<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 29, 1998
-----------------------
STEVEN MYERS & ASSOCIATES, INC.
-------------------------------
(Exact name of registrant a specified in its Charter)
California 0-23585 33-0080929
- ---------------------------- ----------- -------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
4695 MacArthur Court, Eighth Floor, Newport Beach,California 92660
- ------------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 975-1550
----------------------
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Steven Myers & Associates, Inc. ("SM&A") acquired Space Applications
Corporation ("SAC"), a California corporation, in a reverse-triangular merger
(the "Acquisition") pursuant to an Agreement and Plan of Reorganization and
Merger (the "Merger Agreement"), dated May 18, 1998, by and among SM&A, SAC, SAC
Acquisition, Inc. ("Sub"), a California corporation, a wholly-owned subsidiary
of SM&A, and Roger H. Skinner, an individual. Pursuant to the Merger Agreement,
Sub was merged with and into SAC, with SAC surviving as a wholly-owned
subsidiary of SM&A. In connection with the Acquisition, the shareholders of SAC
received an aggregate of 819,743 shares of SM&A Common stock on a pro rata basis
as set forth in the Merger Agreement. The Acquisition closed on May 29, 1998. In
determining the aggregate purchase price for SAC, SM&A took into account the
value of companies of similar industry and size to SAC, comparable transactions,
and the market for such companies generally.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. Financial Statements of Business Acquired. The audited financial
statements of Space Applications Corporation filed with this report are listed
in the Index to Financial Statements on page F-1 of this report.
B. Pro Forma Financial Information. The pro forma financial
statements for the combined companies filed with this report are listed in the
Index to Financial Statements on page F-1 of this report.
C. Exhibits.
2* Agreement and Plan of Reorganization and Merger, dated May 18,
1998, by and among Steven Myers & Associates, Inc., Space
Application Corporation, and Roger H. Skinner, and certain
exhibits.
99.1* Text of Press Release dated May 18, 1998.
* Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated May 29, 1998 and filed May 29, 1998.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 3, 1998 STEVEN MYERS & ASSOCIATES, INC.
By: /s/ RONALD A. HUNN
----------------------------
Ronald A. Hunn,
Chief Financial Officer
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
TO CURRENT REPORT ON FORM 8-K/A
<TABLE>
<CAPTION>
Page
No.
---
<S> <C> <C>
(a) Financial Statements of Business Acquired.
Report of Independent Auditors F-3
Consolidated Balance Sheets as of June 27, 1997 and June 28, 1996 F-4-F-5
Consolidated Statements of Operations for the Years Ended June 27, 1997
and June 28, 1996 F-6
Consolidated Statements of Shareholders' Equity for the Years Ended June 27, 1997
and June 28, 1996 F-7
Consolidated Statements of Cash Flows for the the Years Ended
June 27, 1997 and June 28, 1996 F-8
Notes to Consolidated Financial Statements as of June 27, 1997 and
June 28, 1996 F-9-F-18
Report of Independent Auditors F-19
Consolidated Balance Sheets as of June 28, 1996 and June 30, 1995 F-20-F-21
Consolidated Statements of Operations for the Years Ended June 28, 1996
and June 30, 1995 F-22
Consolidated Statements of Shareholders' Equity for the Years Ended June 28, 1996
and June 30, 1995 F-23
Consolidated Statements of Cash Flows for the the Years Ended
June 28, 1996 and June 30, 1995 F-24
Notes to Consolidated Financial Statements as of June 28, 1996 and June 30, 1995 F-25-F-32
Unaudited Consolidated Balance Sheet as of March 31, 1998 F-33
Unaudited Consolidated Statements of Operations for the Nine Months
Ended March 31, 1998 and 1997 F-34
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1998 and 1997 F-35
Unaudited Consolidated Statement of Shareholders' Equity for the Nine Months
Ended March 31, 1998 and 1997 F-36
Notes to Unaudited Consolidated Financial Statements F-37
</TABLE>
F-1
<PAGE> 5
<TABLE>
<CAPTION>
Page
No.
---
<S> <C> <C>
(b) Pro Forma Financial Information.
Unaudited Pro Forma Combined Balance Sheet of Steven Myers & Associates, Inc.
and Subsidiaries as of March 31, 1998 F-39
Unaudited Pro Forma Combined Statements of Operations of Steven Myers &
Associates, Inc. and Subsidiaries for the Three Months Ended March 31, 1998 F-40
Unaudited Pro Forma Combined Statements of Operations of Steven Myers &
Associates, Inc. and Subsidiaries for the Year Ended December 31, 1997 F-41
Notes to Unaudited Pro Forma Combined Financial Data as of March 31, 1998 and
December 31, 1997 F-42-F-44
(c) Exhibits:
None
</TABLE>
F-2
<PAGE> 6
Report of Independent Auditors
Board of Directors
Space Applications Corporation
We have audited the accompanying consolidated balance sheets of Space
Applications Corporation and Subsidiary as of June 27, 1997 and June 28, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Space Applications
Corporation and Subsidiary at June 27, 1997 and June 28, 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
October 3, 1997
F-3
<PAGE> 7
Space Applications Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 27 JUNE 28
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 354,879 $ 1,208,426
Receivables:
Trade 3,330,940 3,744,479
Other 30,206 59,409
----------- -----------
3,361,146 3,803,888
Costs and estimated earnings in excess of
billings on contracts in progress
2,839,541 2,274,950
Refundable income taxes 179,121 160,168
Prepaid expenses 441,616 452,406
Deferred income taxes 61,000 287,000
----------- -----------
Total current assets 7,237,303 8,186,838
Property and equipment:
Equipment 2,443,568 4,049,249
Leasehold improvements 1,212,042 1,158,902
Furniture and fixtures 376,542 406,390
Transportation equipment 20,527 20,527
----------- -----------
4,052,679 5,635,068
Less accumulated depreciation and amortization 2,900,941 4,445,234
----------- -----------
1,151,738 1,189,834
Contract rights 1,657,182 --
Note receivable from related party 235,155 210,788
Note receivable 167,237 --
Investments and advances - Savant Corporation 142,182 676,867
Deposits 258,105 104,500
Deferred income taxes 158,000 157,000
Other assets 328,933 27,270
----------- -----------
Total assets $11,335,835 $10,553,097
=========== ===========
</TABLE>
F-4
<PAGE> 8
Space Applications Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 27 JUNE 28
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,100,000 $-
Term note payable - current 333,334 --
Accounts payable 1,299,149 1,260,280
Accrued compensation and benefits 1,496,907 1,943,521
Notes payable - Savant Corporation -- 441,276
Deferred acquisition payments 185,627 --
Deferred rent - current 597,670 607,936
Income taxes payable -- 88,941
----------- -----------
Total current liabilities 5,012,687 4,341,954
Term note payable - long-term 666,666 --
Deferred rent -- 597,670
Deferred acquisition payments 287,500 --
Deferred supplemental retirement 208,494 --
----------- -----------
6,175,347 4,939,624
Shareholders' equity:
Common stock, $1 per share par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 342,549 in 1997
and 350,881 in 1996
342,549 350,881
Additional paid-in capital 534,123 353,083
Retained earnings 4,283,816 4,909,509
----------- -----------
5,160,488 5,613,473
----------- -----------
Total liabilities and shareholders' equity $11,335,835 $10,553,097
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 9
Space Applications Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 27 JUNE 28
1997 1996
------------ ------------
<S> <C> <C>
Contract revenue $ 25,582,679 $ 28,635,607
Costs and expenses:
Costs of revenue:
Direct costs 14,248,081 15,622,059
Overhead 8,357,574 8,666,240
------------ ------------
22,605,655 24,288,299
General and administrative 1,830,459 2,005,204
Bid and proposal, and research and development 697,245 614,929
Equity in losses of Savant Corporation 638,834 61,166
Interest expense and other (income) loss, net 42,421 (20,323)
------------ ------------
25,814,614 26,949,275
Income (loss) before income taxes (231,935) 1,686,332
Income tax expense 156,814 615,780
------------ ------------
Net income (loss) $ (388,749) $ 1,070,552
============ ============
Net income (loss) per common share:
Basic $ (1.11) $ 3.08
------------ ------------
Diluted $ (1.11) $ 2.56
------------ ------------
Weighted average common shares used in computing
per share amounts:
Basic 349,613 347,831
------------ ------------
Diluted 349,613 417,481
------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE> 10
Space Applications Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 $ 344,781 $ 204,662 $ 3,923,137 $ 4,472,580
Net income for 1996 -- -- 1,070,552 1,070,552
Shares issued 5,000 59,850 -- 64,850
Shares issued under stock option plans 9,100 98,151 -- 107,251
Tax benefit from exercise of stock options -- 2,000 -- 2,000
Purchase and retirement of common stock (8,000) (11,580) (84,180) (103,760)
----------- ----------- ----------- -----------
Balance at June 28, 1996 350,881 353,083 4,909,509 5,613,473
Net loss for 1997 -- -- (388,749) (388,749)
Shares issued 13,608 212,332 -- 225,940
Shares issued under stock option plans 4,500 64,755 -- 69,255
Tax benefit from exercise of stock options -- 2,500 -- 2,500
Purchase and retirement of common stock (26,440) (98,547) (236,944) (361,931)
----------- ----------- ----------- -----------
Balance at June 27, 1997 $ 342,549 $ 534,123 $ 4,283,816 $ 5,160,488
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 11
Space Applications Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 27 JUNE 28
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (388,749) $ 1,070,552
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 392,641 356,499
Deferred income taxes 225,000 360,000
Deferred rent (389,936) (759,401)
Loss on disposal of equipment 64,457 36,874
Minority interest in losses of subsidiary -- 16,000
Equity in losses of Savant Corporation 638,834 61,166
Changes in operating assets and liabilities:
Receivables 442,742 (883,559)
Costs and estimated earnings in excess of
billings on contracts in progress (764,591) (222,715)
Prepaid expenses and other assets (433,461) 80,443
Accounts payable 38,869 668,663
Other liabilities (257,378) 481,044
----------- -----------
Net cash (used in) provided by operating activities (431,572) 1,265,566
INVESTING ACTIVITIES
Purchase of property and equipment (419,002) (731,528)
Proceeds from sale of property and equipment -- 20,000
Payments for assets acquired - Applied Research (1,306,722) --
Cash paid to fund annuity (28,500) --
Investment and advances - Savant Corporation (89,359) (298,033)
----------- -----------
Net cash used in investing activities (1,843,583) (1,009,561)
FINANCING ACTIVITIES
Borrowings on line of credit 5,550,000 --
Repayments of line of credit (4,450,000) --
Proceeds from issuance of term note 1,000,000 --
Principal payments on notes payable (440,000) (10,919)
Sale of minority interest in subsidiary -- (16,000)
Purchase and retirement of common stock (286,292) (103,760)
Proceeds from sale of common stock 47,900 174,101
----------- -----------
Net cash provided by financing activities 1,421,608 43,422
----------- -----------
Increase (decrease) in cash and cash equivalents (853,547) 299,427
Cash and cash equivalents at beginning of year 1,208,426 908,999
----------- -----------
Cash and cash equivalents at end of year $ 354,879 $ 1,208,426
=========== ===========
</TABLE>
See accompanying notes
F-8
<PAGE> 12
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 27, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by Space Applications Corporation and
Subsidiary (the Company), as summarized below, are in conformity with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of Space Applications
Corporation and its subsidiary, Staminet, Inc., which operate in principally one
business segment in the information technology industry. Space Applications
Corporation develops computer software and provides high technology services
primarily on a contractual basis for the United States Government and the
aerospace industry including computer systems integration and Internet Services,
and local and wide area network design, implementation and services for
commercial and government customers. During the year ended June 28, 1996, a
minority equity interest representing approximately 11% of the outstanding stock
of Staminet, Inc. was purchased by employees of Staminet, Inc. The proceeds from
the sale of the minority interest of $16,000 were fully offset by the allocable
share of the losses of Staminet, Inc. in the year ended June 28, 1996.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, in particular estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
ACCOUNTING PERIOD
The Company operates its accounting cycle on a 52-53 week year. The last Friday
in the month of June is the Company's fiscal year end.
CASH EQUIVALENTS
Cash equivalents consist of investments that are readily convertible into cash
and generally have maturities of 90 days or less when purchased.
F-9
<PAGE> 13
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
assets which range from five to seven years. Amortization of leasehold
improvements is computed using the straight-line method over the term of the
leases.
DEFERRED RENT
Deferred rent expense arises from the recognition of rent expense on the
straight-line method over the term of the lease. At June 27, 1997 and June 28,
1996, deferred rent also includes a loss accrual balance of approximately
$278,000 and $800,000, respectively, representing the anticipated shortfall of
sublease income as compared to future leasing costs of a vacant facility. In
1997, the loss accrual balance was reduced by approximately $203,000 due to the
execution of a sublease on part of the vacant facility.
INCOME RECOGNITION AND CONTRACTS IN PROGRESS
The Company generally recognizes income on contracts using the percentage of
completion method. Accrued income is based on the percentage of estimated total
income that costs incurred to date bear to estimated total costs after giving
effect to the most recent estimates of cost and estimated contract price at
completion. Some contracts contain incentive provisions based upon performance
in relation to established targets to which applicable recognition has been
given in the contract revenue estimates. Since many contracts extend over a long
period of time, revisions in cost and price estimates during the progress of
work have the effect of adjusting earnings in the current period applicable to
performance in prior periods. When the contract estimate indicates a loss,
provision is made for the total anticipated loss. In accordance with these
practices, contracts in progress are stated at cost plus estimated profit, but
not in excess of realizable value.
Revenues on certain contracts obtained on a time and material basis are
accounted for as work is performed. Generally, the Company is required to meet
certain contractual milestones prior to having the right to bill the customer.
Certain customers require retention of a portion of the contract price or fee
until final settlement of overhead rates and close-out of the contract. Such
retainages are normally collected within one year.
EARNINGS PER SHARE
The Company's earnings per share calculations are based upon the weighted
average of shares of common stock outstanding. The dilutive effect of stock
options are excluded for purposed of calculating basic earnings per share. In
addition, in periods where the basic earnings per share is less than $0.00, the
Company does not include any effects of the options to acquire Common stock as
the inclusion of such securities would be anti-dilutive.
F-10
<PAGE> 14
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT IN SAVANT CORPORATION
In June 1996, the Company acquired for cash and notes payable, totaling
$700,000, a 45% interest in the outstanding common stock of Savant Corporation
(Savant), a software development company. This investment is accounted for under
the equity method. During fiscal 1997, Savant issued shares of preferred stock
which diluted the Company's ownership percentage to 36.82%. As of June 27, 1997,
the Company had recognized equity in losses of Savant of $700,000, an amount
equal to the equity investment. Notes payable to Savant of $440,000 were payable
monthly through September 1996, and were fully paid in the year ended June 27,
1997.
The initial investment agreement included an administrative services agreement
with Savant, whereby the Company provided Savant with certain administrative and
management services. The payment of up to $150,000 of these costs could be
deferred by Savant. Any deferred amounts earned interest at an annual rate of
20% from the date of invoice until paid in full. Charges to Savant under the
administrative services agreement were based on the Company's cost. The
administrative services agreement was terminated effective January 31, 1997.
Savant issued a promissory note of $142,182 to the Company, dated June 30, 1997,
for the deferred amounts and accrued interest through June 30, 1997. The note
principal and interest at 20% per annum are due and payable on January 31, 2000.
At June 27, 1997 the Company was the guarantor of approximately $41,500 of
payments due under Savant's capital leases payable monthly through June 1999.
3. BANK CREDIT FACILITY
The Company has a loan agreement with a bank that includes a $3,500,000 line of
credit and a $1,000,000 term note. The $3,500,000 line of credit expires on
November 30, 1997. Available borrowings under the line of credit are subject to
a borrowing base determined as a percentage of eligible accounts receivable. The
line of credit has an interest rate, at the Company's option, of LIBOR plus
1.75% per annum or prime which was 7.47% at June 27, 1997. At June 27, 1997,
$1,100,000 was outstanding under the line of credit.
F-11
<PAGE> 15
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. BANK CREDIT FACILITY (CONTINUED)
In June 1997, the Company borrowed $1,000,000 under a term loan to finance the
purchase of the majority of the assets of Applied Research of Maryland, Inc. See
Note 10. Principal payments for the term loan of $27,778 are payable monthly
through June 2000, along with monthly payments of interest at the Prime Rate
plus .5 percent which was 9% at June 27, 1997.
The Company is required to meet various financial ratios and covenants under the
loan agreement, the most restrictive of which requires the Company to maintain a
minimum tangible net worth. As of June 27, 1997 the Company failed to meet
certain covenants of the loan agreement. However, the Company has obtained
waivers for the respective covenant requirements from the lender.
Interest paid for fiscal 1997 and 1996 was approximately $81,000 and $13,000,
respectively.
4. LEASES
The Company leases office facilities and certain equipment under non-cancelable
operating leases. As of June 27, 1997, future minimum lease payments under
non-cancelable operating leases with initial terms of one year or more are as
follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR ENDING LEASES
----------------------------- ----------
<S> <C>
1998 $1,734,984
1999 318,703
2000 227,438
2001 193,671
2002 17,604
----------
Total minimum lease payments $2,492,400
==========
</TABLE>
Rental expense for fiscal 1997 and 1996 was approximately $1,160,000 and
$1,843,000, respectively. Future minimum sublease income from a non-cancelable
operating sublease, which extends to June 1998, is approximately $74,000. Future
payment of $597,670 under non-cancelable operating leases are included on the
balance sheet as deferred rent at June 27, 1997.
F-12
<PAGE> 16
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY
In February 1997 the Company issued 11,608 shares of common stock with a
valuation of $200,000 to the Space Applications Corporation 401(k) and Profit
Sharing Plan as part of the fiscal 1996 profit sharing contribution. On March 2,
1997, the Company acquired 1,500 shares of stock from a former employee in
exchange for a promissory note of $25,845 to be repaid in three equal annual
principal payments plus simple interest.
During fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 allows companies to continue to measure
compensation cost for stock-based employee compensation plans using the
intrinsic value method of accounting as prescribed in Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company has elected to continue its APB Opinion No.
25 accounting treatment for stock-based compensation, and has adopted the
provisions of SFAS No. 123 requiring disclosure of the pro forma effect on net
income (loss) as if compensation expense had been recognized based upon the
estimated fair value at the date of grant for options awarded. The effect of
applying SFAS No. 123 on the net loss as reported is not representative of the
effects on reported net income (loss) for future years due to the vesting period
of the stock options and the fair value of additional sock options in future
years. Had compensation expense been determined in accordance with the
methodology of SFAS No. 123, the Company's net (loss) income in 1997 and 1996
would have been approximately ($423,000) and $1,036,000, respectively. The fair
value of options granted during 1997 and 1996 are estimated as $3.45 and $3.34
per share, respectively, on the date of grant using the minimum value option
pricing model with the following assumptions: dividend 0%, risk free interest
rate of 6.00% for 1997 and 1996, and an expected life of five years.
The Company has a qualified incentive stock option plan (ISOP) and a
non-qualified stock option plan (NQSOP). The ISOP provides that options be
granted to certain officers and key employees at prices equal to estimated fair
value at the date of grant. There were no ISOP options granted during fiscal
1997. The NQSOP options granted in fiscal 1997 were granted at a price
determined by an independent valuation conducted as of June 28, 1996. The NQSOP
options in fiscal 1996 were granted at a price equal to the book value per share
at June 30, 1995. Options granted are for ten years and become exercisable at
varying times. The Company has reserved 200,000 shares under the ISOP and NQSOP
plans.
F-13
<PAGE> 17
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Share information with respect to the options is as follows:
<TABLE>
<CAPTION>
ISOP NQSOP
------ -------
<S> <C> <C>
Outstanding at June 30, 1995: 8,500 41,625
Granted -- 142,000
Exercised (2,000) (7,100)
Canceled (2,000) (41,725)
------ -------
Outstanding at June 28, 1996: 4,500 134,800
Granted -- 10,000
Exercised (3,000) (1,500)
Canceled (1,500) (7,000)
------ -------
Outstanding at June 27, 1997 -- 136,300
====== =======
</TABLE>
Weighted average exercise prices of the options are as follows:
<TABLE>
<CAPTION>
ISOP NQSOP
--------- ---------
<S> <C> <C>
Outstanding at June 30, 1995: $ 13.29 $ 10.05
Granted -- 12.97
Exercised 10.15 12.25
Canceled 12.39 11.49
--------- ---------
Outstanding at June 28, 1996: 15.09 12.57
Granted -- 17.23
Exercised 16.60 12.97
Canceled 12.08 11.05
--------- ---------
Outstanding at June 27, 1997 $ -- $ 12.98
========= =========
</TABLE>
F-14
<PAGE> 18
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding at
June 27, 1997:
<TABLE>
<CAPTION>
NQSOP OPTIONS OUTSTANDING
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
----------- --------------- ----- ----------- -----
<S> <C> <C> <C> <C>
5,800 3 $ 8.31 5,800 $ 8.31
8,000 5 11.23 8,000 11.23
112,500 8 12.97 43,300 12.97
10,000 10 17.23 -- --
--------- ------- --------- --------- ---------
136,300 8 $ 12.98 57,100 $ 12.25
========= ======= ========= ========= =========
</TABLE>
In September 1997, in connection with the resignation of an officer of the
Company, the Company paid approximately $420,000 to repurchase 7,000 shares of
common stock, to cancel options on 80,000 shares of common stock and to provide
a severance benefit.
The following table sets forth the computation of basic and dilutive earnings
per share:
<TABLE>
<CAPTION>
Year Ended
June 27 June 28
1997 1996
--------- ---------
<S> <C> <C>
Numerator:
Net (loss) income (no reconciling
items for basic or diluted earnings
per share calculations) $(388,749) $(388,749)
========= =========
Denominator:
Denominator for weighted average
basic earnings per share 349,613 347,831
Effect of dilutive securities:
Employee stock options -- 69,650
--------- ---------
Denominator for diluted earnings per share
adjusted weighted average shares and assumed
conversions 349,613 417,481
--------- ---------
Basic earnings per share $ (1.11) $ 3.08
--------- ---------
Diluted earnings per share $ (1.11) $ 2.56
--------- ---------
</TABLE>
F-15
<PAGE> 19
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. 401(k) AND PROFIT SHARING PLAN
The Company has a discretionary profit sharing plan under which it contributes
up to a maximum of 15% of the salaries paid to eligible employees of the
Company. In addition, the plan also has a 401(k) feature under which all
employees of the Company other than casual status employees may contribute up to
15% of their salary with the Company matching 50% of employee contributions (up
to a maximum of 3% of each eligible employee's salary). Total expense under the
plan for fiscal 1997 and 1996 was approximately $315,000 and $667,000,
respectively.
7. INCOME TAXES
Deferred income taxes reflect the net deferred tax asset arising from tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax
purposes. A valuation allowance of approximately $273,000 was established for
the equity in losses of Savant Corporation. No valuation allowance was deemed
necessary for other deferred tax assets as a result of management's evaluation
of the likelihood that all of the deferred tax assets will be realized.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JUNE 27 JUNE 28
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible
for tax purposes $ 353,411 $ 424,354
Project reserves 120,013 207,053
Equity in losses of Savant Corporation 273,000 --
Depreciation 24,168 11,980
--------- ---------
Total deferred tax assets 770,592 643,387
Valuation allowance (273,000) --
--------- ---------
497,592 643,387
--------- ---------
Deferred tax liabilities:
Unbilled receivables 157,613 --
Prepaid expenses 20,477 44,387
Other 100,502 155,000
--------- ---------
Total deferred tax liabilities 278,592 199,387
--------- ---------
Net deferred tax assets $ 219,000 $ 444,000
========= =========
</TABLE>
F-16
<PAGE> 20
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 27 JUNE 28
1997 1996
--------- ---------
<S> <C> <C>
Current:
Federal $ (42,713) $ 212,128
State (25,473) 43,652
--------- ---------
Total current (68,186) 255,780
Deferred:
Federal 182,000 286,000
State 43,000 74,000
--------- ---------
Total deferred 225,000 360,000
--------- ---------
$ 156,814 $ 615,780
========= =========
</TABLE>
The Company made income tax payments of approximately $327,000 and $254,000
during fiscal 1997 and 1996, respectively.
Income tax expense for each of the two years ending June 27, 1997 and June 28,
1996 varies from the amount which would have been computed using statutory rates
as follows:
<TABLE>
<CAPTION>
June 27, 1997 June 28, 1996
------------- -------------
<S> <C> <C>
Tax computed at the Federal statutory rate $ (79,000) $ 573,000
State income taxes, net of Federal income
tax benefit or charge (12,000) 84,000
Valuation allowance on equity in losses in
Savant Corporation 273,000 --
Permanent differences and other (25,186) (41,220)
--------- ---------
Income tax (benefit)/expense $ 156,814 $ 615,780
========= =========
</TABLE>
8. RESEARCH AND DEVELOPMENT
The Company incurred research and development costs of approximately $103,000
and $57,000 for fiscal 1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The Company has a note receivable dated January 15, 1996 from an officer of the
Company in the amount of $200,000 with accrued interest of approximately $35,000
and $11,000 at June 27, 1997 and June 28, 1996, respectively. The note bears
interest at the prime rate with principal and accrued interest payable on or
before January 15, 2001.
F-17
<PAGE> 21
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. APPLIED RESEARCH ACQUISITION
On June 19, 1997, the Company purchased certain assets of Applied Research of
Maryland, Inc. ("ARM"), including the rights to contracts, unbilled accounts
receivable relating to contracts, and property and equipment for $1,750,000. The
majority of ARM employees were hired by the Company effective June 16, 1997 and
are included in the results from operations as of that date. The purchase price
consisted of $1,172,400 of cash at closing and $577,600 of assumed liabilities
and deferred payments payable through three years after the closing date. The
Company also incurred $134,322 of legal fees and other due diligence expenses
related to the purchase. The Company financed $1,000,000 of the cash due at
closing through a 36 month bank term note.
The transaction was accounted for using the purchase method of accounting. The
purchase price, including transaction expenses, of $1,884,322 was allocated to
purchased assets as follows:
<TABLE>
<S> <C>
Unbilled accounts receivable $ 200,000
Property and equipment 27,141
Contracts rights 1,657,181
----------
$1,884,322
==========
</TABLE>
Contract rights will be amortized to expense over five years based on the
profits expected to be realized from the contracts.
Pro forma unaudited consolidated operating results of the Company for the years
ended June 27, 1997 and June 28, 1996, respectively, assuming the acquisition
had been made at the beginning of each of the respective years are summarized
below:
1997 1996
----------- -----------
Pro forma Revenue $31,500,000 $34,600,000
Pro forma Net Income (Loss) (464,000) 995,000
Pro forma Income (Loss) per common share $(1.33) $2.86
Pro forma Income (Loss) per common share
assuming dilution $(1.33) $2.38
These pro forma results have been prepared for comparative purposes only and
include adjustments such as additional amortization expense as a result of
contract rights and increased interest expense related to debt used to finance
the acquisition. They do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in
effect at the beginning of the periods presented, or of the future results of
operations of the Company.
F-18
<PAGE> 22
Report of Independent Auditors
Board of Directors
Space Applications Corporation
We have audited the accompanying consolidated balance sheets of Space
Applications Corporation and Subsidiary as of June 28, 1996 and June 30, 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Space Applications
Corporation and Subsidiary at June 28, 1996 and June 30, 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
September 20, 1996
F-19
<PAGE> 23
Space Applications Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 28 JUNE 30
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,208,426 $ 908,999
Receivables:
Trade 5,445,022 4,587,893
Other 59,408 32,978
----------- -----------
5,504,430 4,620,871
Costs and estimated earnings in excess of billings
on contracts in progress
574,408 351,693
Deferred income taxes 287,000 348,000
Prepaid expenses 452,406 312,361
Refundable income taxes 160,168 423,870
----------- -----------
Total current assets 8,186,838 6,965,794
Property and equipment:
Equipment 4,049,249 3,421,717
Leasehold improvements 1,158,902 1,091,484
Furniture and fixtures 406,390 390,338
Transportation equipment 20,527 93,545
----------- -----------
5,635,068 4,997,084
Less accumulated depreciation and amortization 4,445,234 4,139,975
----------- -----------
1,189,834 857,109
Investments and advances - Savant Corporation
(Note 2) 676,867 --
Capitalized software costs, net of amortization -- 14,570
Note receivable from officer 210,788 150,000
Deferred income taxes 157,000 456,000
Other assets 131,770 149,345
----------- -----------
Total assets $10,553,097 $ 8,592,818
=========== ===========
</TABLE>
F-20
<PAGE> 24
<TABLE>
<CAPTION>
JUNE 28 JUNE 30
1996 1995
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 3) $ -- $ 5,000
Notes payable - Savant Corporation 441,276 --
Accounts payable 1,260,280 591,617
Accrued compensation and benefits 1,943,521 1,552,695
Current portion of capital lease obligations -- 5,919
Income taxes payable 88,941 --
----------- -----------
Total current liabilities 3,734,018 2,155,231
Deferred rent 1,205,606 1,965,007
----------- -----------
4,939,624 4,120,238
Shareholders' equity (Note 5):
Common stock, $1 per share par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 350,881 in 1996
and 344,781 in 1995
350,881 344,781
Additional paid-in capital 353,083 204,662
Retained earnings 4,909,509 3,923,137
----------- -----------
5,613,473 4,472,580
----------- -----------
Total liabilities and shareholders' equity $10,553,097 $ 8,592,818
=========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE> 25
Space Applications Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28 JUNE 30
1996 1995
------------ ------------
<S> <C> <C>
Contract revenue $ 28,635,607 $ 27,251,278
Costs and expenses:
Costs of revenue:
Direct costs 15,622,059 14,712,394
Overhead 8,666,240 8,491,171
------------ ------------
24,288,299 23,203,565
General and administrative 2,005,204 4,210,347
Bid and proposal, and research and development (Note 8)
614,929 806,008
Equity in losses of Savant Corporation 61,166 --
Interest expense and other income, net (20,323) 1,598
------------ ------------
26,949,275 28,221,518
Income (loss) before income taxes 1,686,332 (970,240)
Income tax expense (benefit) (Note 7) 615,780 (418,257)
------------ ------------
Net income (loss) $ 1,070,552 $ (551,983)
============ ============
Net income (loss) per common share:
Basic $ 3.08 $ (1.44)
------------ ------------
Diluted $ 2.56 $ (1.44)
------------ ------------
Weighted average common shares used in computing
per share amounts:
Basic 347,831 382,131
------------ ------------
Diluted 417,481 382,131
------------ ------------
</TABLE>
See accompanying notes.
F-22
<PAGE> 26
Space Applications Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 24, 1994 $ 419,481 $ 165,931 $ 5,710,919 $ 6,296,331
Net loss for 1995 -- -- (551,983) (551,983)
Shares issued under stock option plans 27,175 116,137 -- 143,312
Tax benefit from exercise of stock options -- 82,000 -- 82,000
Purchase and retirement of common stock (101,875) (159,406) (1,235,799) (1,497,080)
----------- ----------- ----------- -----------
Balance at June 30, 1995 344,781 204,662 3,923,137 4,472,580
Net income for 1996 -- -- 1,070,552 1,070,552
Shares issued 5,000 59,850 -- 64,850
Shares issued under stock option plans 9,100 98,151 -- 107,251
Tax benefit from exercise of stock options -- 2,000 -- 2,000
Purchase and retirement of common stock (8,000) (11,580) (84,180) (103,760)
----------- ----------- ----------- -----------
Balance at June 28, 1996 $ 350,881 $ 353,083 $ 4,909,509 $ 5,613,473
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE> 27
Space Applications Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28 JUNE 30
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,070,552 $ (551,983)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 356,499 606,775
Deferred income taxes 360,000 (604,948)
Deferred rent (759,401) 1,296,237
Loss on disposal of equipment 36,874 --
Minority interest in losses of subsidiary 16,000 --
Equity in losses of Savant Corporation 61,166 --
Changes in operating assets and liabilities:
Receivables (883,559) (408,211)
Costs and estimated earnings in excess of billings
on contracts in progress (222,715) (176,446)
Prepaid expenses and other assets 80,443 (439,413)
Accounts payable 668,663 20,833
Other liabilities 481,044 (470,830)
----------- -----------
Net cash provided by (used in) operating activities 1,265,566 (727,986)
INVESTING ACTIVITIES
Purchase of property and equipment (731,528) (364,763)
Proceeds from sale of property and equipment 20,000 --
Investment and advances - Savant Corporation (298,033) --
----------- -----------
Net cash used in investing activities (1,009,561) (364,763)
FINANCING ACTIVITIES
Principal payments on bank borrowings and capital lease obligations (10,919) (10,711)
Sale of minority interest in subsidiary (16,000) --
Purchase and retirement of common stock (103,760) (1,497,080)
Proceeds from sale of common stock 174,101 225,312
----------- -----------
Net cash provided by (used in) financing activities 43,422 (1,282,479)
----------- -----------
Increase (decrease) in cash and cash equivalents 299,427 (2,375,228)
Cash and cash equivalents at beginning of year 908,999 3,284,227
----------- -----------
Cash and cash equivalents at end of year $ 1,208,426 $ 908,999
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE> 28
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by Space Applications Corporation and
Subsidiary (the Company), as summarized below, are in conformity with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of Space Applications
Corporation and its subsidiary, Staminet, Inc., which operates in principally
one business segment in the information technology industry. Space Applications
Corporation develops computer software and provides high technology services
primarily on a contractual basis for the United States Government and the
aerospace industry including computer systems integration and Internet Services
and local and wide area network design, implementation and services for
commercial and government customers. During the year ended June 28, 1996, a
minority equity interest in Staminet was purchased by employees of Staminet. The
minority interest at June 28, 1996 represents 11% of the outstanding stock of
Staminet. The proceeds from the sale of the minority interest of $16,000 were
fully offset by the allocable share of the losses of Staminet.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, in particular estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
ACCOUNTING PERIOD
The Company operates its accounting cycle on a 52-53 week year. The last Friday
in the month of June is the Company's fiscal year end.
CASH EQUIVALENTS
Cash equivalents consist of investments that are readily convertible into cash
and generally have maturities of 90 days or less when purchased.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
assets. Amortization of leasehold improvements is computed using the
straight-line method over the term of the leases.
F-25
<PAGE> 29
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS
The Company capitalizes certain software costs incurred subsequent to the
determination of a product's technological feasibility and prior to the
product's general commercial release. The Company considers technological
feasibility for a software product to be the point when the detail program
design has been completed.
Capitalized software costs related to internally developed software are
amortized using the straight-line method over five years and are included in
direct costs. Software costs capitalized as a result of acquisition are
amortized using the straight-line method over three years. Revenue is recognized
as the software is sold. Accumulated amortization of capitalized software costs
was approximately $327,000 and $312,000 for fiscal 1996 and 1995, respectively.
DEFERRED RENT
Deferred rent expense arises from the recognition of rent expense on the
straight-line method over the term of the lease. At June 28, 1996 and 1995,
deferred rent also includes a loss accrual balance of $800,000 and $1,400,000
respectively, representing the anticipated shortfall of sublease income as
compared to future leasing costs of a vacant facility.
INCOME RECOGNITION AND CONTRACTS IN PROGRESS
The Company generally recognizes income on contracts using the percentage of
completion method. Accrued income is based on the percentage of estimated total
income that costs incurred to date bear to estimated total costs after giving
effect to the most recent estimates of cost and estimated contract price at
completion. Some contracts contain incentive provisions based upon performance
in relation to established targets to which applicable recognition has been
given in the contract revenue estimates. Since many contracts extend over a long
period of time, revisions in cost and price estimates during the progress of
work have the effect of adjusting earnings in the current period applicable to
performance in prior periods. When the contract estimate indicates a loss,
provision is made for the total anticipated loss. In accordance with these
practices, contracts in progress are stated at cost plus estimated profit, but
not in excess of realizable value.
EARNINGS PER SHARE
The Company's earnings per share calculations are based upon the weighted
average of shares of common stock outstanding. The dilutive effect of stock
options are excluded for purposed of calculating basic earnings per share. In
addition, in periods where the basic earnings per share is less than $0.00, the
Company does not include any effects of the options to acquire Common stock as
the inclusion of such securities would be anti-dilutive.
F-26
<PAGE> 30
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues on certain contracts obtained on a time and material basis are
accounted for as work is performed. Generally, the Company is required to meet
certain contractual milestones prior to having the right to bill the customer.
Certain customers require retention of a portion of the contract price or fee
until final settlement of overhead rates and close-out of the contract. Such
retainages are normally collected within one year.
2. INVESTMENT IN SAVANT CORPORATION
In June 1996, the Company acquired for cash and notes payable, totalling
$700,000, a 45% interest in the outstanding common stock of Savant Corporation
(Savant), a software development company. This investment is accounted for under
the equity method. Notes payable to Savant of $440,000 are payable monthly
through September 1996. Accrued interest on the notes payable was approximately
$1,000 at June 28, 1996.
The Company also has an administrative services agreement with Savant, whereby
the Company will provide Savant with certain administrative and management
services. The payment of up to $150,000 of these costs may be deferred by
Savant. Any deferred amounts bear interest at an annual rate of 20% from the
date of invoice until paid in full. Charges to Savant under the administrative
services agreement are based on the Company's cost.
At June 28, 1996 the Company was the guarantor of $50,000 of payments due under
Savant's operating leases payable monthly through June 1999.
F-27
<PAGE> 31
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. LINE OF CREDIT
The Company has a $3,000,000 line of credit with a bank, expiring November 30,
1997. The line has an interest rate at the borrower's option of (a) floating and
fluctuating rate of interest determined by the daily London Interbank Offered
Rate (expressed as a percentage) for Thirty (30), Sixty (60), and Ninety (90)
day Dollar deposits as quoted by the Bank for 11 o'clock a.m. (London Time)
adjusted for required reserves and FDIC premiums (the "Libo Rate") plus 1.75%
per annum, or (b) Prime. At June 28, 1996, the Company had no line of credit
borrowings outstanding.
The Company is required to meet various financial ratios and covenants under the
line of credit, the most restrictive of which requires the Company to maintain a
minimum tangible net worth.
Interest paid, including interest on capital lease obligations, for fiscal 1996
and 1995 was approximately $13,000 and $2,000, respectively.
4. LEASES
The Company leases office facilities and certain equipment under noncancelable
operating leases. As of June 28, 1996, future minimum lease payments under
noncancelable operating leases with initial terms of one year or more are as
follows:
<TABLE>
<CAPTION>
Operating
FISCAL YEAR ENDING Leases
----------------------------- ---------
<S> <C>
1997 $1,893,103
1998 1,603,413
1999 66,051
2000 11,016
----------
Total minimum lease payments $3,573,583
==========
</TABLE>
Rental expense for fiscal 1996 and 1995 was approximately $1,843,000 and
$1,887,000, respectively. Future minimum sublease income from noncancelable
operating subleases, which extend to 1998, is approximately $159,000. At June
28, 1996 this income is scheduled to be received as follows: $81,000 in 1997 and
$78,000 in 1998. In July 1996 the Company entered into a noncancelable facility
lease with future minimum lease payments of approximately $598,000 payable
monthly through July 2001.
F-28
<PAGE> 32
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND SHAREHOLDERS' EQUITY
The Company has a qualified incentive stock option plan (ISOP) and a
non-qualified stock option plan (NQSOP). The ISOP plan provides that options be
granted to certain officers and key employees at prices equal to estimated fair
value at the date of grant. The NQSOP plan options in fiscal 1996 were granted
at prices equal to the book value per share at June 30, 1995. Options granted
are for ten years and become exercisable at varying times. The Company has
reserved 200,000 shares under the plans.
Share information with respect to the options is as follows:
<TABLE>
<CAPTION>
ISOP NQSOP
---------- ----------
<S> <C> <C>
Outstanding at June 25, 1994: 30,800 86,500
Exercised (3,300) (23,875)
Canceled (19,000) (21,000)
Outstanding at June 30, 1995: 8,500 41,625
Granted -- 142,000
Exercised (2,000) (7,100)
Canceled (2,000) (41,725)
---------- ----------
Outstanding at June 28, 1996 4,500 134,800
========== ==========
Exercisable at June 28, 1996 4,500 31,800
========== ==========
Option price range $(12.08-16.60) $(8.09-12.97)
</TABLE>
The following table sets forth the computation of basic and dilutive earnings
per share:
<TABLE>
<CAPTION>
Year Ended
June 28 June 30
1996 1995
---------- ----------
<S> <C> <C>
Numerator:
Net (loss) income (no reconciling
items for basic or diluted earnings
per share calculations) $1,070,552 $ (551,983)
========== ==========
Denominator:
Denominator for weighted average
basic earnings per share 347,831 382,131
Effect of dilutive securities:
Employee stock options 69,650 --
Denominator for diluted earnings per share
adjusted weighted average shares and assumed
conversions 417,481 382,131
---------- ----------
Basic earnings per share $ 3.08 $ (1.44)
========== ==========
Diluted earnings per share $ 2.56 $ (1.44)
========== ==========
</TABLE>
F-29
<PAGE> 33
6. 401(k) AND PROFIT SHARING PLAN
The Company has a discretionary profit sharing plan under which it contributes
up to a maximum of 15% of the salaries paid to eligible employees. In addition,
the plan also has a 401(k) feature under which employees may contribute up to
12% of their salary with the Company matching 50% of employee contributions (up
to a maximum of 3% of each eligible employee's salary). Total expense under the
plan for fiscal 1996 and 1995 was approximately $667,000 and $444,000,
respectively.
F-30
<PAGE> 34
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. No valuation allowance
was deemed necessary as a result of management's evaluation of the likelihood
that all of the deferred tax assets will be realized.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JUNE 28 JUNE 30
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible
for tax purposes $424,354 $746,479
Project reserves 207,053 187,670
Other 11,980 9,918
-------- --------
Total deferred tax assets 643,387 944,067
Deferred tax liabilities:
Prepaid expenses 44,387 40,205
Other 155,000 99,862
-------- --------
Total deferred tax liabilities 199,387 140,067
-------- --------
Net deferred tax assets $444,000 $804,000
======== ========
</TABLE>
F-31
<PAGE> 35
Space Applications Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28 JUNE 30
1996 1995
--------- ---------
<S> <C> <C>
Current:
Federal $ 212,128 $ 152,000
State 43,652 34,691
--------- ---------
Total current 255,780 186,691
Deferred:
Federal 286,000 (527,948)
State 74,000 (77,000)
--------- ---------
Total deferred 360,000 (604,948)
--------- ---------
$ 615,780 $(418,257)
========= =========
</TABLE>
The Company made income tax payments of approximately $254,000 and $428,000
during fiscal 1996 and 1995, respectively.
Income tax expense for each of the two years ending June 28, 1996 and June 30,
1995 varies from the amount which would have been computed using statutory rates
as follows:
<TABLE>
<CAPTION>
June 28, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Tax computed at the Federal statutory rate $ 573,000 $(330,000)
State income taxes, net of Federal income
tax benefit or charge 84,000 (49,000)
Permanent differences and other (41,220) (39,257)
--------- ---------
Income tax (benefit)/expense $ 615,780 $(418,257)
========= =========
</TABLE>
8. RESEARCH AND DEVELOPMENT
The Company incurred research and development costs of approximately $57,000 and
$82,000 for fiscal 1996 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
The Company has a note receivable dated January 15, 1996 from an officer in the
amount of $200,000 with accrued interest of approximately $11,000 at June 28,
1996. The note bears interest at the prime rate and principal and accrued
interest is payable on or before January 15, 2001.
F-32
<PAGE> 36
Space Applications Corporation and Subsidiary
Unaudited Consolidated Balance Sheet
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
==============
MARCH 31, 1998
==============
<S> <C>
ASSETS
Current Assets:
Cash $ 300
Accounts receivable 4,963
Costs and estimated earnings in excess of billings on 1,955
contracts in progress, net allowance
Inventory 75
Prepaid expenses and other current assets 477
-------
Total current assets 7,770
Property and equipment, net 1,106
Other assets 2,177
Notes receivable, officers 244
-------
Total assets $11,297
=======
Current Liabilities:
Trade accounts payable $ 1,635
Current portion of long-term debt 1,683
Accrued salaries, wages, and payroll taxes 1,478
Accrued bonuses 176
Other liabilities 206
-------
Total current liabilities 5,178
Deferred rents 188
Other deferreds 472
Long-term debt, excluding current portion 417
-------
Total liabilities 6,255
Shareholders' equity:
Common stock, no par value 337
Additional paid in capital 590
Retained earnings 4,115
-------
Total shareholders' equity 5,042
-------
Total liabilities and shareholders' equity $11,297
=======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-33
<PAGE> 37
Space Applications Corporation and Subsidiary
Unaudited Consolidated Statements of Operations
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
==================================
NINE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
=============== ===============
<S> <C> <C>
Net revenues $ 22,912 $ 19,417
Cost of revenues 16,181 13,581
-------- --------
Gross profit 6,731 5,836
Selling, general and administrative expenses 6,614 5,892
-------- --------
Operating income (loss) 117 (56)
Other (income) expense:
Interest expense 174 40
Other (income) expense, net (13) 187
-------- --------
Loss before income taxes (44) (283)
Income tax expense (benefit) (17) (113)
-------- --------
Net loss $ (27) $ (170)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-34
<PAGE> 38
Space Applications Corporation and Subsidiary
Unaudited Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===========================
NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
========== ==========
<S> <C> <C>
Cash flows from operating activities:
Net Earnings (27) (170)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for costs and estimated earnings in excess of 11 15
current billings
Depreciation and amortization 609 335
Gain on sale of fixed assets
Changes in assets and liabilities:
Trade accounts receivable (1,632) (296)
Cost and estimated earnings in excess of current billings 873 (19)
Prepaid expenses and other current assets 160 (195)
Deferred rent (410) (479)
Accounts payable and other current liabilities 513 (1,252)
------- -------
Net cash provided by operating activities 97 (2,061)
------- -------
Cash flows from investing activities:
Net purchases of property and equipment (262) (383)
Net change in notes receivable from related party (9) 7
Net change in other noncurrent assets 234 124
------- -------
Net cash provided by investing activities (37) (252)
------- -------
Cash flows from financing activities:
Borrowings on line of credit 250 1,700
Repayment of term note (250) --
Net change in other liabilities (23) (441)
Net proceeds from issuance of common stock 75 226
Exercise of stock options -- 70
Purchase & retirement of common stock (167) (350)
------- -------
Net cash provided by (used in) financing activities (115) 1,205
------- -------
Net increase (decrease) in cash (55) (1,108)
------- -------
Cash and cash equivalents at beginning of period 355 1,208
Cash and cash equivalents at end of period $ 300 $ 100
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-35
<PAGE> 39
Space Applications Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $ 351 $ 353 $ 4,910 $ 5,614
Net loss for nine months ended March 31, 1997 -- -- (170) (170)
Shares issued 14 212 -- 226
Shares issued under stock option plans 5 65 -- 70
Purchase and retirement of common stock (27) (92) (231) (350)
------- ------- ------- -------
Balance at March 31, 1997 $ 343 $ 538 $ 4,509 $ 5,390
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ 343 $ 534 $ 4,284 $ 5,161
Net loss for nine months ended March 31, 1998 -- -- (27) (27)
Shares issued 4 71 -- 75
Purchase and retirement of common stock (10) (15) (142) (167)
------- ------- ------- -------
Balance at March 31, 1998 $ 337 $ 590 $ 4,115 $ 5,042
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-36
<PAGE> 40
Space Applications Corporation
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Space
Applications Corporation (SAC) and subsidiaries have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
the interim financial reporting. Accordingly, they do not include all of
the information and footnote disclosures necessary for complete
financial statements in conformity with GAAP. These unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in this current
report.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments considered necessary for a
fair presentation of the financial condition as of March 31, 1998, the
results of operations for the nine months ended March 31, 1998 and 1997,
the statement of cash flows for the nine months ended March 31, 1998 and
1997 and the statements of shareholders' equity for the nine months
ended March 31, 1998 and 1997. Certain reclassifications to prior period
financial statements have been made in order to conform to the current
period presentation.
2. SUBSEQUENT EVENTS
On May 18, 1998, SAC completed a purchase agreement with Steven Myers
& Associates,Inc.(SM&A) whereby all shares of the common stock of SAC
were exchanged for $14.7 million in common shares of SM&A stock.
F-37
<PAGE> 41
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Combined Balance Sheet presents the unaudited
pro forma financial condition of SM&A as if the Merger occurred as of March 31,
1998. The following Pro Forma Combined Statements of Operations for the three
months ended March 31, 1998 present unaudited pro forma operating results for
SM&A as if the Merger had occurred as of January 1, 1998. The following Pro
Forma Combined Statements of Operations for the twelve months ended December 31,
1997 present unaudited pro forma operating results for SM&A as if the Merger had
occurred as of January 1, 1997.
The Unaudited Pro Forma Combined Balance Sheet and Statements of
Earnings were prepared assuming the consummation of the Merger, which is
accounted for under the purchase method of accounting. The unaudited pro forma
adjustments are described in the accompanying notes. The unaudited pro forma
adjustments represent SM&A's preliminary determination of the necessary
adjustments and are based upon certain assumptions SM&A considers reasonable
under the circumstances. Final amounts may differ from those set forth below.
The unaudited pro forma financial information presented does not
consider any future events. The unaudited pro forma financial information
presented does not attempt to quantify any operating expense synergies or cost
reductions of the combined operations of SM&A and SAC that may be realized after
the Merger, nor does the unaudited pro forma financial information consider the
incremental expense, capital or conversion costs which may be incurred as a
result of the Merger.
The purchase price in excess of the estimated fair market values of
acquired assets has been allocated to goodwill. The allocated amounts may change
when the fair value of the acquired assets and liabilities is further evaluated.
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred had the Merger been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results or financial position of SM&A following the Merger.
The unaudited pro forma combined financial information should be read in
conjunction with the financial statements of SM&A and the financial statements
of SAC and the related notes thereto contained in (i) SM&A's Form S-1, and (ii)
SAC's audited financial statements for the fiscal years ended June 30, 1995,
June 28, 1996 and June 27, 1997, included herein in this current report.
F-38
<PAGE> 42
Steven Myers & Associates, Inc.
Unaudited Pro Forma Combined Balance Sheet
March 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ----------------------------------
SM&A SAC ADJS. NOTES COMBINED
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 17,516 $ 300 $ -- $ 17,816
Accounts receivable, net allowance for 5,917 4,963 -- 10,880
doubtful accounts
Costs and estimated earnings in excess of billings -- 1,955 -- 1,955
on contracts in progress
Inventory -- 75 -- 75
Advances to employees -- 73 -- 73
Prepaid expenses and other current assets 342 404 -- 746
-------- -------- -------- --------
Total current assets 23,775 7,770 -- 31,545
Property and equipment, net 345 1,106 -- 1,451
Other assets 55 2,177 -- 2,232
Notes receivable, officers -- 244 -- 244
Costs in excess of net assets of business acquired, net -- -- 12,315 a (i) 12,315
-------- -------- -------- --------
Total assets $ 24,175 $ 11,297 $ 12,315 $ 47,787
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 97 $ 1,635 $ -- 1,732
Current portion of long-term debt 11 1,683 -- 1,694
Accrued salaries, wages, and payroll taxes 3,972 1,478 -- 5,450
Accrued bonuses 811 176 -- 987
Income taxes payable 1,042 -- -- 1,042
Other liabilities 209 205 -- 414
-------- -------- -------- --------
Total current liabilities 6,142 5,177 -- 11,319
Deferred rents -- 188 -- 188
Deferred revenue -- (8) -- (8)
Deferred tax liability 161 -- -- 161
Other deferreds -- 480 -- 480
Long-term debt, excluding current portion 8 418 -- 426
-------- -------- -------- --------
Total liabilities 6,311 6,255 -- 12,566
Shareholders' equity:
Common stock, no par value 150 337 (329) a (ii) 158
Additional paid in capital 22,645 590 16,759 a (ii&iii) 39,994
Retained earnings (accumulated deficit) (4,931) 4,115 (4,115) a (ii) (4,931)
-------- -------- -------- --------
Total shareholders' equity 17,864 5,042 12,315 35,221
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 24,175 $ 11,297 $ 12,315 $ 47,787
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data
F-39
<PAGE> 43
Steven Myers & Associates, Inc.
Unaudited Pro Forma Combined Statement of Operations
Three Months Ended March 31, 1998
( DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA )
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
--------------------------------- --------------------------------
SM&A SAC COMBINED ADJS. NOTES COMBINED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 10,659 $ 8,442 $ 19,101 $ -- $ 19,101
Cost of revenues 5,988 5,837 11,825 -- 11,825
-------- -------- -------- -------- ---------
Gross profit 4,671 2,605 7,276 -- 7,276
Selling, general and
administrative expenses 1,746 2,312 4,058 103 b (i) 4,161
-------- -------- -------- -------- ---------
Operating income 2,925 293 3,218 (103) 3,115
Other (income) expense:
Interest expense 70 62 132 -- 132
Other (income) expense, net (139) 35 (104) -- (104)
-------- -------- -------- -------- ---------
Earnings (loss) before 2,994 196 3,190 (103) 3,087
Income taxes
Income tax expense 1,245 76 1,321 -- 1,321
-------- -------- -------- -------- ---------
Net earnings (loss) $ 1,749 $ 120 $ 1,869 $ (103) $ 1,766
======== ======== ======== ======== =========
Earnings per common share:
Basic $ .12 $ .12
-------- ---------
Diluted $ .12 $ .12
-------- ---------
Weighted average common shares
used in computing share amounts:
Basic 14,347 15,166
-------- ---------
Diluted 14,431 15,356
-------- ---------
</TABLE>
See accompanying notes to unaudited pro forma combined financial data
F-40
<PAGE> 44
Steven Myers & Associates, Inc.
Unaudited Pro Forma Combined Statement of Operations
Twelve Months Ended December 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SM&A SM&A
PRO PRO SAC
SM&A FORMA FORMA SAC PRO FORMA
HISTORICAL ADJ. NOTES BALANCES HISTORICAL COMBINED ADJ. NOTES COMBINED
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 36,962 $ 36,962 $ 26,816 $ 63,778 $ 63,778
Cost of revenues 20,529 -- 20,529 18,556 39,085 -- 39,085
-------- -------- -------- -------- -------- -------- --------
Gross profit 16,433 16,433 8,260 24,693 24,693
Selling, general and
administrative expenses c(i)
6,927 1,007 c(ii) 7,934 7,786 15,720 411 16,131
-------- -------- -------- -------- -------- -------- --------
Operating income 9,506 (1,007) 8,499 474 8,973 (411) 8,562
Other (income) expense:
Interest expense 505 505 210 715 715
Other (income)
expense, net 37 -- 37 266 303 -- 303
-------- -------- -------- -------- -------- -------- --------
Earnings (loss)
before 8,964 (1,007) 7,957 (2) 7,955 (411) 7,544
income taxes
Income tax expense 147 3,036 c(iii) 3,183 259 3,442 -- 3,442
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) $ 8,817 $ (4,043) $ 4,774 $ (261) $ 4,513 $ (411) $ 4,102
======== ======== ======== ======== ======== ======== ========
Earnings per common share:
Basic $ .37 $ .30
-------- --------
Diluted $ .37 $ .30
-------- --------
Weighted average common
shares used in computing share amounts:
Basic 12,900 13,720
-------- --------
Diluted 12,900 13,826
-------- --------
</TABLE>
See accompanying notes to unaudited pro forma combined financial data
F-41
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
March 31, 1998
a. The unaudited pro forma combined balance sheet for the Company as of
March 31, 1998 has been prepared to reflect the acquisition of the net
assets of Space Applications Corporation (SAC) under the purchase method
of accounting. The purchase price of $14.7 million has been allocated to
the net assets purchased based upon the estimated fair values as of
March 31, 1998.
The allocation of the aggregate purchase cost below is preliminary. The
final allocation will be based on management's final assessments and
appraisals of net assets. The excess of purchase cost over the estimated
fair market value of the net assets acquired will ultimately be
allocated to goodwill. The difference between the final allocation of
the purchase cost and the resulting effect on goodwill and the pro forma
amounts included herein is not believed to be significant. The
preliminary adjustments are summarized in the table below:
<TABLE>
<S> <C>
Purchase price $ 14,700,000
Fair value of SM&A options granted (iii) 2,657,174
------------
Total consideration costs 17,357,174
Less: estimated fair value of
the net assets acquired (5,041,886)
------------
Net goodwill (i) $ 12,315,288
============
</TABLE>
-------------
(i) Represents the net goodwill based on the net of total
consideration costs and preliminary appraisals of SAC assets and
liabilities at March 31, 1998. This amount is subject to
adjustment based on final appraisals.
(ii) To eliminate the equity of SAC as of March 31, 1998 and to
record the issuance of 819,743 SM&A shares of common stock at a
value of $17.93 per share.
(iii) To record the the fair value of SM&A stock options exchanged for
outstanding SAC stock options.
F-42
<PAGE> 46
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Three Months Ended March 31, 1998
b. The unaudited pro forma combined statement of operations for the three
months ended March 31, 1998 combines the results of Steven Myers &
Associates, Inc. and the results of Space Applications Corporation for
the three months ended March 31, 1998.
Net income per share has been computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. Net income per share information is calculated under Statement
of Financial Accounting Standard No. 128, "Earnings per Share."
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 net income available to common
stockholders by the weighted-average number of common shares outstanding
during the period. Shares issued during the period and shares
repurchased during the period shall be weighted for the portion of the
period that they are outstanding. For the combined pro forma basic
earnings per share figures, it is assumed that 12.9 million shares of
SM&A common stock were outstanding since January 1, 1998 along with the
819,743 shares issued to SAC in the acquisition. The 2.1 million SM&A
shares issued in the initial public offering are weighted from January
28, 1998. 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 dilutive effect of
outstanding options issued by the Company has been reflected in diluted
EPS by application of the treasury stock method. The Company's combined
pro forma diluted earnings per share is calculated by arriving at basic
earnings per share and factoring in the dilutive effect of approximately
176,000 SM&A options granted SAC employees in the acquisition as if they
had been outstanding since January 1, 1998 and weighing in the effect of
790,000 SM&A options granted SM&A employees upon consummation of the IPO
as of January 28, 1998.
The unaudited pro forma combined statement of operations give effect to
the following adjustment:
(i) To record three months of amortization expense of $103,000 on the $12.3
million of goodwill with an estimated useful life of 30 years.
F-43
<PAGE> 47
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Twelve Months Ended December 31, 1997
c. The unaudited pro forma combined statement of operations for the fiscal
year ended December 31, 1997 combines the pro forma results of Steven
Myers & Associates, Inc. and the results of Space Applications
Corporation for the twelve-month period ended December 31, 1997.
The pro forma adjustments to the historical SM&A financial statements
include additional salaries for the two principal executive officers who
are to be paid a maximum $2.7 million in salaries and bonuses under the
1998 Executive Compensation Program. The maximum amount is in excess of
historical figures included in selling, general, and administrative
expenses for 1997. Federal and state income taxes were also adjusted to
reflect a 40% C corporation tax rate rather than the historically used S
corporation tax rate.
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 which were
issued and outstanding on the consummation of the initial public
offering January 28, 1998.
Net income per share has been computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. Net income per share information is calculated under Statement
of Financial Accounting Standard No. 128, "Earnings per Share."
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 net income available to common
stockholders by the weighted-average number of common shares outstanding
during the period. Shares issued during the period and shares
repurchased during the period shall be weighted for the portion of the
period that they are outstanding. For the combined pro forma basic
earnings per share figures, it is assumed that 12.9 million shares of
SM&A common stock were outstanding since January 1, 1997 along with the
819,743 shares issued to SAC in the acquisition. 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 dilutive effect of outstanding options issued by
the Company has been reflected in pro forma diluted EPS by application
of the treasury stock method. The Company's combined pro forma diluted
earnings per share is calculated by arriving at basic earnings per share
and factoring in the dilutive effect of approximately 176,000 SM&A
options granted SAC employees in the acquisition as if they had been
outstanding since January 1, 1997.
The unaudited pro forma combined statement of operations give effect to
the following adjustments:
(i) To record twelve months of amortization expense of $411,000 on the $12.3
million of goodwill with an estimated life of 30 years.
(ii) To record additional compensation to the two principal executive
officers, which combined with 1997 wages in the aggregate, total the
maximum salaries and bonuses payable of $2.7 million under the 1998
Executive Compensation Program.
(iii) To adjust the provision for income taxes to reflect Federal and state
income taxes as if the Company had been taxed as a C corporation rather
than an S corporation. The adjustment reflects a 40% combined federal
and state tax rate on the combined pro forma result of operations.
F-44
