquire Decision-Science
Applications, Inc. ("DSA") for approximately $28 million in a stock for stock
and cash exchange merger. The merger, the consummation of which is subject to
certain conditions set forth in the Merger Agreement, will be comprised of
approximately $14 million in stock and $14 million in cash. DSA is a technical
services corporation specializing in information systems, software development,
electrical engineering, telecommunications and physics.
7
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FACTORS CONCERNING FORWARD-LOOKING STATEMENTS
From time to time, Steven Myers & Associates, Inc (the "Company", or
"SM&A"), through its management, may make forward-looking public statements,
such as statements concerning then expected future revenues or earnings or
concerning projected plans, performance, contract procurement as well as other
estimates relating to future operations. Forward-looking statements may be in
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), in press releases or informal statements made with the approval
of an authorized executive officer. The words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of Section 21E of the Exchange Act and Section 27A of the Securities
Act of 1933, as amended, as enacted by the Private Securities Litigation Reform
Act of 1995.
The Company wishes to caution readers not to place undue reliance on
these forward-looking statements which speak only as of the date on which they
are made. In addition, the Company wishes to advise readers that the factors
listed below, as well as other factors not currently identified by management,
could affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation
to publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events which may
cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
Dependence on Defense Industry. A substantial portion of the Company's
revenues are derived from proposal management services, including proposal
development centers, related to government procurement contracts. For the
foreseeable future, the Company expects that the percentage of its revenues
attributable to such contracts will continue to be substantial. In the future,
U.S. Government expenditures for defense products may decline with such
reductions having an effect on the Company's clients, or, indirectly, the
Company. A number of trends may contribute to such a decline, including: (i)
large weapon systems being replaced with smaller, more precise high technology
systems, (ii) multiple procurements for similar weapons being consolidated into
joint service procurements, (iii) threat scenarios transitioning from global
conflicts to regional conflicts, and (iv) the continuing draw down of U.S.
military forces in response to the end of the Cold War. In the event
expenditures for products of the type manufactured by the Company's clients are
reduced and not offset by other new programs or products, there will be a
reduction in the volume of contracts or subcontracts to be bid upon by the
Company's clients and, as a result, a reduction in the volume of proposals
managed by the Company. Unless offset, such reductions could materially and
adversely affect the Company's business, operating results and financial
condition.
Risks of Government Contracting. The Company, through its
government-contractor clients, is subject to risks associated with compliance
with governmental regulations. The fines and penalties which could result
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from noncompliance with appropriate standards and regulations, or a client's
suspension or debarment from the bidding process for future government contracts
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company relies for the continuance and
expansion of its business on a facility security clearance from the U.S.
Government, and individual security clearances, at various levels, for nearly
all members of its staff. There can be no assurance that necessary security
clearances will continue to be made available by the U.S. Government.
CLIENT CONCENTRATION. SM&A derives a significant portion of its
revenues from a relatively limited number of clients. Clients typically retain
the Company for major proposals as needed on an engagement basis rather than
pursuant to long-term contracts, and a client can usually terminate an
engagement at any time without a significant penalty. Moreover, there can be no
assurance that the Company's existing clients will continue to engage the
Company for additional assignments or do so at the same revenue levels. The
loss of any significant client could materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
the level of the Company's services required by an individual client may
diminish over the life of its relationship with the Company, and there can be
no assurance that the Company will be successful in establishing relationships
with new clients as this occurs.
COMPETITION AND MARKET PENETRATION. The market for proposal management
services in the procurement of government and commercial contracts for
aerospace and defense is a niche market with a number of competitors. The
Company principally competes with numerous smaller proposal management
companies in this highly specialized industry. The Company also competes with
some of its clients' internal proposal development resources. The Company has
recently entered and seeks to achieve significant growth in the contract
support services market. The market for services in the contract support
industry is competitive, highly fragmented and subject to rapid change. Such
competition is likely to increase in the future. Many of the Company's
competitors have greater personnel, financial, technical and marketing
resources than the Company. The Company also competes with its clients'
in-house resources. This source of competition may increase as consolidation of
the aerospace and defense industry creates larger organizations. Although the
Company believes that it has the ability to further penetrate the contract
support services market, there can be no assurance that the Company will be
successful in such efforts. In addition, significant further expense for sales
and marketing may be required to promote a major expansion of the Company's
services in such area. If the Company is unsuccessful in its efforts to
penetrate further the market for such services, or if its historical win rate
in the proposal management business drops significantly, the Company's growth
prospects could be materially and adversely affected.
MANAGEMENT OF GROWTH. The Company's business involves the delivery of
services through an experienced team of trained professionals. The Company's
success depends in large part upon its ability to attract, develop, motivate
and retain highly-skilled professionals and administrative employees. The
Company has experienced significant growth in recent years and intends to
pursue further growth as part of its business strategy. This growth strategy
will require an increase in the Company's personnel, particularly skilled
systems engineers and program managers. Qualified professionals are currently
in great demand and there is significant competition for employees with the
requisite skills from other major and boutique consulting firms, research
firms, government contractors, proposal management or business acquisition
departments of major corporations and other professional services firms. There
can be no assurance that the Company will be able to attract and retain the
qualified personnel necessary to pursue its growth strategy. There can be no
assurance that the Company will be able to maintain or accelerate its current
growth, effectively manage its expanding operations or achieve planned growth
on a timely or profitable basis. To the extent the Company is unable to manage
its growth effectively and efficiently, the Company's business, financial
condition and results of operations could be materially and adversely affected.
RISKS RELATED TO POSSIBLE ACQUISITIONS. An element of SM&A's growth
strategy is to expand its operations through the acquisition of complementary
businesses. The Company had no history of making acquisitions prior to the SAC
acquisition, and there can be no assurance that the Company will be able to
identify, acquire, profitably manage or successfully integrate any other such
businesses into the Company without incurring substantial expenses, delays or
other operational or financial problems. Moreover,
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competitors of the Company are also soliciting potential acquisition candidates,
which could both increase the price of any acquisition targets and decrease the
number of attractive companies available for acquisition. Further, acquisitions
may involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, increased costs to improve
managerial, operational, financial and administrative systems, legal
liabilities, and increased interest expense and amortization of acquired
intangible assets, some or all of which could materially and adversely affect
the Company's business, operating results and financial condition. Client
satisfaction or performance problems at a single acquired firm could have a
materially adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings or performance at levels historically
enjoyed by the Company. The failure of the Company to manage its acquisition
strategy successfully could materially and adversely affect the Company's
business, operating results and financial condition.
OVERVIEW
The Company is the largest proposal management company in the United
States. The Company's proprietary proposal management processes and team of
approximately 410 highly experienced professionals help its clients to achieve a
higher probability of winning the government and commercial contracts that are
critical to their success, and also provides systems engineering and program
integration services to aerospace, communications and engineering companies.
RESULTS OF OPERATIONS
The following information sets forth pro forma operating results for all
periods indicated except the six months ended June 30, 1998, which are
historical results of operations. Pro forma amounts reflect adjustments for (a)
the elimination of salaries and bonuses paid to the three principal executive
officers (which have historically been included in SG&A expenses) in excess or
less than $2.7 million ($675,000 per quarter) in the aggregate (which amount is
equal to the maximum salaries and bonuses payable for 1998 under the Executive
Compensation Program), and (b) adjustments for Federal and state income taxes as
if the Company had been taxed as a C corporation at an assumed effective income
tax rate of approximately 40%. The pro forma adjustment in clause (a) above is
made to provide a more meaningful comparison of the Company's SG&A expenses by
recasting historical financials to be consistent with future levels of executive
compensation following termination of the Company's S corporation status.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net revenues. Net revenues for the three months ended June 30, 1998 were
$13.5 million compared to $8.5 million for the three months ended June 30, 1997,
an increase of $5.0 million or 58.8%. Net revenues from proposal management
services were $5.4 million compared to $4.6 million for the comparable three
months of the prior year, an increase of $0.8 million or 17.4%. This increase
was attributable to an increase in the customer base and number of proposals
managed as a result of increased marketing efforts by the Company. Net revenues
from Proposal Development Centers ("PDCs") were $2.8 million compared to $2.5
million for the comparable three months of the prior year, an increase of $0.3
million or 12.0%. Net revenues from contract support services for the three
months ended June 30, 1998 were $5.3 million compared to $1.4 million for the
comparable three months of the prior year, an increase of $3.9 million or
278.6%. The increase in contract support services revenue was due primarily to
the acquisition of SAC in May, 1998 which increased the Company's scope of
services and customer base in this area of its business.
Gross profit. Gross profit was $5.9 million for the three months ended
June 30, 1998 compared to $3.7 million for the three months ended June 30, 1997,
an increase of $2.2 million or 59.5%. As a percentage of net revenues, gross
profit was 43.7% for the three months ended June 30, 1998, an increase from
43.5% for the three months ended June 30, 1997. The increase in gross profit as
a percentage of revenues was primarily attributable to a more favorable margin
mix in the proposal management sector for the three months ended June 30, 1998.
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SG&A Expenses. Selling, general and administrative expenses for the
three months ended June 30, 1998 were $2.9 million compared to $1.8 million for
the three months ended June 30 of 1997, an increase of $1.1 million or 61.1%.
The increase was primarily the result of increased overhead and facility
expenses of $0.9 million related to the SAC acquisition, an increase in senior
management staff to position the Company for continued growth, and an increase
in facility lease costs. The Company relocated to an expanded facility in June
1997. As a percentage of total revenues, SG&A expenses were 21.5% for the three
months ended June 30, 1998, up from 21.2% for the three months ended June 30,
1997.
Other income (expense). Other income was $1.1 million for the three
months ended June 30, 1998 compared to an expense of $100,000 for the same three
months of 1997. This increase in income was primarily the result of a gain of
$0.8 million resulting from the sale of the Company's Turbo Commander aircraft
at market value to an affiliate of the Company's principal shareholder. Also,
the Company had no bank debt, and recorded interest income of $0.2 million from
marketable securities during the three months ended June 30, 1998, compared to
interest expense of $0.1 million for the same period in 1997 on bank loan
facilities.
Net earnings. Net earnings were $2.5 million for the three months ended
June 30, 1998 compared to $1.1 million for the three months ended June 30, 1997,
an increase of $1.4 million or 127.3%.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues. Net revenues for the six months ended June 30, 1998 were
$24.1 million compared to $15.8 million for the six months ended June 30, 1997,
an increase of $8.3 million or 52.5%. Net revenues from proposal management
services were $12.2 million compared to $8.9 million for the comparable six
months of the prior year, an increase of $3.3 million or 37.1%. This increase
was the result of continued strong demand for the Company's proposal management
services, and an increased customer base. Net revenues from PDCs were $4.9
million for the six months ended June 30, 1998 compared to $3.9 million for the
six months ended June 30, 1997, an increase of $1.0 million or 25.6%. This
increase was attributable to an increase in marketing efforts by the Company to
develop additional PDCs at customer sites. Net revenues from contract support
services for the six months ended June 30, 1998 were $7.0 million compared to
$3.0 million for the same period in 1997, an increase of $4.0 million or 133.3%.
The increase in contract support services revenue was due primarily to the
acquisition of SAC in May 1998 which increased the Company's scope of services
and customer base in this area of its business, as well as increased marketing
efforts during 1998 to include contract support agreements with proposal
management contracts.
Gross profit. Gross profit increased to $10.6 million for the six months
ended June 30, 1998, up from $7.1 million recorded for the same period in 1997,
an increase of $3.5 million or 49.3%. As a percentage of net revenues, gross
profit was 44.0% for the six months ended June 30, 1998, compared to 44.9% for
the six months ended June 30, 1997. This decrease as a percentage of net
revenues was primarily attributable to success fees earned in the first six
months of 1997 of $277,000, which earned a 100% margin. There were no success
fees earned in the first six months of 1998.
SG&A expenses. Selling, general and administrative expenses for the six
months ended June 30, 1998 were $4.6 million compared to $3.3 million for the
six months ended June 30, 1997, an increase of $1.3 million, or 39.3%. The
increase was primarily the result of increased overhead and facility expenses of
$0.9 million related to the SAC acquisition, an increase in senior management
staff to position the Company for continued growth, in addition to an increase
in facility lease costs. As a percent of sales, SG&A expenses decreased to 19.1%
for the six months ended June 30, 1998 compared to 20.9% for the same period in
1997.
11
<PAGE> 12
Other income (expense). Other income for the six months ended June 30,
1998 was $1.2 million compared to an expense of $50,000 for the six months ended
June 30, 1997. This increase in income was primarily attributable to a gain
recognized on the sale of the Turbo Commander aircraft, and interest income of
$0.4 million earned during the first six months of 1998 on proceeds from the
Company's IPO in January 1998.
Net earnings. Net earnings were $4.2 million for the six months ended
June 30, 1998 compared to $2.2 million for the six months ended June 30, 1997,
an increase of $2.0 million or 90.9%.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company generated cash flows
from operating activities of $2.2 million, compared with $957,000 for the same
period of the prior year. This increase was mainly due to increased net revenues
and improved operating margins in the current period.
Net cash used in investing activities was $16.6 million for the six
months ending June 30, 1998, compared to $864,000 for the same period of the
prior year. The Company's primary source of funds from investing activities
during six months ending June 30, 1998 was the January repayment to the Company
of the Steven and Paula Myers promissory note dated December, 1996 for $679,000,
representing full payment of the original $632,000 note plus all accrued
interest. The principal use of cash for investing activities during the six
months ended June 30, 1998 was the acquisition of SAC wherein the Company issued
819,743 shares of common stock valued at approximately $14.7 million for
substantially all the outstanding common stock of SAC, plus stock option
consideration of approximately $2.6 million.
Net cash provided by financing activities was $30.4 million in the six
months ended June 30, 1998, compared to a use of $1.8 million for the same
period of the prior year. Financing activities provided funds of $22.5 million
to the Company as a result of the IPO and $17.3 million from the acquisition of
SAC in the six months ending June 30, 1998. The primary uses of cash for the six
months ended June 30, 1998 were for the repayment of $7.1 million of outstanding
bank debt of the Company existing at the time of the IPO, payment of $1.0
million for expenses directly related to the IPO, and payment of $1.6 million in
full payment of all SAC bank indebtedness existing at the time of the SAC
acquisition.
The Company believes that remaining net proceeds from the IPO, together
with funds generated by operations will continue to provide adequate cash to
fund its anticipated operating cash needs, which may include future acquisitions
of complementary businesses, for at least the next twelve months. The Company
has a $4.0 revolving line of credit facility with a bank. The interest rate on
the revolving line of credit agreement is the daily prime rate. At June 30,
1998, the Company had $3.5 million available under the credit facility. The
Company has signed a financing proposal with a bank for a $25.0 million
revolving credit facility to be secured by a first priority security interest in
substantially all of the assets of the Company. The terms of the facility will
be LIBOR plus an applicable margin from 1.25% to 2.0%, based on the ratio of
total indebtedness to earnings before interest and taxes ("EBIT").
INFLATION
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible, seeking
to insure that billing rates reflect increases in costs due to inflation.
YEAR 2000
The Company has performed a review of its internal systems to identify
and resolve the effect of Year 2000 software issues on the integrity and
reliability of the Company's financial and operational systems. Based on this
review, management believes that its internal systems are substantially
compliant
12
<PAGE> 13
with Year 2000 issues. In addition, the Company is also communicating with its
principal service providers and vendors to ensure Year 2000 issues will not have
an adverse impact on the Company. Based upon its internal review and
communications with its principal service providers and vendors to date, the
Company believes that the costs of achieving Year 2000 compliance will not have
a material adverse impact on the Company's business, operations or financial
condition.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period covered by that financial statements. SFAS 130 requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. SFAS 130 did not have a material impact
on the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statements No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirement for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
product or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) CHANGES IN SECURITIES
On May 29, 1998, the Company acquired Space Applications Corporation
("SAC") in a stock-for-stock reverse triangular merger (the "Merger"). In
connection with such acquisition and in exchange for all of the issued and
outstanding SAC common stock and options, the Company issued an aggregate of
819,743 shares of its common stock and 175,925 options to purchase its common
stock to the shareholders and option holders of SAC, respectively, consisting
mainly of SAC employees, executives and directors. The options permit the
grantee thereof to purchase shares of the Company's Common Stock upon the same
terms and conditions applicable to such grantee's converted option to purchase
Common Stock of SAC under the SAC Nonqualified Stock Option Agreement, subject
to the conversion factor set forth in the Merger Agreement. As part of the
Merger, the optionholders have agreed that they will not exercise any options to
purchase the Company's Common Stock for one year following the effective date of
the Merger. The exchange involved 35 or fewer persons not established to the
reasonable satisfaction of the Registrant as "accredited investors" under Rule
501(a) of the Securities Act of 1933, as amended (the "Act"), and was
consummated in reliance upon Section 4 (2) of the Act, and the rules and
regulations thereunder. Pursuant to Rule 506 (b), all investors were either
accredited investors, reasonably believed by the Company to have such knowledge
and experience in financial and business matters that such investor was capable
of evaluating the merits and risks of the investment, or retained a purchaser
representative not affiliated with the Company in connection with the
transaction.
(B) USE OF PROCEEDS
A Registration Statement on Form S-1 (File No. 333-40725) registering
3,150,000 shares of the Company's Common Stock, filed in connection with the
Company's IPO, was declared effective by the Securities and Exchange Commission
on January 27, 1998. The IPO closed on February 3, 1998 and the offering has
terminated. All of the shares covered by the Registration Statement were sold
upon termination of the offering. The Company and its selling shareholders sold,
in the aggregate, all 3,150,000 shares registered in the IPO, with an aggregate
offering price to the public of $37.8 million through an underwriting syndicate
managed by Donaldson, Lufkin & Jenrette Securities Corporation and Lehman
Brothers Incorporated.
In connection with the IPO, the Company incurred total underwriting
discounts and commission expenses of $1.8 million through March 31, 1998. After
aggregate underwriting discounts and commissions, the Company's net proceeds
from the IPO were $23.4 million. From February 3, 1998 through June 30, 1998,
the amount of net offering proceeds used by the Company has been $7.1 million in
full payment of all existing revolver and term loan indebtedness with a bank at
the time of the IPO, $0.3 million towards a full payoff of $0.5 million made on
a note secured by the Company aircraft, and $1.6 million has been used for
repayment of indebtedness of an acquired company. All other expenses associated
with the IPO were paid through working capital generated from operations. The
remainder of the net offering proceeds are invested in high quality short-term
securities.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit No.
- -----------
11.1 -- Computation of Earnings per Share
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
On May 29, 1998, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K describing the acquisition of Space
Applications Corporation.
On August 3 and August 4, 1998, the Company filed with the Securities
and Exchange Commission, interim reports on Form 8-K/A providing consolidated
financial information related to the acquisition of Space Applications
Corporation.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEVEN MYERS & ASSOCIATES, INC.
Date: August 13, 1998 By: /s/ RONALD A. HUNN
--------------------------------
Ronald A. Hunn
Vice President, Chief Financial
Officer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Earnings Per Share
27 Financial Data Schedules (EDGAR)
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
The following table illustrates the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1997(1) 1998 1997(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per
common share -- net earnings $ 2,454 $ 1,100 $ 4,203 $ 2,245
======= ======= ======= =======
Denominator:
Denominator for basic earnings per common
share -- weighted average number of common
shares outstanding during the period 15,297 12,948 14,825 12,948
Incremental common shares attributable to
outstanding stock options 333 -- 217 --
------- ------- ------- -------
Denominator for diluted earnings per common share 15,630 12,948 $15,042 $12,948
======= ======= ======= =======
Basic earnings per common share $ 0.16 $ 0.08 $ 0.28 $ 0.17
======= ======= ======= =======
Diluted earnings per common share $ 0.16 $ 0.08 $ 0.28 $ 0.17
======= ======= ======= =======
</TABLE>
- ----------
(1) Based on pro forma net earnings.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STEVEN
MYERS & ASSOCIATES, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,443
<SECURITIES> 14,774
<RECEIVABLES> 9,646
<ALLOWANCES> 10
<INVENTORY> 198
<CURRENT-ASSETS> 28,818
<PP&E> 4,129
<DEPRECIATION> 2,783
<TOTAL-ASSETS> 45,969
<CURRENT-LIABILITIES> 7,095
<BONDS> 0
0
0
<COMMON> 158
<OTHER-SE> 37,477
<TOTAL-LIABILITY-AND-EQUITY> 45,969
<SALES> 24,121
<TOTAL-REVENUES> 24,121
<CGS> 13,499
<TOTAL-COSTS> 18,136
<OTHER-EXPENSES> (1,230)
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 7,139
<INCOME-TAX> 2,936
<INCOME-CONTINUING> 4,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,203
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
