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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SM&A CORPORATION
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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<S> <C> <C>
CALIFORNIA 8742 33-0080929
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4695 MACARTHUR COURT, EIGHTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(949) 975-1550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD A. HUNN
CHIEF FINANCIAL OFFICER
SM&A CORPORATION
4695 MACARTHUR COURT, EIGHTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(949) 975-1550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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THOMAS J. CRANE, ESQ. KENNETH J. BARONSKY, ESQ.
SCOTT SANTAGATA, ESQ. MILBANK, TWEED, HADLEY & MCCLOY
NATALIE DUNDAS, ESQ. 601 SOUTH FIGUEROA STREET, 30TH FLOOR
RUTAN & TUCKER, LLP LOS ANGELES, CALIFORNIA 90017
611 ANTON BOULEVARD, 14TH FLOOR (213) 892-4000
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
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Common Stock, no par value........ 5,750,000 shares $26.00 $149,500,000 $44,102.50
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</TABLE>
(1) Includes 750,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 25, 1998
PROSPECTUS
, 1998
5,000,000 SHARES
(LOGO)
COMMON STOCK
Of the 5,000,000 shares of Common Stock offered hereby, 2,500,000 shares
are being sold by SM&A Corporation ("SM&A" or the "Company"), formerly Steven
Myers & Associates, Inc., and 2,500,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"WINS." On August 20, 1998 the last reported sale price of the Common Stock on
the Nasdaq National Market was $26.00 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share............................. $ $ $ $
Total(3).............................. $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $600,000 to be paid by the Company.
The Company has agreed to pay the expenses of the Selling Shareholders,
other than Underwriting Discounts and Commissions.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 750,000 additional shares of Common Stock at the Price to the
Public, less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If the Underwriter's over-allotment option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions, Proceeds to the Company and Proceeds to the Selling
Shareholders will be , , and
, respectively. The Company will not receive any of the proceeds
from the sale of the shares of Common Stock by the Selling Shareholders
pursuant to the Underwriters' over-allotment option, if exercised. See
"Underwriting" and "Principal and Selling Shareholders."
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York, on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
LEGG MASON WOOD WALKER
INCORPORATED
<PAGE> 3
The first page of photography will depict the core business of the Company,
proposal management, with graphic, including statement "Providing Worldwide
Support to Fortune 100 Clients in Proposal Leadership, Information Systems,
Program Integration, and Systems Engineering," bullet points describing the
Company's 89% proposal success rate, industry experience, rapidly expanding
service lines, and 38% compound annual growth rate, and winning proposal covers.
The second page of photography (back inside cover) will be a list of the
Company's non-government clients in a semi-circle around a photograph of the
Earth, together with the slogan "When You Must Win . . . You Need Doers, Not
Advisors."(SM)
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, that involve substantial
risks and uncertainties. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "expect" and similar expressions as they relate to the
Company of its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE SHORT COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The Company, formerly known as Steven Myers & Associates, Inc.,
acquired Space Applications Corporation and its subsidiary ("SAC") on May 29,
1998 and Decision-Science Applications, Inc. and its subsidiary ("DSA") on
August 20, 1998, and each is a wholly-owned subsidiary of the Company. For
financial reporting purposes, each of these transactions (collectively, the
"Acquisitions") was accounted for using the purchase method. As used in this
Prospectus, except where the context clearly requires otherwise, references made
to "SM&A" or the "Company" mean SM&A Corporation and its subsidiaries. Unless
otherwise indicated, the information in this Prospectus assumes (i) an offering
price of $26.00 per share and (ii) no exercise of (A) the Underwriters'
over-allotment option, (B) options to purchase 804,500 shares which have been
granted under the Company's 1997 Stock Option Plan, and (C) the nonqualified
options to purchase 175,925 shares of Common Stock issued in connection with the
acquisition of SAC (the "Acquisition Options").
THE COMPANY
SM&A is a leading nationwide provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform such contracts. The Company's
clients include leading firms in the aerospace, defense and communications
industries such as The Boeing Company, Harris Corporation, Hewlett Packard
Company, Hughes Electronics Corporation, Litton Industries, Inc., Lockheed
Martin Corporation, Loral Space & Communications, Ltd., Motorola, Inc., MCI
Communications, Inc. and Raytheon Company.
The Company estimates the annual market for proposal management and
high-end contract support services is approximately $10 billion. The demand for
the Company's comprehensive breadth of services is increasing as consolidation
in the aerospace, communications and defense industries continues. In this
highly competitive environment, major contractors find it is vital to win new
contracts in order to survive, increasing their incentive to employ the
Company's professional proposal management services. In addition, the trend
toward utilizing outsourced expertise has created a significant opportunity for
the Company to expand its mission critical contract support services in systems
engineering, information technology and program integration.
The Company's proposal management expertise has resulted in a proposal win
rate of 89.3% of all dollars awarded on SM&A engagements since its inception in
1982. The Company's win rate greatly exceeds the results disclosed in the "Best
Practices 2000" survey conducted by a major national accounting firm which
indicated that a majority of the companies surveyed considered a 30% win rate as
positive, as cited in Aviation Week & Space Technology. The Company's win rate
is calculated by dividing the total dollar value of contracts won by the total
dollar value of proposals managed by SM&A from inception to completion
(excluding competitions that were canceled or otherwise not awarded). The
Company has worked on or is currently engaged on 389 major proposals for $148
billion of government and commercial procurements. The Company leverages its
success in winning business for its clients and its involvement in the project
life cycle to extend its services beyond proposal development to contract
support such as systems engineering, information technology, and program
integration. Through internal growth as well as the Acquisitions, SM&A continues
to expand its contract support services. Revenues from contract support services
increased from 3.0% of the Company's revenues for 1994 to 28.8% for the six
months ended June 30, 1998. Revenues from contract support services on a pro
forma basis to reflect the Acquisitions would have been 64.9% of the Company's
revenues for the six months ended June 30, 1998.
In 1998, SM&A acquired two high-end engineering and information technology
consulting firms: Space Applications Corporation and Decision-Science
Applications, Inc. SAC, founded in 1969, provides systems engineering,
scientific research, program management and support services to military and
civilian space programs worldwide, the intelligence community and the defense
sector. DSA, founded in 1977, provides systems engineering, information systems
development, scientific research and program management support to the U.S.
Government, principally the Department of Defense. These acquisitions have
significantly increased the
3
<PAGE> 5
scope and depth of the Company's high-end contract support services, adding more
than 400 systems engineering, information technology and program integration
experts to SM&A's workforce and expanding SM&A's domestic presence with offices
in strategic locations near significant market centers.
The Company believes that several factors distinguish it from its
competitors and position it to capitalize on the rapidly growing demand for its
services, such as (i) a proven track record and superior reputation in proposal
management based on an impressive win rate established over the last 15 years;
(ii) an ability to provide a broad array of services to companies seeking to win
and execute government and commercial contracts; (iii) the expertise of SM&A's
professionals, who have an average of more than 20 years of relevant industry
experience; and (iv) long-standing client relationships that often lead to
repeat engagements and additional growth opportunities in complementary lines of
business.
The Company's growth strategy is to expand its position as the largest
proposal management company in the United States and to continue to grow its
expanding contract support services. The key elements of the Company's growth
strategy are to (i) expand its core proposal management business; (ii) leverage
existing relationships to obtain support services contracts upon completion of a
proposal management engagement; (iii) build a complementary array of high-end
contract support services through acquisitions and internal growth; and (iv)
pursue opportunities in the growing market for large commercial programs.
A key component of SM&A's growth strategy involves the identification,
acquisition and integration of complementary businesses. The Company considers a
number of factors in identifying potential acquisition candidates, including:
(i) the caliber of the candidate's professionals and client base; (ii) the
opportunities for SM&A to obtain proposal management and high-end contract
support service engagements; and (iii) the anticipated benefits to the acquired
company from integration with SM&A. After the acquisition, SM&A seeks to
integrate the acquired business by (i) transitioning new personnel to higher
rate projects; (ii) providing new employees with equity incentives in SM&A;
(iii) training new employees on SM&A's proprietary proposal management process
in an effort to increase the win rate of the acquired business; (iv)
restructuring existing contracts for improvements where possible; and (v)
combining operations to increase efficiencies.
Established as a sole proprietorship in 1982, the Company was incorporated
in California in 1985 under the name Steven Myers & Associates, Inc. In August
1998, the Company changed its name to SM&A Corporation. The Company's principal
executive offices are located at 4695 MacArthur Court, Eighth Floor, Newport
Beach, California 92660, and its telephone number is (949) 975-1550.
THE OFFERING
Common Stock offered by the Company............... 2,500,000 shares
Common Stock offered by the Selling
Shareholders...................................... 2,500,000 shares
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Total................................... 5,000,000 shares
--------------------------------------------------------------
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Common Stock to be outstanding after the
offering(1)....................................... 19,034,582 shares
Use of Proceeds to the Company.................... Strategic acquisitions and
other general corporate
purposes. See "Use of
Proceeds."
Nasdaq National Market symbol..................... WINS
- ------------------------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the 1997 Stock Option Plan, of which 804,500 shares are issuable pursuant to
options currently outstanding under the Plan and (ii) 175,925 shares of
Common Stock subject to the Acquisition Options. Also does not reflect the
possible issuance of additional shares to former shareholders of SAC or
surrender of outstanding shares held by former shareholders of SAC that may
result due to certain price protection provisions relating to the shares of
Common Stock issued in connection with the acquisition of SAC. Assuming the
offering was consummated on August 21, 1998, the former shareholders of SAC
would be required to surrender an aggregate of 26,247 shares of Common Stock
to SM&A for cancellation. See "Shares Eligible For Future Sale."
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
<TABLE>
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SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1993 1994(1) 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SM&A HISTORICAL STATEMENT OF OPERATIONS
DATA(2):
Net revenues............................ $10,738 $15,220 $20,777 $25,699 $ 36,962 $15,773 $24,121
Gross profit............................ 3,622 5,771 8,464 11,187 16,433 7,116 10,622
Operating income........................ 830 878 671 438 9,506 4,353 5,985
Earnings (loss) before income taxes..... 817 (823) 678 574 8,964 4,303 7,139
Net earnings (loss)..................... $ 801 $ (811) $ 668 $ 565 $ 8,817 $ 4,275 $ 4,203
======= ======= ======= ======= ======== ======= =======
SM&A PRO FORMA SUPPLEMENTAL DATA(3):
Net earnings............................ $ 4,774 $ 2,245 $ 4,203
======== ======= =======
Net earnings per share(4)............... $ 0.37 $ 0.17 $ 0.28
======== ======= =======
Diluted weighted average common
shares(4)............................. 12,948 12,948 15,042
======== ======= =======
SM&A AND ACQUISITIONS PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
DATA(5):
Net revenues............................ $101,520 $47,559 $48,863
Gross profit............................ 35,912 16,930 18,450
Operating income........................ 9,951 5,383 5,564
Earnings before income taxes............ 9,047 5,029 6,194
Income tax expense...................... 4,357 2,500 2,758
Net earnings............................ $ 4,690 $ 2,529 $ 3,436
======== ======= =======
Net earnings per share(4)............... $ 0.30 $ 0.16 $ 0.21
======== ======= =======
Diluted weighted average common
shares(4)............................. 15,861 15,861 16,524
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $16,217 $63,990
Working capital............................................. 21,723 74,105
Total assets................................................ 45,969 127,696
Long term debt, including current portion................... 545 567
Total shareholders' equity.................................. 37,635 110,536
</TABLE>
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(1) In 1994, the Company wrote off $1.7 million of receivables from California
Kamchatka Company, Inc. ("CKC"), an affiliated entity. See "Certain
Transactions."
(2) In connection with the Company's initial public offering on January 28, 1998
(the "IPO"), the Company converted to a C corporation under the Internal
Revenue Code of 1986, as amended (the "Code"). Prior to conversion, the
Company was an S corporation for federal and certain state income tax
purposes. See "Prior S Corporation Status."
(3) Amounts reflect pro forma adjustments for (a) the additional compensation
for three principal executive officers who are to be paid a maximum of $2.7
million in salaries and bonuses for 1998 under an executive compensation
program consisting of an Executive Employment Agreement and an Executive
Bonus Plan (the "Executive Compensation Program") (the maximum amount is in
excess of historical figures included in selling, general and administrative
expenses for 1997) and (b) provisions for federal and state income taxes as
if the Company had been taxed as a C corporation at an assumed statutory tax
rate of approximately 40%. For additional pro forma statement of operations
data for 1995, 1996, and 1997, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(4) In January 1997, the Company repurchased 1,995,125 shares of Common Stock
from certain of its existing shareholders for approximately $5.9 million
using borrowings under its then existing bank facility.
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<PAGE> 7
See "Certain Transactions." In January 1998, the Company sold 2,100,000 shares
of Common Stock in the IPO and received proceeds net of underwriting fees of
approximately $23.4 million. Diluted weighted average common shares includes
options outstanding or deemed to be outstanding during the respective
periods. Basic and diluted earnings per share are the same for the periods
presented.
(5) In addition to the pro forma adjustments discussed in footnote 3 above,
combined pro forma data presented gives effect to the Acquisitions as if
both Acquisitions occurred at the beginning of the respective periods. This
pro forma data reflects adjustments for the Acquisitions including
reclassifications to prior period financial statements in order to conform
to the Company's current period presentation. The unaudited pro forma
financial information does not reflect certain cost savings that management
believes would have been realized had the Acquisitions been consummated at
the beginning of the periods presented. Management believes that such
savings would have been realized primarily through the discontinuance of
certain stock repurchase programs and other special incentives paid to
employees of SAC and DSA in 1997 and 1998 in addition to scheduled salary
and bonus compensation. In addition, management believes that the
Acquisitions would have enabled the Company to achieve additional savings as
a result of certain economies of scale with respect to facility costs and
various selling, general and administrative functions. There can be no
assurance that the Company would have actually realized any such cost
savings had the Acquisitions been consummated at the beginning of the
periods presented or that the Company will realize any such cost savings in
the future.
(6) Adjusted to give effect to the sale by the Company of 2,500,000 shares of
Common Stock offered hereby and the receipt of the estimated net proceeds
therefrom (See "Use of Proceeds.") and to reflect the DSA acquisition as if
both transactions had been completed on June 30, 1998.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors in evaluating the
Company and its business before purchasing any shares of the Common Stock
offered hereby.
RISKS OF ACQUISITION STRATEGY
An element of the Company's growth strategy is to expand its operations
through the acquisition of complementary businesses. However, there can be no
assurance that the Company will be able to identify suitable acquisition
candidates or that, if identified, the Company will be able to acquire such
companies on suitable terms. Moreover, other companies which may have greater
resources than SM&A may compete for acquisition candidates, which could result
in an increase in the price of acquisition targets and a decrease in the number
of attractive companies available for acquisition.
There can be no assurance that the anticipated economic, operational and
other benefits of any of the Acquisitions or any future acquisitions will be
realized or that the Company will be able to successfully integrate acquired
businesses in a timely manner without substantial costs, delays or other
operational or financial problems. The difficulties of such integration may
initially be increased by the necessity of integrating personnel with disparate
business backgrounds and corporate cultures. In addition, acquisitions may
involve the expenditure of significant funds. Failure to effectively integrate
the acquired companies may adversely affect the Company's ability to bid
successfully on certain engagements and otherwise grow its business. Client
dissatisfaction or performance problems at a single acquired company could have
an adverse effect on the reputation of the Company as a whole, resulting in
increased difficulty in marketing services or acquiring companies in the future.
In addition, there can be no assurance that the acquired companies will operate
profitably or will not otherwise adversely impact the operating results of the
Company. Acquisitions also involve a number of additional risks, including
diversion of management attention, potential loss of key clients or personnel,
risks associated with unanticipated problems, liabilities or contingencies and
risks of entering markets in which the Company has limited or no direct
expertise. The occurrence of some or all of the events described in these risks
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Growth Strategy."
MANAGEMENT OF GROWTH
The Company is currently experiencing significant growth and intends to
pursue further growth as part of its business strategy. The Company's ability to
manage the growth of its operations will require it to continue to improve its
operational, financial and other internal systems and to attract, develop,
motivate and retain its employees. The Company's rapid growth has presented and
will continue to present numerous operational challenges, such as the
assimilation of financial reporting systems and increased pressure on the
Company's senior management and will increase the demands on the Company's
systems and internal controls. In addition, 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's 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 increase its
current rate of 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. See "Business--Growth Strategy."
7
<PAGE> 9
DEPENDENCE ON DEFENSE INDUSTRY
Approximately 78.9% and 71.2% of the Company's revenues were derived from
proposal management services related to government procurement contracts for the
fiscal year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. In addition, a significant portion of the Company's revenues are
derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, the Company expects that the percentage of its revenues
attributable to such contracts will continue to be substantial. U.S. Government
expenditures for defense products may decline in the future 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, such as the Joint Strike Fighter, (iii) threat scenarios evolving
away 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 ASSOCIATED WITH GOVERNMENT CONTRACTING
The Company, both directly and through its government-contractor clients,
is subject to risks associated with compliance with governmental regulations.
The fines and penalties which could result 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.
In addition, a significant portion of the Company's revenues are derived
from contracts or subcontracts with the U.S. Government. The Company's services
are performed pursuant to the following types of contracts: (i) cost
reimbursable; (ii) time-and-materials; and (iii) fixed-price contracts and
subcontracts. Under fixed-price contracts and time-and-materials contracts, the
Company bears any risk of increased or unexpected costs that may reduce its
profits or cause it to sustain a loss.
The Company's U.S. Government contracts and subcontracts are subject to
termination, reduction or modification as a result of changes in the U.S.
Government's requirements or budgetary restrictions, or at the convenience of
the U.S. Government. Moreover, when the Company participates as a subcontractor,
it is subject to the risk that the primary contractor may fail or become unable
to perform its duties and responsibilities as a prime contractor. If a contract
were to be terminated for convenience, the Company would be reimbursed for its
allowable costs incurred up to the date of termination and would be paid a
proportionate amount of the stipulated profits or fees attributable to the work
actually performed. To date, the U.S. Government has not terminated any
contracts with the Company for convenience.
Contracts with the U.S. Government are generally complex in nature, and
require the Company to comply with numerous U.S. Government regulations
regarding discrimination in the hiring of personnel, fringe benefits for
employees, safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping and
accounting, management qualifications, drug free work place and numerous other
matters. The Company has not experienced any material difficulty in complying
with applicable U.S. Government regulations.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of the Company
or its major clients could have a material adverse effect upon the Company. The
books and records of the Company are subject to audit by the Defense Contract
Audit Agency, which can result in
8
<PAGE> 10
adjustments to contract costs and fees. If any costs are improperly allocated to
a contract, such costs are not reimbursable and, if already reimbursed, will be
required to be refunded to the government. Furthermore, if improper or illegal
activities are discovered in the course of any audits or investigations, the
contractor may be subject to various civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or disqualification from
doing business with the government. If the Company becomes subject to penalties
or sanctions, such penalties or sanctions could have a material adverse effect
on the Company's business, financial condition and results of operations.
CLIENT CONCENTRATION
SM&A derives a significant portion of its revenues from a relatively
limited number of clients. For example, revenues from the Company's ten most
significant clients accounted for approximately 81.7%, 90.3%, 98.0%, 92.9% and
91.2% of its total revenues for the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996, 1995 and 1994, respectively. Six clients,
Lockheed Martin Corporation, Litton Industries, Inc., Motorola, Inc., Raytheon
Company, The Boeing Company, and Hughes Electronics Corporation accounted for
approximately 69.6% and 81.5% of total revenues for the six months ended June
30, 1998 and the year ended December 31, 1997, respectively. Lockheed Martin
Corporation is the Company's single largest client, accounting for approximately
18.0%, 22.5% and 22.9% of the Company's total revenues for the six months ended
June 30, 1998 and the years ended December 31, 1997 and 1996, respectively. On a
pro forma basis giving effect to the Acquisitions, various branches and agencies
of the U.S. Government together would have accounted for an aggregate 21.9% of
the Company's revenues for the six months ended June 30, 1998.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Clients and Representative Engagements."
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 is the largest provider of such
services and 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. Such competitors include many larger management consulting
firms such as McKinsey & Company, Booz Allen & Hamilton, and Science
Applications International Corp., as well as the consulting arms of major
accounting firms. 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 current
9
<PAGE> 11
89.3% win rate in the proposal management business drops significantly, the
Company's growth prospects could be materially and adversely affected. See
"Business--Market Opportunity."
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, patent, copyright and trademark laws
to protect its proprietary rights. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights.
Although the Company believes that its services do not infringe on the
intellectual property rights of others and that is has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of claims alleging infringement of third-party intellectual
property rights. Any such claims could require the Company to spend significant
sums in litigation, pay damages, develop non-infringing intellectual property or
acquire licenses to the intellectual property which is the subject of asserted
infringement.
DEPENDENCE ON KEY EMPLOYEES
The success of SM&A is highly dependent upon the efforts, abilities,
business generation capabilities and project execution of its executive
officers, in particular those of Steven S. Myers, the Company's Chief Executive
Officer, President and Chairman of the Board, and Kenneth W. Colbaugh, the
Company's Executive Vice President and Chief Operating Officer. In November,
1997, the Company entered into two-year employment agreements with both of these
individuals. The loss of the services of either of these individuals for any
reason could materially and adversely affect the Company's business, operating
results and financial condition, including its ability to secure and complete
engagements. The Company maintains key-man life insurance policies, in the
amount of $2.0 million, on each of Mr. Myers and Mr. Colbaugh. See "Management."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
The net proceeds to be received by the Company in connection with this
offering will be used for general corporate purposes, which may include
strategic acquisitions. Accordingly, management will have broad discretion with
respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock offered hereby will be entrusting their funds to the Company's management,
upon whose judgment they must depend. See "Use of Proceeds."
VARIABILITY IN QUARTERLY RESULTS
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including the size, timing and
duration of client engagements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
STOCK PRICE VOLATILITY
The Common Stock was first publicly traded on January 29, 1998 after the
Company's initial public offering at $12.00 per share. Between January 29, 1998
and August 20, 1998, the closing sale price has ranged from a low of $10.69 per
share to a high of $28.63 per share. The market price of the Common Stock could
continue to fluctuate substantially due to a variety of factors, including
quarterly fluctuations in results of operations, adverse circumstances affecting
the introduction or market acceptance of new services offered by the Company,
announcements of new services by competitors, the Company's loss of key
employees, changes in the regulatory environment or market conditions affecting
the defense and aerospace industry, changes in earnings estimates by analysts,
changes in accounting principles, sales of Common Stock by existing holders,
loss of key personnel, the announcement and market acceptance of proposed
acquisitions and other factors. The market price for the Company's Common Stock
may also be affected by the Company's ability to meet
10
<PAGE> 12
analysts' expectations, and any failure to meet such expectations, even if
minor, could have a material adverse effect on the market price of the Company's
Common Stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation instigated against the Company could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Price Range of Common Stock and Dividend Policy."
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of SM&A's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. 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 the Company's internal systems
are substantially compliant with Year 2000 issues. In addition, the Company is
also communicating with its principal service providers 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, the Company
believes at this time that the costs of achieving Year 2000 compliance will not
have a material adverse impact on the Company's business, operations or
financial condition. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
CONTROL BY PRINCIPAL SHAREHOLDERS
Following the consummation of the offering, Steven S. Myers will
beneficially own approximately 33.8% of the Company's outstanding Common Stock
and will have the ability to control or significantly influence the election of
directors and the results of other matters submitted to a vote of shareholders.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company and may adversely affect the voting or other
rights of other holders of Common Stock. The Board of Directors of the Company
is currently comprised entirely of designees of Mr. Myers. See "Management" and
"Principal and Selling Shareholders."
ANTI-TAKEOVER PROVISIONS
The Board of Directors has the authority to issue up to ten million shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any vote or
action by the shareholders. The rights of the holders of the Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of the
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plan to
issue any shares of preferred stock. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 19,034,582 shares
of Common Stock outstanding. As of August 20, 1998 the Company had outstanding
options to acquire, subject to certain vesting requirements, 804,500 shares of
Common Stock pursuant to the Company's 1997 Stock Option Plan. In connection
with the acquisition of SAC, the Acquisition Options were granted to purchase an
aggregate of 175,925 shares of Common Stock. In addition, due to certain price
protection provisions relating to the shares
11
<PAGE> 13
of Common Stock issued in connection with the acquisition of SAC, the Company
may be required to issue additional shares of Common Stock to former
shareholders of SAC depending upon the market price of the Common Stock at
certain defined "liquidation dates." See "Shares Eligible For Future Sale." The
Company has registered on a registration statement on Form S-8 all 1,500,000
shares of Common Stock underlying the options outstanding or issuable under the
1997 Stock Option Plan. Immediately following the completion of this offering, a
total of 8,150,000 shares of Common Stock will be freely tradable without
restriction. All of the remaining 10,884,582 shares are "restricted securities"
as defined by Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), which, upon expiration of lockup agreements with certain
shareholders of the Company 180 days after the date of this Prospectus, will be
eligible for sale in the public market from time to time in reliance on and
subject to the limitations of Rule 144. In addition, in connection with the
Acquisitions, former shareholders of SAC and DSA received certain registration
rights with respect to the Company's Common Stock exchanged for the equity
interests in their respective companies. The possibility that substantial
amounts of Common Stock may be sold in the public market would likely have a
material adverse effect on prevailing market prices of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements, including,
among others (i) the anticipated growth in the proposal management and contract
support services markets; (ii) anticipated trends in the Company's financial
condition and results of operations (including expected changes in the Company's
gross margin and general, administrative and selling expenses); (iii) the
ability of the Company to finance its working capital requirements; (iv) the
Company's business strategy for expanding its presence in the proposal
management and contract support services markets; and (v) the Company's ability
to distinguish itself from its current and future competitors. These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
proposal management and contract support services markets; (ii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iii)
unanticipated working capital or other cash requirements; (iv) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the proposal management and contract support services
markets; and (v) various other factors that may prevent the Company from
competing successfully in the marketplace. In light of these risks and
uncertainties, many of which are described in greater detail elsewhere in this
"Risk Factors" discussion, there can be no assurance that the actual results
will not differ materially from such forward-looking statements contained in
this Prospectus.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and other offering expenses (all of the other offering
expenses of the Selling Shareholders are payable by the Company) are estimated
to be approximately $61.0 million. The Company anticipates that the net proceeds
will be used for general corporate purposes, which may include future
acquisitions of complementary businesses. Accordingly, management will have
broad discretion with respect to the expenditure of such proceeds. See "Risk
Factors -- Broad Management Discretion as to Use of Proceeds." The Company has
no agreement, understanding or commitment and is not currently engaged in
negotiations with respect to any future acquisitions. Pending their application
by the Company, the net proceeds of this offering not immediately required for
the purposes described above will be invested principally in U.S. Government
securities, short-term certificates of deposit, money market funds or other
short-term, interest-bearing securities.
RECAPITALIZATION
As of December 31, 1997, the Company had outstanding 202,292 shares of
Series A Common Stock and 812,829 shares of Series B Common Stock. On January
21, 1998, in connection with the initial public offering of its Common Stock,
the Company filed Restated Articles of Incorporation with the California
Secretary of State providing for the conversion of each of its issued and
outstanding shares of Series A Common Stock and Series B Common Stock into
12.7078 shares of Common Stock, or an aggregate of 12,900,000 shares (the
"Recapitalization").
PRIOR S CORPORATION STATUS
From January 1, 1991 until January 28, 1998, the Company had been treated
as an S corporation for purposes of federal and state income taxes. Accordingly,
during that period, the Company was not subject to regular federal income tax,
but it was subject to California income tax at a rate of 1.5% of its taxable
income earned in California, as well as the income tax rates of certain other
states with respect to income earned in those states. Each of the Company's
shareholders was required to include the Company's taxable income in his
individual income for state and federal income tax purposes. The Company's S
corporation status terminated on January 28, 1998, the Company is now taxed as a
C corporation, and is subject to regular federal and state income taxes.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "WINS" since January 29, 1998. The following table sets forth
for the quarters indicated the high and low closing sale prices as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter (commencing January 29, 1998)............... 17 3/4 10 11/16
Second Quarter............................................ 21 17 1/4
Third Quarter (through August 20, 1998)................... 28 5/8 19 1/2
</TABLE>
At August 20, 1998, there were approximately 48 holders of the Company's
outstanding shares of Common Stock and the closing sale price of the Common
Stock on the Nasdaq National Market was $26.00 per share.
In 1997, the Company paid S corporation dividends of $1.2 million, $1.9
million, $2.5 million and $4.4 million on April 11, July 1, October 1, and
December 29, respectively. On January 27, 1998, immediately prior to
consummating its initial public offering, the Company declared an S corporation
dividend, in the amount of $710,000, to its then-current shareholders,
representing all undistributed earnings of the Company from January 1, 1998
through January 28, 1998 (the "S Corporation Dividend"). Purchasers of Common
Stock in the Company's initial public offering did not receive any portion of
the S Corporation Dividend. The Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, capital requirements,
the general financial condition of the Company and restrictions that may be
contained in the Company's financing agreements.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, and (i) as adjusted to reflect this offering and the receipt of the
estimated net proceeds therefrom and (ii) pro forma as adjusted to give effect
to the acquisition of DSA and this offering (and the receipt of the estimated
net proceeds therefrom). See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $16,217 $ 77,192 $ 63,990
======= ======== ========
Long term debt, including current portion................... 545 545 567
Shareholders' equity:
Common Stock, no par value, 50,000,000 shares authorized;
15,819,743 shares issued and outstanding actual;
18,319,743 shares issued and outstanding, as adjusted;
19,034,582 shares issued and outstanding pro forma as
adjusted(1)............................................ 158 183 190
Preferred Stock, no par value, 10,000,00 shares
authorized; no shares issued and outstanding actual; no
shares issued and outstanding, as adjusted; no shares
issued and outstanding pro forma as adjusted........... -- -- --
Additional paid-in-capital................................ 39,953 100,903 112,822
Accumulated deficit....................................... (2,476) (2,476) (2,476)
------- -------- --------
Total shareholders' equity............................. 37,635 98,610 110,536
------- -------- --------
Total capitalization.............................. $38,180 $ 99,155 $111,103
======= ======== ========
</TABLE>
- ------------------------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the 1997 Stock Option Plan, of which 804,500 are issuable pursuant to
options currently outstanding under the Plan and (ii) Acquisition Options.
Also does not reflect the possible issuance of additional shares to former
shareholders of SAC or surrender of outstanding shares held by former
shareholders of SAC that may result due to certain price protection
provisions relating to the shares of Common Stock issued in connection with
the acquisition of SAC. Assuming the offering was consummated on August 21,
1998, the former shareholders of SAC would be required to surrender an
aggregate of 26,247 shares of Common Stock to SM&A for cancellation. See
"Shares Eligible For Future Sale."
15
<PAGE> 17
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1995,
1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 have
been derived from the Financial Statements and Notes thereto, which statements
have been audited by KPMG Peat Marwick LLP, independent auditors, and are
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statements of operations for the year ended December 31,
1994 are derived from the Company's audited financial statements which are not
included herein. The balance sheet data as of December 31, 1993 and the
statement of operations data for the year then ended have been derived from the
Company's unaudited financial statements, which statements are not included
herein and which in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. The data for the six months
ended June 30, 1997 and June 30, 1998 have been derived from unaudited Financial
Statements also appearing elsewhere herein and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods presented. The results of operations for the periods ended June 30, 1997
and 1998 are not necessarily indicative of the results to be expected for any
other interim period or for the full year. The following information should be
read in conjunction with the Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1993 1994(1) 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SM&A HISTORICAL STATEMENT OF OPERATIONS
DATA(2):
Net revenues........................... $10,738 $15,220 $20,777 $25,699 $ 36,962 $15,773 $24,121
Cost of revenues....................... 7,116 9,449 12,313 14,512 20,529 8,657 13,499
------- ------- ------- ------- -------- ------- -------
Gross profit........................... 3,622 5,771 8,464 11,187 16,433 7,116 10,622
Selling, general and administrative
expenses............................. 2,792 4,893 7,793 10,749 6,927 2,763 4,637
------- ------- ------- ------- -------- ------- -------
Operating income....................... 830 878 671 438 9,506 4,353 5,985
Other income (expense)................. (13) (1,701) 7 136 (542) 50 1,154
------- ------- ------- ------- -------- ------- -------
Earnings (loss) before income taxes.... 817 (823) 678 574 8,964 4,303 7,139
Income tax expense (benefit)(3)........ 16 (12) 10 9 147 28 2,936
------- ------- ------- ------- -------- ------- -------
Net earnings (loss).................... $ 801 $ (811) $ 668 $ 565 $ 8,817 $ 4,275 $ 4,203
======= ======= ======= ======= ======== ======= =======
SM&A AND ACQUISITIONS PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
DATA(4)(5):
Net revenues.................................................................. $101,520 $47,559 $48,863
Cost of revenues.............................................................. 65,608 30,629 30,413
-------- ------- -------
Gross profit.................................................................. 35,912 16,930 18,450
Selling, general and administrative expenses.................................. 25,961 11,547 12,886
Operating income.............................................................. 9,951 5,383 5,564
Other income (expense)........................................................ (904) (354) 630
-------- ------- -------
Earnings before income taxes.................................................. 9,047 5,029 6,194
Income tax expense............................................................ 4,357 2,500 2,758
Net earnings.................................................................. $ 4,690 $ 2,529 $ 3,436
======== ======= =======
Net earnings per share(6)..................................................... $ 0.30 $ 0.16 $ 0.21
======== ======= =======
Diluted weighted average common shares(6)..................................... 15,861 15,861 16,524
======== ======= =======
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1993 1994(1) 1995 1996 1997 1998
------ ------- ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 189 $ 242 $ 269 $ 1,927 $ 150 $16,217
Working capital...................................... 868 95 794 (279) 101 21,723
Total assets......................................... 2,269 2,320 3,034 11,820 5,331 45,969
Long term debt, including current portion(6)(7)...... 283 541 605 6,250 7,729 545
Total shareholders' equity (deficit)(6).............. 918 114 668 755 (6,328) 37,635
</TABLE>
- ------------------------------
(1) In 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliated entity that was subsequently dissolved. See "Certain
Transactions."
(2) In connection with the IPO, the Company converted to a C corporation under
the Code. Prior to conversion, the Company was an S corporation for federal
and certain state income tax purposes.
(3) For the five years ended December 31, 1997, amounts represent California and
other state franchise taxes incurred by the Company.
(4) Amounts reflect pro forma adjustments for (a) the additional compensation
for three principal executive officers who are to be paid a maximum of $2.7
million in salaries and bonuses for 1998 under the Executive Compensation
Program (the maximum amount is in excess of historical figures included in
selling, general and administrative expenses for 1997) and (b) provisions
for federal and state income taxes as if the Company had been taxed as a C
corporation at an assumed statutory rate of approximately 40%. For
additional pro forma statement of operations data for 1995, 1996, 1997 and
the six months ended June 30, 1997 and the historical six months ended June
30, 1998, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(5) In addition to the adjustments described in footnote 4 above, combined pro
forma data presented gives effect to the Acquisitions as if both
Acquisitions occurred at the beginning of the respective periods.
Additionally, pro forma data reflect adjustments for the Acquisitions
including reclassifications to prior period financial statements in order to
conform to the current period presentation of the Company. The unaudited pro
forma financial information does not reflect certain cost savings that
management believes would have been realized had the Acquisitions been
consummated at the beginning of the periods presented. Management believes
that such savings would have been realized primarily through the
discontinuance of certain stock repurchase programs and other special
incentives paid to employees of SAC and DSA in 1997 and 1998 in addition to
scheduled salary and bonus compensation. In addition, management believes
that the Acquisitions would have enabled the Company to achieve additional
savings as a result of certain economies of scale with respect to facility
costs and various selling, general and administrative functions. There can
be no assurance that the Company would have actually realized any such cost
savings had the Acquisitions been consummated at the beginning of the
periods presented or that the Company will realize any such cost savings in
the future.
(6) In January 1998, the Company sold 2,100,000 shares of Common Stock in the
IPO for proceeds net of underwriting fees of approximately $23.4 million and
repaid all of the Company's then existing indebtedness of $7.4 million. In
January 1997, the Company repurchased 1,995,125 shares of Common Stock from
certain of its existing shareholders for approximately $5.9 million using
borrowings under its then existing bank facility. Basic and diluted earnings
per share are the same for the periods presented.
(7) In April 1996, the Company purchased a Hawker 800 aircraft for $5.8 million
and financed the purchase through a bank. In January 1997, the Company sold
the Hawker aircraft to a company which is owned by Steven S. Myers, the
Company's principal shareholder. See Note (4) of the Notes to Financial
Statements.
17
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
is based upon the historical combined financial statements of SM&A, SAC and DSA
and has been prepared to illustrate the effects of this offering and the
Acquisitions.
The unaudited pro forma condensed combined balance sheet as of June 30,
1998 gives effect to (i) the acquisition of DSA under the purchase method of
accounting and (ii) this offering and the receipt of the estimated net proceeds
therefrom as if such transactions had been completed on June 30, 1998 and
combines the balance sheet of the Company and DSA as of June 30, 1998.
The unaudited pro forma condensed combined statement of operations for the
twelve months ended December 31, 1997 and the six months ended June 30, 1997
were prepared based upon the pro forma results of operations of the Company and
the historical results of operations of SAC and DSA for such periods as if the
Acquisitions had been completed on January 1, 1997. The pro forma results of
operations of the Company also give effect to the following: (i) additional
compensation for three principal executive officers under the Executive
Compensation Program and (ii) provisions for federal and state income taxes as
if the Company had been taxed as a C corporation at an assumed statutory rate of
approximately 40%. The unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 1998 was prepared based upon the
historical results of operations of the Company (which includes the historical
results of SAC from May 18, 1998, the date of acquisition, to June 30, 1998) and
the historical results of operations of SAC for the period January 1, 1998 to
May 18, 1998 and DSA for the six months ended June 30, 1998 as if the
Acquisitions had been completed on January 1, 1998.
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 12,900,000 shares of common stock.
The unaudited pro forma condensed combined financial data are a
presentation of historical results with accounting adjustments (consisting of
normal recurring entries), which in the opinion of management, are necessary for
a fair presentation of such information. This financial information has been
provided for comparative purposes only and does not purport to be indicative of
results which would actually have been obtained had the transactions described
above been effected on the date indicated or of results which may be obtained in
the future. The unaudited pro forma financial information does not reflect
certain cost savings that management believes would have been realized had the
Acquisitions been consummated at the beginning of the periods presented.
Management believes that such savings would have been realized primarily through
the discontinuance of certain stock repurchase programs and other special
incentives paid to employees of SAC and DSA in 1997 and 1998 in addition to
scheduled salary and bonus compensation. In addition, management believes that
the Acquisitions would have enabled the Company to achieve additional savings as
a result of certain economies of scale with respect to facility costs and
various selling, general and administrative functions. There can be no assurance
that the Company would have actually realized any such cost savings had the
Acquisitions been consummated at the beginning of the periods presented or that
the Company will realize any such cost savings in the future.
The following unaudited pro forma condensed combined financial statements
and accompanying notes should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements and notes thereto of SM&A, SAC and DSA and
other historical consolidated financial information included elsewhere in this
Prospectus.
18
<PAGE> 20
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ------------------------------
SM&A DSA ADJUSTMENTS NOTES COMBINED
------- ------- ----------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $16,217 $ 3,322 $(14,075) (a) $ 63,990
60,975 (b)
(2,449) (c)
Accounts receivable, net allowance for doubtful
accounts.............................................. 9,636 7,462 -- 17,098
Costs and estimated earnings in excess of billings on
contracts in progress................................. 2,011 1,494 -- 3,505
Inventory................................................ 198 -- -- 198
Advances to employees.................................... -- -- -- --
Prepaid expenses and other current assets................ 756 319 -- 1,075
------- ------- -------- --------
Total current assets............................. 28,818 12,597 44,451 85,866
Property and equipment, net................................ 1,346 1,231 -- 2,577
Other assets............................................... 822 1,989 -- 2,811
Notes receivable, officers................................. 1,124 -- -- 1,124
Costs in excess of net assets of business acquired, net.... 13,859 -- 21,459 (a) 35,318
------- ------- -------- --------
Total assets..................................... $45,969 $15,817 $ 65,910 $127,696
======= ======= ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,065 $ 710 $ -- $ 1,775
Current portion of long-term debt........................ 11 -- -- 11
Accrued salaries, wages, and payroll taxes............... 4,332 3,315 -- 7,647
Accrued bonus............................................ 815 -- -- 815
Income taxes payable..................................... 841 -- -- 841
Other liabilities........................................ 31 391 250 (d) 672
------- ------- -------- --------
Total current liabilities........................ 7,095 4,416 250 11,761
Deferred rents............................................. 52 242 -- 294
Deferred tax liability..................................... 161 3,896 -- 4,057
Other deferreds............................................ 492 -- -- 492
Long-term debt, excluding current portion.................. 534 22 -- 556
------- ------- -------- --------
Total liabilities................................ 8,334 8,576 250 17,160
Shareholders' equity:
Common stock, no par value............................... 158 1 7 (a) 190
(1) (e)
25 (b)
Additional paid-in capital............................... 39,953 -- 14,368 (a) 112,822
60,950 (b)
(2,449) (c)
Retained earnings (accumulated deficit).................. (2,476) 7,240 (7,240) (e) (2,476)
------- ------- -------- --------
Total shareholders' equity....................... 37,635 7,241 65,660 110,536
------- ------- -------- --------
Total liabilities and shareholders' equity....... $45,969 $15,817 $ 65,910 $127,696
======= ======= ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
19
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
The unaudited pro forma combined balance sheet for SM&A as of June 30, 1998
has been prepared to reflect the acquisition of the net assets of DSA under the
purchase method of accounting. The purchase price has been allocated to the net
assets purchased based upon the book value, which approximates the estimated
fair values, on the date of the acquisition. The Company is currently in the
process of valuing the assets acquired. The preliminary allocation of the
purchase price to the net assets acquired follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock consideration............................ $14,375(a)
Cash........................................... 14,075(a)
Acquisition expenses........................... 250(d)
-------
Total consideration.................. 28,700
Less book value of net assets acquired......... 7,241
-------
Estimated goodwill................... $21,459(a)
=======
</TABLE>
- ---------------
(a) To record the acquisition of DSA for an aggregate purchase price of
approximately $28.5 million, subject to adjustment. The purchase price will
be in the form of (a) cash of approximately $14.1 million and (b) 714,839
shares of SM&A common stock, valued as of July 21, 1998 based on an average
market price (20-day trailing price of $20.11). The purchase will result in
$21.5 million in goodwill based on total consideration costs and book value
of DSA assets and liabilities at June 30, 1998. The preliminary allocation
of the purchase price to net assets acquired could change.
(b) To effect the sale by the Company of 2,500,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom. See
"Use of Proceeds."
(c) To reflect cash paid by DSA to cancel certain DSA options outstanding, prior
to the Company's acquisition of DSA.
(d) To reflect $250,000 of estimated liability incurred by SM&A associated with
professional services (legal and accounting) rendered in connection with the
acquisition of DSA.
(e) To eliminate all DSA shareholders' equity balances as of June 30, 1998.
20
<PAGE> 22
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SM&A SAC/DSA
PRO FORMA SM&A PRO FORMA
SM&A ADJUSTMENTS NOTES PRO FORMA SAC DSA ADJUSTMENTS NOTES COMBINED
------- ----------- ----- --------- ------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $36,962 $ -- $36,962 $26,816 $37,742 $ -- $101,520
Cost of revenues................. 20,529 -- 20,529 18,556 31,457 (4,934) (a) 65,608
------- ------- ------- ------- ------- ------- --------
Gross profit................. 16,433 16,433 8,260 6,285 4,934 35,912
Selling, general and
administrative expenses........ 6,927 1,007 (b) 7,934 7,786 4,173 1,134 (c) 25,961
4,934 (a)
------- ------- ------- ------- ------- ------- --------
Operating income............. 9,506 (1,007) 8,499 474 2,112 (1,134) 9,951
Other (income) expense:
Interest expense............... 505 -- 505 210 10 -- 725
Other (income) expense, net.... 37 -- 37 266 (124) -- 179
------- ------- ------- ------- ------- ------- --------
Earnings (loss) before income
taxes...................... 8,964 (1,007) 7,957 (2) 2,226 (1,134) 9,047
Income tax expense............... 147 3,036 (d) 3,183 259 915 -- 4,357
------- ------- ------- ------- ------- ------- --------
Net earnings (loss).......... $ 8,817 $(4,043) $ 4,774 $ (261) $ 1,311 $(1,134) $ 4,690
======= ======= ======= ======= ======= ======= ========
Earnings per common share:
Basic.......................... $ 0.37 $ 0.30
======= ========
Diluted........................ $ 0.37 $ 0.30
======= ========
Weighted average common shares
used in computing share
amounts:
Basic.......................... 12,948 15,743
------- --------
Diluted........................ 12,948 15,861
------- --------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
21
<PAGE> 23
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SM&A SAC/DSA
PRO FORMA SM&A PRO FORMA
SM&A ADJUSTMENTS NOTES PRO FORMA SAC DSA ADJUSTMENTS NOTES COMBINED
------- ----------- ----- --------- ------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $15,773 $ -- $15,773 $12,346 $19,440 $ -- $47,559
Cost of revenues................. 8,657 -- 8,657 8,213 16,102 (2,343) (a) 30,629
------- ------- ------- ------- ------- ------- -------
Gross profit................. 7,116 7,116 4,133 3,338 2,343 16,930
Selling, general and
administrative
expenses....................... 2,763 562 (b) 3,325 3,483 1,829 567 (c) 11,547
2,343 (a)
------- ------- ------- ------- ------- ------- -------
Operating income............. 4,353 (562) 3,791 650 1,509 (567) 5,383
Other (income) expense:
Interest expense............... 248 -- 248 77 4 -- 329
Other (income) expense, net.... (198) -- (198) 303 (80) -- 25
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes...................... 4,303 (562) 3,741 270 1,585 (567) 5,029
Income tax expense............... 28 1,468 (d) 1,496 353 651 -- 2,500
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).......... $ 4,275 $(2,030) $ 2,245 $ (83) $ 934 $ (567) $ 2,529
======= ======= ======= ======= ======= ======= =======
Earnings per common share:
Basic........................ $ 0.17 $ 0.16
======= =======
Diluted...................... $ 0.17 $ 0.16
======= =======
Weighted average common shares
used in computing share
amounts:
Basic........................ 12,948 15,743
------- -------
Diluted...................... 12,948 15,861
------- -------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
22
<PAGE> 24
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SAC SAC/DSA
JANUARY 1, 1998- PRO FORMA
SM&A MAY 18, 1998 DSA ADJUSTMENTS NOTES COMBINED
------- ---------------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................. $24,121 $7,364 $17,378 $ -- $48,863
Cost of revenues......................... 13,499 4,997 14,655 (2,738) (a) 30,413
------- ------ ------- ------- -------
Gross profit........................ 10,622 2,367 2,723 2,738 18,450
Selling, general and administrative
expenses............................... 4,637 2,567 2,377 567 (c) 12,886
2,738 (a)
------- ------ ------- ------- -------
Operating income.................... 5,985 (200) 346 (567) 5,564
Other (income) expense:
Interest expense....................... 66 89 23 -- 178
Other (income) expense, net............ (1,220) 104 (44) 352 (e) (808)
------- ------ ------- ------- -------
Earnings (loss) before income
taxes............................. 7,139 (393) 367 (919) 6,194
Income tax expense (benefit)............. 2,936 (153) 116 (141) (e) 2,758
------- ------ ------- ------- -------
Net earnings (loss)................. $ 4,203 $ (240) $ 251 $ (778) $ 3,436
======= ====== ======= ======= =======
Earnings per common share:
Basic.................................. $ 0.28 $ 0.21
======= =======
Diluted................................ $ 0.28 $ 0.21
======= =======
Weighted average common shares used in
computing share amounts:
Basic.................................. 14,825 16,210
======= =======
Diluted................................ 15,042 16,524
======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
23
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
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 are 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 12,900,000 shares of
SM&A common stock were outstanding since January 1, 1997 along with 819,743
shares issued in the SAC acquisition and 714,839 shares issued in the DSA
acquisition. The December 31, 1997 and June 30, 1997 combined pro forma basic
earnings per share figures also give effect to 1,261,000 shares issued in the
Company's IPO to provide the cash paid in the DSA acquisition. The June 30, 1998
combined pro forma basic earnings per share figures also include 2,100,000
shares issued in the Company's IPO, weighted from January 28, 1998 to June 30,
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 earnings per share by application
of the treasury stock method. The Company's December 31, 1997 and June 30, 1997
combined pro forma diluted earnings per share is calculated by arriving at basic
earnings per share and factoring in the dilutive effect of 175,925 SM&A options
granted to SAC employees as if they had been outstanding since January 1, 1997.
The Company's June 30, 1998 combined pro forma diluted earnings per share is
calculated by arriving at basic earnings per share and factoring in the dilutive
effect of 175,925 SM&A options granted to SAC employees as if they had been
outstanding since January 1, 1998 and weighing in the effect of 803,000 SM&A
options granted to SM&A directors and employees and outstanding as of June 30,
1998.
The unaudited pro forma combined statement of operations gives effect to
the following adjustments:
(a) To reclassify certain overhead expenses of DSA, which have historically been
included in cost of sales, to selling, general, and administrative expenses
in order to conform to SM&A's historic presentation of such expenses.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Reclassification of overhead expenses...... $4,934,000 $2,343,000 $2,738,000
========== ========== ==========
</TABLE>
(b) To record additional compensation for two principal executive officers of
SM&A which, combined with 1997 wages in the aggregate, total the maximum
salaries and bonuses payable of $2,700,000 under the 1998 Executive
Compensation Program.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
<S> <C> <C> <C>
Pro forma additional compensation.......... $1,007,000 $ 562,000
========== ==========
</TABLE>
(c) To record goodwill amortization expense for the acquisitions of SAC and DSA
based on goodwill of $12,575,000 and $21,459,000, respectively, assuming a
30 year estimated useful life.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Pro forma amortization expense............. $1,134,000 $ 567,000 $ 567,000
========== ========== ==========
</TABLE>
(d) To adjust the provision for income taxes to reflect federal and state income
taxes for the Company as if it had been taxed as a C corporation rather than
an S corporation. The adjustment reflects a 40% combined federal and state
income tax rate on the pro forma SM&A earnings before income taxes.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
<S> <C> <C> <C>
Pro forma income tax expenses.............. $3,036,000 $1,468,000
========== ==========
</TABLE>
(e) To record a reduction in interest income for the $14.1 million in cash to be
paid in connection with the acquisition of DSA.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives most of its revenues from professional service
activities. The majority of these activities are provided under "time and
expenses" billing arrangements, and revenues are recorded as work is performed.
Net revenues are directly related to the total number of hours billed to clients
and the associated hourly billing rates. The Company has several labor
classifications at various billing rates, depending on the level of expertise
needed by the client, and charges its clients at rates consistent with these
labor classifications. The majority of the billable labor is performed at client
locations. For proposal management engagements, net revenues are also derived
from success fees offered to clients as a pricing option. The Company offers to
discount labor rates from 5% to 15% on proposal management engagements in return
for a success fee which is billed at a multiple of two to three times the
discounted amount. This success fee is billable by the Company when a contract
is won by the client. As a result of the Acquisitions, a greater percentage of
the Company's revenues will be derived from high-end contract support services.
Net revenues from contract support services engagements may include award fees,
which are determined at the completion of the specific contract. Award fees are
negotiated by the Company in the original contract support services bid and are
generally from 10% to 12% of the contract value. Revenues from success fees or
award fees are recognized by the Company only upon the attainment of the
specified incentive criteria or award fee determination. Because of the
Acquisitions, the percentage of the Company's revenues derived from contracts
directly with the U.S. Government have increased. Contracts in which the Company
works directly for the U.S. Government generally must comply with Federal
Acquisition Regulations, which impose certain limits on profitability and audit
requirements. As the Company integrates the Acquisitions, it intends to migrate
toward more commercially-oriented contracts.
Cost of revenues consists primarily of direct labor, incentives, travel and
lodging expenses and other direct costs related to consulting services rendered
by the Company. The Company's direct labor employees are generally paid based
upon total hours billed to the clients. Direct labor employees work
predominately at the client's facilities, and actual travel and lodging expenses
incurred are paid by the client. The number of direct labor employees assigned
to specific projects will vary according to the size, complexity, duration and
demands of the project. Project terminations, completions and scheduling delays
may result in periods when direct labor employees are not fully utilized.
However, lower utilization generally results in minimal downward pressure on
margins because: (i) proposal management employees are paid only a nominal
bi-weekly salary and are compensated primarily on an hourly basis and (ii)
contract support services personnel can be placed on other general operations
support functions, many of which are fully reimbursable by the U.S. Government
as part of the overhead rates approved annually. Cost of revenues also includes
incentive compensation paid to vice presidents of SM&A. Historically, these
incentives have been based on 1.4% of revenues and paid to the respective vice
presidents after amounts billed to clients were collected.
Selling, general and administrative ("SG&A") expenses consist primarily of
executive compensation, administrative labor and incentives, marketing expenses,
bid and proposal ("B&P") and independent research and development ("IR&D")
costs, facility expenses and other general overhead expenses. The B&P costs are
those costs associated with the preparation and submission of proposals for new
projects. The IR&D expenses include costs for the development of new products or
ideas. As an S corporation the Company distributed the majority of its net
income to shareholders each year as bonus compensation. This bonus compensation
was in addition to regular salaries and incentives. From 1991 through 1996,
these amounts were distributed as wages, and were included in SG&A expenses. In
1997, the Company instituted quarterly dividend payments to all shareholders of
record, replacing this bonus compensation. In 1997, the Company distributed the
majority of its net income to shareholders as dividends. This change was made
partially due to the investment by non-employee shareholders to ensure that
dividends would be equitably distributed to both employee and non-employee
shareholders.
25
<PAGE> 27
Historically, executive compensation expenses consisted of salaries,
incentive bonuses and discretionary bonuses paid to the three senior executive
shareholders. Paula K. Myers, one of the senior executive shareholders, resigned
in October 1997. The Company's historical levels of executive compensation were
related primarily to the Company's status as an S Corporation and period to
period increases in executive compensation expense were related primarily to the
Company's period to period earnings growth. Total compensation paid to the three
senior executive shareholders was $4.6 million, $5.2 million and $1.7 million in
1995, 1996 and 1997, respectively. In November 1997, the Company adopted an
Executive Compensation Program, which provides maximum annual compensation in an
aggregate amount of approximately $2.7 million for the two remaining senior
executive shareholders, comprised of base salary and bonus amounts to be awarded
based on the attainment of certain financial performance criteria.
As the Company elected to be taxed as an S corporation until its IPO,
substantially all taxes and benefits from income, losses and tax credits have
flowed through the Company to its shareholders for federal income and state
franchise tax reporting purposes. The Company was also taxed as an S corporation
in California at the appropriate statutory tax rate.
RESULTS OF OPERATIONS
The following table sets forth supplemental 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 (i)
the elimination of salaries and bonuses paid to the three principal executive
officers (which have historically been included in SG&A expenses) in excess of
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 (ii) provisions 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 (i) above is
made to provide a more meaningful comparison of the Company's SG&A expenses by
recasting historical financials to be consistent with current levels of
executive compensation.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $20,777 $25,699 $36,962 $15,773 $24,121
Cost of revenues............................... 12,313 14,512 20,529 8,657 13,499
------- ------- ------- ------- -------
Gross profit................................... 8,464 11,187 16,433 7,116 10,622
Selling, general and administrative expenses... 5,851 8,274 7,934 3,325 4,637
Operating income............................... 2,613 2,913 8,499 3,791 5,985
Other income (expense)......................... 7 136 (542) (50) 1,154
------- ------- ------- ------- -------
Earnings before income taxes................... 2,620 3,049 7,957 3,741 7,139
Income tax expense............................. 1,048 1,219 3,183 1,496 2,936
------- ------- ------- ------- -------
Net earnings................................... $ 1,572 $ 1,830 $ 4,774 $ 2,245 $ 4,203
======= ======= ======= ======= =======
</TABLE>
26
<PAGE> 28
The following table sets forth certain supplemental pro forma operating
results as a percentage of net revenues for 1995, 1996 and 1997 and the six
months ended June 30, 1997 and certain historical operating results as a
percentage of net revenues for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 59.3 56.5 55.5 54.9 56.0
----- ----- ----- ----- -----
Gross profit................................... 40.7 43.5 44.5 45.1 44.0
Selling, general and administrative expenses... 28.1 32.2 21.5 21.1 19.2
----- ----- ----- ----- -----
Operating income............................... 12.6 11.3 23.0 24.0 24.8
Other income (expense)......................... 0.0 0.5 (1.5) (0.3) 4.8
----- ----- ----- ----- -----
Earnings before income taxes................... 12.6 11.8 21.5 23.7 29.6
Income tax expense............................. 5.0 4.7 8.6 9.5 12.2
----- ----- ----- ----- -----
Net earnings................................... 7.6% 7.1% 12.9% 14.2% 17.4%
===== ===== ===== ===== =====
</TABLE>
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 $17.1 million compared to $12.8 million for the comparable six
months of the prior year, an increase of $4.3 million or 33.6%. This increase
was the result of continued strong demand for the Company's proposal management
services from the Company's existing customers together with an increased
customer base. 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, 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 45.1% 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 earn a 100% margin. There were no success fees
earned in the first six months of 1998.
SG&A expenses. SG&A 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%. SAC's SG&A expenses accounted for
approximately $0.9 million of this increase. As a percent of revenues, SG&A
expenses decreased to 19.2% for the six months ended June 30, 1998 compared to
21.1% for the same period in 1997.
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 Commander aircraft, and interest income of
$400,000 earned during the first six months of 1998 on proceeds from the
Company's initial public offering in January of 1998.
Net earnings. Net earnings were $4.2 million for the six months ended June
30, 1998 compared to $2.2 million for the three months ended June 30, 1997, an
increase of $2.0 million or 90.9%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues. Net revenues were $37.0 million for 1997 compared to $25.7
million for 1996, an increase of $11.3 million or 44.0%. Net revenues from
proposal management services were $22.1 million for 1997
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<PAGE> 29
compared to $14.7 million for the prior year, an increase of $7.4 million or
50.3%. This increase was attributable to an increase in the Company's customer
base and the number of proposals managed as a result of increased marketing
efforts by the Company. Net revenues from proposal development centers were $7.1
million for 1997 compared to $7.5 million for the prior year, a decrease of
$400,000 or 5.3%. This decrease was attributable to a transfer of certain
proposal development centers activities to the proposal management segment by
two major clients, and reduced proposal development centers expenditures by
another major client to focus on contract support for contracts already won. Net
revenues from contract support services were $7.8 million for 1997 compared to
$3.5 million for the prior year, an increase of $4.3 million or 122.9%. This
increase was due primarily to the expanding number of clients utilizing the
Company's contract support services in 1997.
Gross profit. Gross profit was $16.4 million for 1997 compared to $11.2
million for 1996, an increase of $5.2 million or 46.4%. As a percentage of net
revenues, gross profit increased to 44.5% for 1997 from 43.5% for the prior
year. The increase in gross profit as a percentage of net revenues was primarily
attributable to more favorable labor margins realized on average from the new
employees hired by the Company throughout 1997, and reduced travel costs as a
percentage of net revenues.
SG&A expenses. SG&A expenses were $7.9 million for 1997 compared to $8.3
million for 1996, a decrease of $400,000 or 4.8%. This decrease was primarily
attributable to reduced aircraft expenses in 1997 compared to 1996. The Company
purchased a Hawker aircraft in 1996 for use by the Company and to be chartered
to non-affiliated entities. Due to the investment by non-employee shareholders
in 1996 and the limited use by the Company, the aircraft was sold to an
affiliate of the Company's principal shareholder at market value. This sale
resulted in a gain of $137,000. As a percentage of net revenues, SG&A expenses
decreased to 21.5% for 1997, from 32.2% for the prior year.
Operating income. Operating income was $8.5 million for 1997 compared to
$2.9 million for 1996, an increase of $5.6 million or 193.1%. As a percentage of
net revenues, operating income increased to 23.0% for 1997 from 11.3% the prior
year. The increase in operating income as a percentage of net revenues was due
primarily to increased revenues and the stabilization of fixed operating costs
in 1997.
Other income (expense). Other expense was $542,000 for 1997 compared to
income of $136,000 for 1996. This difference was primarily due to revenues
recognized in 1996 from aircraft charter services from the Company's Hawker
aircraft. As the Hawker aircraft was sold in January 1997, there were no such
revenues recognized in 1997.
Net earnings. Net earnings were $4.8 million for 1997 compared to $1.8
million for 1996, an increase of $3.0 million or 166.7%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues. Net revenues were $25.7 million for 1996 compared to $20.8
million for 1995, an increase of $4.9 million or 23.6%. Net revenues from
proposal management services for 1996 were $14.7 million compared to $13.6
million for the prior year, an increase of $1.1 million or 8.1%. This increase
was attributable to the addition of several major proposals in 1996. Net
revenues from proposal development centers were $7.5 million for 1996 compared
to $4.2 million for the prior year, an increase of $3.3 million or 78.6%. This
increase was attributable to an increase in marketing efforts by the Company to
develop additional proposal development centers at customer sites. Net revenues
from contract support services for 1996 were $3.5 million compared to $3.0
million for the prior year, an increase of $500,000 or 16.7%.
Gross profit. Gross profit was $11.2 million for 1996 compared to $8.5
million for 1995, an increase of $2.7 million or 31.8%. As a percentage of net
revenues, gross profit increased to 43.5% for 1996 from 40.7% for the prior
year. The increase as a percentage of net revenues was primarily attributable to
additional success fees earned in 1996 of $873,000, compared to success fees
earned for the prior year of $348,000. Success fees carry a 100% margin.
SG&A expenses. SG&A expenses were $8.3 million for 1996 compared to $5.9
million for 1995, an increase of $2.4 million, or 40.7%. The increase was
primarily attributable to an increase in senior management staff to position the
Company for continued growth, expenses associated with the Hawker
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<PAGE> 30
aircraft, an increase in advertising expenses and increased expenses related to
additional employer sponsored benefit plans implemented in 1996. The Company
purchased the Hawker aircraft in 1996 for use by the Company and to be chartered
to non-affiliated entities. Due to the investment by non-employee shareholders
in 1996 and the limited use by the Company, the aircraft was sold to an
affiliate of the Company's principal shareholder at market value. This sale
resulted in a gain of $137,000. As a percentage of net revenues, SG&A expenses
increased to 32.2% for 1996, from 28.2% for the prior year.
Other income (expense). Other income was $136,000 for 1996 compared to
income of $7,000 for 1995. This increase in income was primarily due to revenues
recognized in 1996 from aircraft charter services from a Hawker aircraft
purchased by the Company in April 1996, and subsequently sold in January 1997.
Net earnings. Net earnings were $1.8 million for 1996 compared to $1.6
million for 1995, an increase of $200,000 or 12.5%.
QUARTERLY RESULTS
The following table sets forth supplemental pro forma and historical
unaudited selected quarterly financial information. This information has been
derived from unaudited financial statements which, in the opinion of management,
include all adjustments (consisting of normal recurring entries) necessary for a
fair presentation of such information. Results of operations for any one or more
quarters are not necessarily indicative of results for an entire year or the
results to be expected for any future period.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
---------------------------------------------------------------------------- -------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $7,824 $4,092 $6,237 $7,229 $8,544 $10,866 $10,323 $10,659 $13,462
Cost of revenues............. 4,544 2,433 3,113 3,865 4,792 6,181 5,691 5,988 7,511
------ ------ ------ ------ ------ ------- ------- ------- -------
Gross profit................. 3,280 1,659 3,124 3,364 3,752 4,685 4,632 4,671 5,951
Selling, general and
administrative expenses.... 2,207 1,720 2,850 1,507 1,818 2,476 2,133 1,746 2,891
------ ------ ------ ------ ------ ------- ------- ------- -------
Operating income (loss)...... 1,073 (61) 274 1,857 1,934 2,209 2,499 2,925 3,060
Other income (expense):
Interest expense........... 109 149 145 124 124 130 127 70 (4)
Miscellaneous income
(expense)................ 149 188 195 174 24 31 (266) 139 1,081
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) before income
taxes...................... 1,113 (22) 324 1,907 1,834 2,110 2,106 2,994 4,145
Income tax expense
(benefit).................. 445 (9) 129 762 734 844 843 1,245 1,691
------ ------ ------ ------ ------ ------- ------- ------- -------
Net earnings (loss).......... $ 668 $ (13) $ 195 $1,145 $1,100 $ 1,266 $ 1,263 $ 1,749 $ 2,454
====== ====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
The Company, prior to 1997, experienced some seasonality, with third
quarter earnings dropping slightly as clients reduced their bid and proposal
activity in anticipation of the release of the federal budget in October. The
impact of seasonality during the third quarter of 1997 was mitigated by the
Company's increase of non-seasonal contract support services revenue and the
increase in the number of proposal development centers ("PDCs") operated at
clients' sites. A PDC operates pursuant to an annual contract that generates
revenues throughout the course of the year as opposed to project specific
engagements for other proposal management or contract support services.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations and the timely collection of its accounts receivable. 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.
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<PAGE> 31
Net cash provided by investing activities was $766,000 for the six months
ended June 30, 1998, compared to a use of $864,000 for the same period of the
prior year. The Company's primary source of funds from investing activities
during six months ended 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.
Net cash provided by financing activities was $13.1 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 in the six months ended 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 repayment of $1.6 million of SAC bank indebtedness existing at the
time of the acquisition of SAC.
The Company believes that the funds generated by operations will continue
to provide adequate cash to fund its anticipated operating cash needs and
together with the proceeds of this offering will provide adequate cash for other
general corporate purposes, which may include future acquisitions of
complementary businesses, for at least the next twelve months. The Company has a
$4.0 million 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 outstanding balance under
the $4.0 million revolving line of credit will be repaid and that facility will
be terminated upon securing the new credit facility.
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 issued 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 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 revenue and
communications with its principal service providers and vendors to date, the
Company believes at this time that the costs of achieving Year 2000 compliance
will not have a material adverse impact on the Company's business, operations or
financial condition. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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 (revenues, 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 statement. SFAS 130 requires an enterprise to (a) classify items of
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<PAGE> 32
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. The adoption of SFAS 130 has not had an
impact on the Company's combined 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
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements 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
products 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.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a Statement of Position ("SOP") which will delay for one year
the effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of SFAS 133 is not expected to
have a material impact on the Company's consolidated financial position or
results of operations.
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<PAGE> 33
BUSINESS
INTRODUCTION
SM&A is a leading nationwide provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform such contracts. The Company's
clients include leading firms in the aerospace, defense and communications
industries such as The Boeing Company, Harris Corporation, Hewlett Packard
Company, Hughes Electronics Corporation, Litton Industries, Inc., Lockheed
Martin Corporation, Loral Space & Communications, Ltd., Motorola, Inc., MCI
Communications, Inc. and Raytheon Company.
The Company's proposal management expertise has resulted in a proposal win
rate of 89.3% of all dollars awarded on SM&A engagements since its inception in
1982. The Company's win rate greatly exceeds the results disclosed in the "Best
Practices 2000" survey conducted by a major national accounting firm which
indicated that a majority of the companies surveyed considered a 30% win rate as
positive, as cited in Aviation Week & Space Technology (May 29, 1995). The
Company has worked on or is currently engaged on 389 major proposals for $148
billion of government and commercial procurements. The Company leverages its
success in winning business for its clients and its involvement in the project
life cycle to extend its services beyond proposal development to contract
support such as systems engineering, information technology services, and
program integration.
In 1998, SM&A acquired two high-end engineering and information technology
consulting firms: Space Applications Corporation and Decision-Science
Applications, Inc. SAC, founded in 1969, provides systems engineering,
scientific research, program management support and military support services to
military and civilian space programs worldwide, the intelligence community and
the defense sector. DSA, founded in 1977, provides systems engineering,
information systems development, scientific research and program management
support to the U.S. Government, principally the Department of Defense. These
acquisitions have significantly increased the scope and depth of the Company's
high-end contract support services, adding more than 400 systems engineering,
information technology and program integration experts and expanding SM&A's
domestic presence with offices in strategic locations near significant market
centers.
MARKET OPPORTUNITY
The Company believes that the competitive procurement process for both
government and commercial projects presents significant market opportunities for
proposal management and contract support services. Companies competing for large
government and commercial contracts often seek the assistance of an outside firm
of experts that can manage the proposal process and maximize the company's
prospects of winning the business. After a company wins a government or
commercial contract, it often requires contract support services including
high-level systems engineering and program integration in order to fulfill the
contract. Outside firms who have assisted in the preparation of the proposal are
uniquely qualified to provide such contract support services. Both of these
areas represent a significant and growing market opportunity.
The Company estimates the annual market for proposal management and
high-end contract support services is approximately $10 billion. In 1998, the
Department of Defense has estimated that it alone will award contracts totalling
approximately $80 billion for thousands of military and civilian projects.
Competitions for procurement of parts and subassemblies conducted by private
industry represent another significant portion of the market.
The Company believes that the market for proposal management and high-end
contract support services will continue to grow due to a number of factors:
- Corporate Outsourcing. There has been a trend among large corporations to
increase efficiencies in the procurement and performance of government
and commercial projects of all sizes. As a result, major companies are
"outsourcing" more services, instead of maintaining and expanding
internal
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<PAGE> 34
groups. Through outsourcing, companies receive the trained expertise
needed without incurring the overhead expenses associated with an
in-house team.
- Government Outsourcing. In response to a reduced federal budget and
demands for efficiencies in government operations, many projects that
were once performed in-house by the U.S. Government are now being
outsourced to private industry. The increase in the number of these
projects creates a corresponding opportunity to provide proposal
management and contract support services in connection with such
projects.
- Increase in Commercial Projects. U.S. industry is making major
investments to exploit new markets in commercial data and
telecommunications systems. For example, both Teledesic and Boeing's
Elipso program are building multi-billion dollar satellite commercial
communication networks. This dramatic increase in programs requiring
expertise in proposal management, systems engineering and program
integration has created a growing market for the Company's services.
- Increasing Importance of Proposal Management Services. The Company
believes that various factors in the aerospace, communications and
defense industries are contributing to an increased need to win projects.
Recent consolidation activity in these industries has resulted in fewer,
larger firms as well as an increased disparity between the resources of
such larger firms and the remaining "smaller" firms. The large
consolidated firms are more motivated to win programs to support their
operations and the smaller firms have an even greater need to access the
resources necessary to compete with larger firms for programs. The U.S.
Government has also conducted a number of "winner-take-all" competitions
in which the government chose a single winner from two large aerospace
suppliers that had traditionally jointly supplied a product. The winner
may receive a multi-billion dollar contract while the loser may be
required to shut down an existing production facility and re-assign or
lay off several thousand workers. Consequently, proposal management
services are becoming increasingly important to competitors of all sizes.
STRENGTHS AND DIFFERENTIATION
The Company believes that the following business strengths and
differentiating characteristics position it to capitalize on the significant
market opportunities presented by the changing environment of competitive
procurements and contract support services for both government and commercial
programs.
Proposal Management Expertise
The Company's proposal management expertise has resulted in a proposal win
rate of 89.3% of all dollars awarded on SM&A engagements since its inception in
1982. The Company's win rate greatly exceeds the results revealed by a recent
survey which indicated that a majority of the companies surveyed considered a
30% win rate as positive. Another recent survey ranked Lockheed Martin
Corporation as the aerospace and defense industries' most competitive company in
1996 with a 63% win rate. As a partner in this success, SM&A managed three of
the largest programs highlighted in Lockheed Martin Corporation's 1996 annual
report: VentureStar X-33 (the new space shuttle), Space Based Infra-red Sensor
System (SBIRS) and Joint Strike Fighter (JSF). In addition, the Company managed
Boeing's winning proposal for the National Missile Defense Program which
contract was awarded in May 1998. SM&A has recently begun employing its proposal
management expertise to obtain contract support engagements for its
subsidiaries. For example, SM&A recently assisted SAC in winning a National
Security Agency program. The Company's win rate is the result of the creation of
a successful, proprietary proposal management process and the implementation of
that process by SM&A's team of trained proposal management specialists. SM&A's
track record provides it with an advantage over its competitors in the
increasingly competitive contract procurement market where winning is critical
to the client's survival and growth.
Broad Array of Services
SM&A provides a full range of services to companies seeking to win and
execute large mission-critical government and commercial contracts. SM&A is
capable of providing both proposal management and
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<PAGE> 35
contract support services to its clients. With approximately 175 highly
qualified proposal management professionals, SM&A is the largest proposal
management firm in the U.S. In 1998, the Company significantly increased the
scope and depth of its expertise in contract support services and now has more
than 450 highly qualified information technology, engineering and scientific
professionals with extensive industry experience working on a variety of
programs. The Company addresses the needs of its clients in various aspects of
proposal management, systems engineering, software engineering and development,
and program integration. The Company's size provides it with the capability to
increase staffing or augment particular expertise on a project to respond to a
client's needs and immediately adjust the staffing when such needs change. In
addition, the Company's early involvement as a program manager provides
opportunities to leverage a successful proposal management assignment and obtain
related support services contracts.
Skills of SM&A's Personnel
The Company's employees are highly qualified and experienced professionals.
The typical SM&A employee has more than 20 years of applicable experience and a
majority possess advanced degrees in science or engineering fields. SM&A's
professionals also participate in continual education and training to be fully
conversant with the latest trends in the contract procurement process, including
electronic proposal preparation and submittal. Given the practical expertise of
the Company's professionals, the SM&A team is not only highly skilled in the
proposal management process, but well versed in the cultural nuances of the
procurement being pursued, whether government or commercial.
SM&A has the ability to staff a winning proposal team with leadership
personnel who are able to provide the contract support services needed to
transition a winning proposal into a successful program. The skills and breadth
of the Company's professionals means that SM&A has enough highly skilled people
to both manage proposals and provide effective contract support services. This
is a competitive advantage for SM&A as it provides clients with high confidence
that once the program is won, the critical SM&A skills will remain available to
the client's program management team. These skills include top level systems
engineering (understanding the customer's requirements and converting them into
affordable products) and comprehensive program planning (organizing the work of
perhaps thousands of persons over many years to deliver products on time and
within budget).
Established Client Relationships
SM&A has forged a superior reputation among its clients in the proposal
management business. A majority of SM&A's revenue each year is generated through
repeat business from existing clients. Business relationships with the Company's
clients span various levels within client organizations, ranging from corporate
board members, chief executive officers and other senior management, to
operational managers. Clients have come to rely upon SM&A not only for its
impressive track record but also the quality of the services provided by
experienced professionals, the versatility of the Company in responding to
clients' needs, and the accessibility of the Company's senior executive
management. The Company's reputation and relationships with its clients have
enabled the Company not only to acquire repeat proposal development business but
to expand its services to include post-proposal contract support and other
high-end contract support engagements.
GROWTH STRATEGY
The Company's strategy is to expand its position as the largest proposal
management company and to continue to grow its expanding contract support
services. The key elements of the Company's growth strategy are to:
- Leverage Existing Relationships to Obtain Support Services
Contracts. SM&A's involvement in the proposal development phase of a
project provides opportunities to leverage a successful proposal
management assignment and obtain support services contracts to perform
systems engineering, management support and specialized services for such
projects. The Company is ideally positioned as a result of its early
involvement in the planning process to extend its role beyond the
proposal
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<PAGE> 36
management stage into contract support assignments after the project is
won. Through its in-depth involvement in the project from its inception,
the Company offers knowledge-base continuity and close familiarity with
the proposal, the project and the client team. This approach has avoided
the traditional problem of a loss of focus and momentum by the client
after the proposal has been won. The Company's early efforts with this
strategy have resulted in 26 support service contracts won in the last 18
months. Conversely, the relationships arising out of the Company's
high-end contract support services have provided the Company with
additional opportunities for proposal management assignments.
- Build a Complementary Array of High-End Contract Support Services. The
Company intends to broaden its range of services through acquisitions and
internal growth to increase its opportunities to secure contract support
engagements. The Company's acquisition strategy includes efforts to
identify candidates with talented and highly skilled employees, quality
clients, opportunities to generate proposal management and high-end
contract support service engagements, and the potential to benefit from
integration with SM&A. Once acquired, the Company believes it will be
able to integrate the acquired business by (i) providing new employees
with equity incentives in SM&A; (ii) transitioning new personnel to
higher rate engagements developed through the Company's proposal
management expertise; (iii) training new employees on SM&A's proprietary
proposal management process in an effort to increase the win rate of the
acquired business; (iv) restructuring existing contracts for improvements
where possible; and (v) combining operations to reduce SG&A expenses. To
date the Company has completed two acquisitions. The Acquisitions have
added a significant number of professionals experienced in systems
engineering and analysis as well as software development. The Company
believes that the highly fragmented nature of the marketplace will
provide opportunities to pursue strategic acquisitions of management
consulting and systems engineering firms.
- Expand Core Proposal Management Business. The Company believes that it is
well-positioned to benefit from the increase in demand for proposal
management services due to increasing industry consolidation and
"winner-take-all" programs which drive the growing importance of winning
each new contract. To achieve these "must win" contracts, SM&A believes
that companies will be motivated to increase their use of the Company's
services. SM&A's 89.3% win rate and breadth of impressive staff
professionals facilitate the Company's acquisition of this "must win"
business.
- Pursue Opportunities in the Growing Market for Large Commercial
Programs. The Company's process, expertise and experience are well suited
to the growing sector of large commercial programs. These programs often
require both proposal management and contract support services. The
Company's proven methodology typically increases the probability of
winning and reduces the proposal costs of such commercial projects. In
addition, the Company's expertise is directly applicable to providing
systems engineering and program management support to such programs.
Examples include the Company's work for Boeing on the next-generation
expendable space booster and for Motorola on a telecommunications system.
SERVICES
Proposal Management
Proposal management involves assisting clients with the procurement of
government and commercial programs. The Company manages both large proposals
(more than $100 million) and smaller proposals (less than $100 million). In the
case of smaller proposals, the Company may manage a number of such proposals
over a period time through a PDC located at the client's site. For large
proposals, the Company is engaged on a project specific basis. The process
whereby SM&A manages a large proposal can be divided into three phases:
organization and strategy, proposal preparation, and post submittal.
Organization and Strategy. Once hired to manage a large proposal, SM&A
assembles a team of proposal specialists at the client's site--typically
deploying a proposal manager, volume leaders for each of the major proposal
volumes, specialists well versed in the new management processes required by the
government, and
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production specialists expert in the new forms of electronic proposals often
required by a government acquisition agency. Each SM&A team manages a client
team, typically 50 to 200 engineers and managers, providing full time, hands-on
execution of the SM&A process from strategy formulation, through all phases of
proposal preparation and review, to the post-submittal answers to the
government's questions. The proposal process typically requires three to twelve
months of intensive activity at the client's site. The SM&A team assists the
client in the creation of a win strategy that leads to selection of
sub-contractors, an investment plan, a technical baseline, and a program
implementation plan. SM&A personnel, drawing on their strong technical and
program management experience, ensure that the distinctive technical, cost and
management advantages of the client's proposal are clearly described and easy to
evaluate.
Proposal Preparation. The SM&A team manages a process that starts with
analysis of the government's request for proposal and results in the creation of
a series of proposal documents, each following a proprietary SM&A template
developed over the past 15 years by SM&A. These templates guide the team in
developing the key "facts" that will win, which typically consist of the most
cost-effective technical solution to meet the government's needs and a low-risk
program plan that will deliver the product on time and within budget. Following
SM&A's page-by-page quality review, the proposal is submitted, and if required,
an oral presentation is made. SM&A creates the materials (charts, videos,
models) for the oral presentations, which are becoming more common. SM&A also
trains the presenters to clearly convey the needed information and to stick
rigorously to the presentation plan and schedule.
Post Submittal. After the proposal is submitted, the proposal team's
interaction with the U.S. Government is a critical part of the SM&A winning
process. Many teams submit their proposals and then key personnel are reassigned
on other projects. Conversely, in an SM&A-managed proposal, the core competence
is maintained to answer formal questions from the government, and prepare the
Best and Final Offer. Another area of SM&A action during the government's
proposal evaluation period is working with the client's team in preparation for
winning the award. Many proposals include a very aggressive start-up phase that
requires the delivery of significant products within the first 30 to 60 days
after the contract award. SM&A provides management support, program planners and
schedulers and systems engineers to assist the client's team to meet early
post-award commitments.
Proposal Development Centers. Another innovative SM&A response to its
clients' changing needs is the creation of Proposal Development Centers. In
contrast to the work done for large proposals in which a dedicated team is
specifically created for the proposal, PDCs are established for clients who
expect to produce a number of smaller proposals over a given period of time. The
Company believes installation of a PDC at a client site allows the Company to
realize a recurring annual income stream. Each PDC has an SM&A team permanently
located at a client's facility, managing the resources needed to produce 10 to
50 proposals per year. The number of SM&A employees located at a PDC ranges from
three to ten. As of June 30, 1998, SM&A was managing six PDCs at clients' sites.
Firms lacking the resources to have a dedicated PDC can employ the PDC
maintained at SM&A headquarters to provide an instantly available turnkey
proposal creation resource.
High-End Contract Support Services
Whether the contract support services are performed in connection with a
proposal won by SM&A or to support an independent project, the Company has
focused on three areas: (i) systems engineering, (ii) information technology,
and (iii) program integration.
Systems Engineering. The Company's systems engineering work helps its
clients to fully define the work that must be done to meet the program's
objectives. The first step is to formally define the top level program
objectives including mission requirements, annual and total budget, and the
schedule for each major program milestone and then to communicate them to each
engineering and management department. The systems engineers perform trade
studies and analyses to objectively evaluate the cost, schedule, risk and likely
performance of alternative solutions. The systems engineers then manage the top
level program requirements data base. As the program evolves from design through
development, test and production phases, they
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constantly evaluate the work of the program's design and test groups to be
certain that these top level requirements are being met.
Information Technology. The Company's information technology business is
focused on consulting, software development, systems integration and outsourcing
services. The business includes both federal government and commercial services
and commercial software. These efforts include commercial off-the-shelf
solutions to hardware/software needs and development of custom database
applications. A few specific activities are: (i) developing Windows-based
software for certain Hewlett Packard equipment; (ii) helping clients transfer
applications from the UNIX platform to the Microsoft Windows NT platform; (iii)
developing LAN/WAN management systems for telecommunications companies including
MCI Communications, Inc. and LCI International, Inc.; (iv) developing a software
system for second tier telephone companies to sort billing charges; (v)
providing "Thin Client" solutions (the Company is rated a Platinum solution
provider by Citrix Systems, Inc.); and (vi) creating software for simulation and
training.
Program Integration. Concurrent with systems engineering are the Company's
program integration functions. This work is done to ensure that the program has
been meticulously planned and that the program team follows the plan. In many
aerospace procurements, the government insists that (i) the program plan be
submitted with the proposal, (ii) it become a binding contractual document upon
award, and (iii) there be significant financial incentives for meeting plan
milestones on time and financial penalties in case of failure to adhere to the
plan. The SM&A program integration effort is therefore critical to the financial
success of the client. The work has an initial phase in which the program to be
accomplished is defined in detail. This includes the detailed description of all
tasks to be done by all of the participants over the lifetime of the program
(usually involving work by thousands of individuals in many companies across the
nation), the scheduling of these tasks, the sizing of each task (how many person
hours and how much equipment is needed) and the definition of the
inter-relationship among the tasks (what task depends on what other task). This
information is maintained by the program integration team in an electronic
format easily accessible to the management team. After the definition work is
completed, the program integration staff focuses on the execution of the
program, in which the status of each task is constantly evaluated (and reported
to management, including the government project office), the likely attainment
of future milestones is predicted, and the program risks are constantly
reevaluated to allow proactive management decisions to mitigate risk.
The Company's recent acquisitions of SAC and DSA have added more than 400
systems engineering, information technology and program integration specialists
to SM&A's workforce, which has substantially expanded the Company's contract
support service capabilities.
CLIENTS
The Company provides its proposal management and contract support services
to numerous Fortune 100 clients including, among others, The Boeing Company
(including former McDonnell Douglas and Rockwell International Corporation),
Harris Corporation, Hewlett Packard Company, Hughes Electronics Corporation,
Litton Industries, Inc., Lockheed Martin Corporation, Loral Space &
Communications, Ltd., MCI Communications, Inc., Motorola, Inc. and Raytheon
Company. The Company also provides contract support services to the U.S. Air
Force, U.S. Navy, U.S. Army, NASA and other government agencies.
Lockheed Martin Corporation, Litton Industries, Inc., Motorola, Inc.,
Raytheon Company, The Boeing Company and Hughes Electronics Corporation
accounted for approximately 22.5%, 14.6%, 12.9%, 10.9%, 10.3%, and 10.3%,
respectively, of the Company's revenue in 1997 and 18.0%, 8.7%, 11.9%, 14.6%,
10.7% and 5.7%, respectively of the Company's revenues for the six months ended
June 30, 1998. On a pro forma basis giving effect to the Acquisitions, various
branches and agencies of the U.S. Government together would have accounted for
an aggregate 21.9% of the Company's revenues for the six months ended June 30,
1998. These revenues are a result of various engagements by several business
units of these companies. Although such business units are affiliated with the
parent entities, the Company's experience has indicated that the particular
engagements are subject to the discretion of each individual business unit.
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BACKLOG
The Company's backlog represents an estimate of the remaining future
revenues from existing signed contracts and letters of intent concerning
contracts that have been awarded but in some cases not yet signed. The backlog
estimates include revenues expected under the current terms of executed
contracts and revenues from contracts in which the scope and duration of the
services required are not definite but estimable.
At June 30, 1998 the Company's backlog was approximately $116.8 million, of
which $51.0 million is scheduled for 1998. The Company's engagements are
terminable at will and no assurance can be given that the Company will receive
any of the fees associated with the backlog described above.
SALES AND MARKETING
The Company markets its services directly to senior executives of major
corporations. The Company employs a variety of business development and
marketing techniques to communicate directly with current and prospective
clients, including making on-site presentations, attending industry seminars
featuring presentations by SM&A personnel, and authoring articles and other
publications about the industry and the Company's methodologies and processes.
A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of engagements during delivery to add
complementary activities. Also, the Company's on-site presence affords it the
opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements facilitates the Company's ability
to market additional capabilities to its clients in the future. In addition, the
SM&A senior management team is actively involved in meeting with companies that
have not yet engaged SM&A and newly appointed senior managers in current SM&A
clients who might not be thoroughly knowledgeable of SM&A's previous assistance
to the client.
In the past four years, SM&A has also increased its marketing efforts
through participation in major industrial trade shows and paid advertising. SM&A
regularly runs full page ads in the national trade journals such as Aviation
Week, Space News and Defense News.
COMPETITION
Proposal Management
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 is the largest provider of such
services and principally competes with numerous smaller proposal management
companies in this highly specialized industry. The Company also competes with
some of its client's internal proposal development resources. A number of SM&A's
clients maintain internal business acquisition teams that are designed to handle
the procurement of government contracts, although the number of such in-house
departments has been decreasing in recent years.
The Company believes that the principal competitive factors in the market
for proposal management include reputation, the level of experience and skill of
staff professionals, industry expertise, quality of service, responsiveness, and
procurement success rate. The need to provide efficient and cost-effective
service is of even greater importance in PDCs where the cost of proposal
development is likely to be a larger percentage of the contract amount than with
a large program.
High-End Contract Support Services
The contract support services market is highly competitive and includes a
large number of highly capable contract support services firms in the United
States. For this reason, the focus of SM&A has been on providing contract
support services for programs which it has won together with its clients. This
significantly enhances the competitive position of the Company because the
contract support to be provided by SM&A is often included in the proposal that
was won. Upon the win, SM&A is awarded its contract and work begins thereafter.
Should there be additional opportunities for SM&A to contribute to the team, the
client often adds scope (and funds) to the SM&A contract. This permits the
growth of the SM&A role over the lifetime of the program--which often lasts many
years.
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In the case of contract support services for projects in which the Company
did not provide proposal management services, the market is highly fragmented
and competitive. Many of the Company's competitors are larger and have greater
resources than the Company. See "Risk Factors--"Competition and Market
Penetration." The Company, however, has found increasing opportunities to work
with clients who have previously retained SM&A. The Company believes that the
principal competitive factors in the contract support services market include
program knowledge, rapidly deployable skilled personnel, responsiveness,
reputation and price.
EMPLOYEES
As of August 21, 1998, the Company had approximately 640 employees.
Approximately 90% are proposal and engineering professionals and 10% are
administrative personnel. The Company believes that its success depends
significantly upon attracting, retaining and motivating talented, innovative and
experienced professionals. For this reason, SM&A is comprised of highly
experienced program managers, engineers, skilled technicians, and computer
programmers, tested in some of the largest and most complex military, commercial
and government programs of the past 30 years. The typical SM&A employee has more
than 20 years of applicable experience and a majority of them possess advanced
degrees in science or engineering fields.
The Company has instituted a training and recruitment program to help
ensure retention of high quality personnel and to enable it to respond to
expanding customer needs. The performance of each SM&A employee is being
constantly evaluated both by the SM&A team with whom the employee is working and
by the client who has engaged SM&A. All clients know that SM&A executives are
always on call to discuss any and all personnel issues. SM&A has maintained the
highest standards of performance to ensure client satisfaction. The Company also
attracts and motivates its professional and administrative staff by offering
competitive packages of base and incentive compensation and benefits. An
indication of the effectiveness of the recruitment, hiring and training process
to pick the best people and to maintain their skills over the long term is that
the 89.3% win rate for SM&A-managed proposals is being accomplished by a
professional staff that is rapidly growing with only a 2.8% annual employee
turnover rate from January 1, 1995 through June 30, 1998 (exclusive of the
turnover rates experienced by SAC and DSA prior to the Acquisitions).
The Company's employees are not represented by any labor union and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
FACILITIES
The Company occupies its principal executive offices adjacent to the Orange
County (John Wayne) International Airport in Newport Beach, California. The
Company has approximately 19,500 square feet of total office space, divided into
approximately 3,900 square feet for the Company's executive management, 5,800
square feet for administration, 7,800 square feet for the in-house PDC, and
2,000 square feet is available for growth.
The Company's other primary offices include an approximately 20,000 square
foot facility in Vienna, Virginia, an approximately 59,000 square feet in
Arlington, Virginia, and an approximately 27,800 square foot facility in
Colorado Springs, Colorado. The leases for the Vienna and Arlington offices
expire on December 31, 1998 and the Company has signed a letter of intent to
lease an approximately 96,000 square foot facility in Merrifield, Virginia for
the purpose of replacing those offices. The Company maintains 16 additional
offices, each consisting of 12,000 square feet or less, throughout the United
States in Albuquerque, New Mexico, Arlington, Virginia, Colorado Springs,
Colorado, Denver, Colorado, Linthicum, Maryland, Largo, Maryland, Santa Ana,
California, Sierra Vista, Arizona, Rome, New York, San Antonio, Texas, Costa
Mesa, California, Las Vegas, Nevada and Phoenix, Arizona.
The Company leases all of its facilities, several of which maintain a top
secret clearance rating.
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of
its business. There are currently no material pending litigation proceedings to
which the Company is a party or to which any of its property is subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages and positions held by the directors, executive officers and
certain key employees of the Company as of August 20, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Steven S. Myers........................... 52 President, Chief Executive Officer,
Chairman of the Board and Director
Kenneth W. Colbaugh....................... 45 Executive Vice President, Chief Operating
Officer and Director
Ronald A. Hunn............................ 50 Senior Vice President, Chief Financial
Officer and Secretary
Thomas F. Heinsheimer..................... 59 Senior Vice President, Chief Scientist
James F. Madewell......................... 65 Vice President, Mergers and Acquisitions
Ajaykumar K. Patel........................ 37 Vice President, Operations
Robert E. Casner.......................... 48 Vice President, Business Development
Thomas J. Amrhein......................... 58 President and General Manager of SAC
Guy A. Ackerson........................... 56 Chief Technical Officer of DSA
J. Christopher Lewis(1)(2)................ 42 Director
James R. Mellor(1)(2)..................... 68 Director
Malcolm R. Currie......................... 71 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
Steven S. Myers founded the Company in 1982 and has been the President,
Chief Executive Officer and Chairman of the Board of the Company since its
incorporation in 1985. Prior to forming SM&A, Mr. Myers was Vice President of
Marketing for Loral Data Systems and held several other key management positions
with Ball Aerospace Systems Division, Fairchild Space and Electronics Company,
and Watkins-Johnson Company. Mr. Myers holds a B.S. in mathematics from Stanford
University.
Kenneth W. Colbaugh, a director of the Company, has served in such capacity
and has been an Executive Vice President and Chief Operating Officer of the
Company since January 1990. Mr. Colbaugh previously held numerous management
positions with Lockheed Corporation, including Director of Program Management on
the Advanced Solid Rocket Motor Program. Mr. Colbaugh is a graduate of the
Lockheed Management Institute and Lockheed Advanced Management Institute. Mr.
Colbaugh holds a B.S. in business from San Jose State University.
Ronald A. Hunn has served as Chief Financial Officer of the Company since
September 1995, and since August 1997 has served as Secretary of the Company.
Mr. Hunn served as Vice President from September 1995 until July 1998 when he
became Senior Vice President of the Company. Mr. Hunn joined the Company in
April 1992 as its Controller and Chief Accounting Officer. Mr. Hunn's
professional career includes twenty four years of experience in all aspects of
accounting, information systems and financial management. From 1987 to 1991, Mr.
Hunn held a number of management positions with Xidex Magnetics, a producer of
rigid and flexible disc media, most recently as the Vice President and Corporate
Controller. Xidex was an independent public company until the August 1988
acquisition by Anacomp, Inc. From 1984 until 1987, Mr. Hunn served as the
Controller of Xebec Corporation, a publicly traded manufacturer of disc drive
controllers and memory storage subsystems. Mr. Hunn holds a B.A. in financial
accounting from National University.
Thomas F. Heinsheimer, Ph.D. has served as the Company's Senior Vice
President and Chief Scientist since joining the Company in 1989. Dr. Heinsheimer
began his career on Project Mercury at General
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Dynamics in 1960 and then at the Massachusetts Institute of Technology
Instrumentation Laboratory on Project Apollo. He has worked with Israel Aircraft
Industries, the French Space Administration and the Soviet (now Russian) Academy
of Sciences on a number of international scientific programs. He was a
participant in the planning and implementation of the Defense Support Program
while at the Aerospace Corporation, and served as Vice President for Space
Systems at Titan Systems Inc. He has designed, built and piloted experimental
balloon systems for scientific research that hold over 20 national and world
ballooning records. Dr. Heinsheimer holds a B.S.E.E. from the Massachusetts
Institute of Technology and a Ph.D. in atmospheric physics from the University
of Paris. He is a seven-term Councilman and former Mayor of Rolling Hills,
California.
James F. Madewell has served as the Company's Vice President--Mergers and
Acquisitions since July 1998. Mr. Madewell joined the Company in August 1997 as
its Vice President--Business Development. Mr. Madewell retired from Lockheed
Martin Corporation in July 1997 where he had served as Vice President--Business
Development for the Lockheed Martin Corporation Aeronautics Sector since 1995.
Prior to that, Mr. Madewell was appointed Vice President--Group Business
Strategy for Lockheed Aeronautical Systems Group in August, 1994. From 1992
until 1994, he held the position of Vice President and director of Advanced
Programs at the Lockheed Space Operations Company. He is a graduate of the
Lockheed Executive Institute and the Rockwell Executive Institute. Mr. Madewell
is a Registered Professional Engineer. Mr. Madewell holds a B.S.M.E. from the
University of Houston and an M.S. in engineering from the University of Alabama.
Ajaykumar K. Patel has served as the Company's Vice President--Operations
since July 1997. Mr. Patel joined the Company in January 1994 as Director of
Marketing for the Department of Energy and Environmental Services. Mr. Patel's
professional career includes over fifteen years of experience in systems
engineering, business development, finance and company operations in the
aerospace, environmental and software industries. Prior to joining the Company,
Mr. Patel served as Vice President and Director of Business Development for
Weiss Associates, an environmental engineering firm from January 1993 until
January 1994. Mr. Patel holds an M.B.A. in finance and strategic planning from
the University of Southern California and a B.S. in physics from The Johns
Hopkins University.
Robert E. Casner, Vice President-Business Development, joined the Company
in July 1998. Mr. Casner's professional career spans over 20 years in domestic
and international aerospace business, program management and proposal
development. From 1981 to 1998, Mr. Casner held various positions at Pratt &
Whitney Space Propulsion including Director, Business Development and Director
of the Russia/US Venture for the RD-180 Engine. Mr. Casner holds a B.S. in
chemistry from George Washington University.
Thomas J. Amrhein joined the Company in January 1995 and held the position
of Associate from January 1995 to January 1996 and Vice President from January
1996 to June 1998. After the acquisition of SAC, Mr. Amrhein was appointed
President and General Manager of SAC in June 1998. He has been responsible for
the Company's proposal management operations at various sites including Lockheed
Martin (Sunnyvale, California) and Boeing (Downey, California). Prior to joining
the Company, Mr. Amrhein served as Director of Business Development and Program
Manager at Lockheed Martin Electronics and Missiles from March 1990 until
January 1995.
Guy A. Ackerson is a co-founder of DSA and served as its Vice President
until 1984. Mr. Ackerson was appointed President of DSA in 1984 and Chief
Executive Officer in 1991 and held those positions until August 1998. Upon the
Company's acquisition of DSA in August, 1998, Mr. Ackerson was appointed as
DSA's Chief Technical Officer.
J. Christopher Lewis was elected a director of the Company in September
1996. Since 1982, Mr. Lewis has been a general partner of Riordan, Lewis &
Haden, a Los Angeles based partnership which invests in management buy-out and
venture capital transactions. Mr. Lewis also serves as a director of California
Beach Restaurants, Inc., Tetra Tech, Inc., PIA Merchandising Services, Inc.,
Data Processing Resources Corporation and several private companies. Mr. Lewis
holds a B.A. in accounting and finance and an M.B.A. in finance from the
University of Southern California.
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James R. Mellor was appointed a director of the Company in December 1997.
Mr. Mellor retired from the office of Chairman and Chief Executive Officer of
General Dynamics in May 1997; he continues to serve on the General Dynamics
Board of Directors and as a consultant to the Company. Mr. Mellor was elected
Chairman of General Dynamics in May 1994. He had served as President and Chief
Executive Officer since May 1993, and as President and Chief Operating Officer
since January 1991. He is presently on the Board of Directors of Aeromovel USA
Inc., Bergen Brunswig Corporation, Computer Sciences Corporation, General
Dynamics Corporation, IDT, Pinkerton Inc., Scripps Research Institute, U.S.
Surgical Corporation, and USEC, Inc. He is a member of the National Advisory
Committee of the University of Michigan, and is currently a Member of the United
States-Egypt President's Council, as well as several other professional and
social organizations. Mr. Mellor holds a B.S. in electrical engineering and in
mathematics and an M.S. from the University of Michigan.
Malcolm R. Currie was appointed a director of the Company in December 1997.
Mr. Currie serves as Chief Executive Officer of Currie Technologies, Inc. Mr.
Currie served as Chairman and Chief Executive Officer of Hughes Aircraft Company
from March 1988 until his retirement in July 1992. From January 1976 until March
1988, Mr. Currie served as President and Chief Executive Officer of Delco
Electronics. From 1973 until 1977 Mr. Currie served as Under Secretary of
Defense for Research and Engineering. He presently serves on the boards of
directors of Unocal Corporation, Investment Company of America, LSI Logic
Corporation, Regal One and Moltech Corp., and as Chairman of the Board of
Trustees of the University of Southern California. Mr. Currie holds a B.A. in
physics and a Ph.D. in engineering physics from the University of California at
Berkeley.
DIRECTOR COMPENSATION
The Company's nonemployee directors receive $1,000 for each board or
committee meeting attended and are reimbursed for out-of-pocket expenses
incurred in connection with attendance at board and committee meetings. In
January 1998, Mr. Currie, Mr. Mellor and Mr. Lewis were granted options to
purchase 30,000, 30,000 and 21,000 shares of Common Stock, respectively, at an
exercise price of $12 per share (the fair market value of the Company's Common
Stock on the date such options were granted).
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established an Audit Committee and a
Compensation Committee.
The Audit Committee, which consists of Messrs. Lewis and Mellor, reviews
the adequacy of internal controls and the results and scope of the audit and
other services provided by the Company's independent auditors. The Audit
Committee will meet periodically with management and the Company's independent
auditors.
The Compensation Committee, which consists of Messrs. Lewis and Mellor,
establishes salaries and other forms of compensation for officers and other
employees of the Company and will administer the Company's option plans. During
the years ended December 31, 1996 and 1997, the Company's Board of Directors
established levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, as the
Compensation Committee had not yet been formed during those periods. Mr. Myers,
the Company's President, Chief Executive Officer, and Chairman of the Board,
Kenneth W. Colbaugh, the Company's Executive Vice President, Chief Operating
Officer and a director of the Company and Paula K. Myers, then serving as a Vice
President, Secretary and a director of the Company, participated in the
deliberations regarding executive compensation for 1996 and 1997. Mr. Myers, Mr.
Colbaugh and Mr. Lewis, a director of the Company, participated in the
deliberations regarding executive compensation for 1998.
In June, 1998 the Company sold its Turbo Commander Aircraft to Summit
Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers, for
$880,000 represented by a note secured by a first priority security interest on
the aircraft. The note bears interest at the prime rate and is due and payable
in full no later than June 25, 1999. The terms of such sale were considered by
the Company's Board of Directors to be as favorable as would have been obtained
from an unaffiliated third party.
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In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers, including Mr. Myers and Mr.
Colbaugh, providing for indemnification rights in certain circumstances. See
"Management--Indemnification of Officers and Directors." In November 1997, the
Company entered into Executive Employment Agreements with Mr. Myers and Mr.
Colbaugh. See "Management--Employment Agreements."
The terms of the Company's bank facility provide for the maintenance of
certain financial covenants. The Company obtained a waiver from the bank from
compliance with certain of the covenants, the principal covenant being the
Company's tangible net worth requirement at December 31, 1997. The waiver was
conditioned upon the Company completing an initial public offering. If the
Company did not complete an initial public offering, the Company's principal
shareholder had agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.
In October 1997, Paula K. Myers resigned from all her positions with the
Company, including those as a director and Secretary. Mrs. Myers was paid
compensation from the Company totalling $550,000, $150,000 and $81,000,
respectively, during the Company's fiscal years ended December 31, 1995, 1996
and 1997.
In January 1997, the Company repurchased 1,995,125 shares of its Common
Stock representing 13.4% of its then outstanding Common Stock from the following
officers of the Company: Steven S. Myers, Kenneth W. Colbaugh, Thomas F.
Heinsheimer, Charles A. Cullian, and John W. Montgomery, for an aggregate
purchase price of $5.9 million.
In January 1997, the Company sold its Hawker 800 aircraft (the "Aircraft")
to Summit, a company wholly owned by Steven S. Myers, for a sales price of $5.6
million. Concurrent with the sale, Summit assumed $5.6 million of the Company's
long-term notes payable bearing interest rates of 7.30% and 10.07% per annum,
and Summit paid the Company $5,000 in cash. The Aircraft was purchased by the
Company in April 1996 for $5.8 million. The sales price of the Aircraft was
based on a determination of its fair market value by an independent source and
approved by the Company's Board of Directors. The Company charters the Aircraft
from time to time as required in connection with Company business through an
independent air service chartering company. During the period from the
Aircraft's purchase by Summit through December 31, 1997, the Company incurred
$444,000 in charter fees for the Aircraft. The terms of use and charter rates
paid by the Company concerning the Aircraft are established by the air service
chartering company and are considered by the Company to be competitive with
charter rates and on terms as favorable as those from unaffiliated third parties
for similar aircraft.
In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.30% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were paid in January 1998.
In December 1996, the Company borrowed $667,000 from Steven and Paula Myers
under the terms of a promissory note (the "Company Note"). The Company Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were due and payable on January 31, 1998. In January 1997, in connection with
the sale of the Aircraft to Summit, all obligations under the Company Note were
assumed by Summit.
In May 1995, Steven and Paula Myers guaranteed the Company's obligations
under a promissory note in the original principal amount of $560,000, which was
incurred to finance the acquisition of the Company's Rockwell Commander
Aircraft. The note provided for interest at an annual rate of 10.74% and was
secured by the aircraft. The note was paid in full in February 1998.
During 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliate of the Company. This write-off represented the Company's termination
of its affiliation with CKC and the amount written off represented all amounts
previously due from CKC. This amount consists of rent, labor charges and
unsecured advances to CKC. Steven S. Myers, the Company's President, Chief
Executive Officer and Chairman of the Board was a controlling shareholder,
director and officer, and Paula K. Myers and Kenneth W. Colbaugh were each
directors and shareholders of both CKC and the Company during the transactions
and periods described above.
43
<PAGE> 45
In January 1993, Kenneth W. Colbaugh purchased Common Stock from the
Company as part of the Company's employee equity ownership program. In
connection with the purchase of shares by Mr. Colbaugh, he became indebted to
the Company under the terms of a Note Secured by Stock Pledge Agreement in the
original principal amount of $316,000 (the "Colbaugh Note"). The Colbaugh Note
provided for interest at a rate of 7.30% per annum, periodic payments out of
Company income distributions to Mr. Colbaugh, and that all amounts due
thereunder were due and payable in January 2003. In January 1997, Mr. Colbaugh
paid in full all amounts owing under the Colbaugh Note.
In September 1996, J. Christopher Lewis, a director of the Company and a
member of the Compensation Committee, and certain affiliates, purchased an
aggregate of 1,702,444 shares of the Company's Common Stock from other
shareholders of the Company for an aggregate purchase price of $5.0 million, or
$2.94 per share. Mr. Lewis was not affiliated with the Company at the time of
the purchase and the price was determined in an arms length negotiation.
Following the consummation of the stock acquisition, Mr. Lewis became a director
of the Company. Mr. Lewis is the sole trustee of a trust which holds shares in
the Company. See "Certain Transactions."
The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the offering, other than Underwriting Discounts and Commissions.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during the year ended December 31, 1997 to the Company's Chief
Executive Officer and to each of the three other most highly compensated
executive officers whose total salary and bonus for 1997 exceeded $100,000 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
FISCAL ----------------------
YEAR SALARY BONUS
------ --------- ---------
<S> <C> <C> <C>
Steven S. Myers............................................. 1997 $559,000 $ --
President and Chief Executive Officer
Kenneth W. Colbaugh......................................... 1997 360,000 692,551
Executive Vice President and Chief Operating Officer
Thomas F. Heinsheimer....................................... 1997 120,000 339,747
Senior Vice President
Ronald A. Hunn.............................................. 1997 160,000 53,861
Vice President, Chief Financial Officer and Secretary
Paula K. Myers(2)........................................... 1997 81,000 --
</TABLE>
- ------------------------------
(1) Excludes perquisites and other personal benefits that, in the aggregate, do
not exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for the Named Executive Officer.
(2) Paula K. Myers resigned from her positions as Senior Vice President and
Secretary of the Company in October 1997. Ronald A. Hunn was appointed
Secretary of the Company upon the resignation of Paula K. Myers.
STOCK OPTIONS
The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1997. As of August 20, 1998, the Company had
outstanding options to purchase 804,500 shares of Common Stock granted to
certain employees and directors during 1998 pursuant to the Company's 1997 Stock
Option Plan. In May 1998, the Company granted the Acquisition Options to
purchase an aggregate of 175,925 shares of Common Stock in connection with the
acquisition of SAC. See "Shares Eligible for Future Sale--Stock Options."
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") is
administered by the Compensation Committee of the Board of Directors, which has
the discretion and authority, consistent with the provisions of the 1997 Stock
Option Plan, to determine which eligible participants will receive options, the
44
<PAGE> 46
time when options will be granted, the terms of options granted and the number
of shares which will be subject to options.
The Company's 1997 Stock Option Plan provides for the granting of
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Stock Options") and nonstatutory
options. Under the 1997 Stock Option Plan, options covering an aggregate of
1,500,000 shares of the Company's Common Stock may be granted, in each case to
directors, employees and consultants of the Company, except that Incentive Stock
Options may not be granted to nonemployee directors or nonemployee consultants.
The exercise price of Incentive Stock Options must not be less than the fair
market value of a share of Common Stock on the date the option is granted (110%
with respect to optionees who own at least 10% of the outstanding Common Stock).
The Company's Compensation Committee has the authority to determine the time or
times at which options granted under the 1997 Stock Option Plan become
exercisable, provided that options expire no later than ten years from the date
of grant. Options are nontransferable, other than by will and the laws of
descent and distribution, and generally may be exercised only by an employee
while employed by the Company or within 90 days after termination of employment
(one year for termination resulting from death or disability). The 1997 Stock
Option Plan terminates in October 2007. As of August 20, 1998, there were
804,500 options to purchase shares of Common Stock outstanding under the 1997
Stock Option Plan.
BONUS PLAN
In November 1997, the Company's Board of Directors adopted an annual
executive bonus plan (the "Executive Bonus Plan") under which participating
executive officers of the Company are eligible to receive bonus payments. The
Executive Bonus Plan is administered by the Company's Compensation Committee.
The Board of Directors currently has the discretion to designate eligible
participants under the Executive Bonus Plan and initially designated Mr. Myers
and Mr. Colbaugh as eligible participants.
Bonus awards are determined based on a consideration of the achievement of
certain performance targets by the Company as well as the individual performance
of each participant. At the beginning of each fiscal year, performance targets
are established based on measures of operating income, earnings per share and/or
other factors considered relevant by the Compensation Committee (calculated
without regard to awards to be paid under the Executive Bonus Plan). Under the
current terms of the Executive Bonus Plan, the maximum annual bonus payable to
Mr. Myers and Mr. Colbaugh are $900,000 and $450,000, respectively.
EMPLOYMENT AGREEMENTS
In November 1997, the Company entered into an employment agreement with
each of (i) Steven S. Myers, President, the Chief Executive Officer and Chairman
of the Board of the Company, and (ii) Kenneth W. Colbaugh, the Executive Vice
President, Chief Operating Officer and a director of the Company. Each
employment agreement provides for a two year term, participation in the
Company's Executive Bonus Plan, and a severance benefit payment equal to twice
the annual salary upon a termination of the employee by the Company without
"cause." The annual salary of Mr. Myers and Mr. Colbaugh under their respective
employment agreements is $900,000 and $450,000, respectively.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation provide that the liability of the
Company's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its shareholders except for liability: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interests of
the Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction for which a director derived an
improper personal benefit; (iv) for acts or omission that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts
45
<PAGE> 47
to an abdication of the director's duty to the Company or its shareholders; (vi)
with respect to certain transactions, or the approval of transactions in which a
director has a material financial interest; and (vii) expressly imposed by
statute, for approval of certain improper distributions to shareholders or
certain loans or guarantees.
The Articles also provide that the Company is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Company's Bylaws or through agreements with such
agents or both, for breach of duty to the Company and its shareholders, in
excess of the indemnification to agents or both, for breach of duty to the
Company and its shareholders, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code.
The Bylaws of the Company provide for indemnification of the Company's
officers, directors, employees, and other agents to the extent and under the
circumstances permitted by California law. The Bylaws further provide that no
indemnification shall be made in the case of a derivative suit in respect to any
claim as to which such person has been adjudged to be liable to the corporation,
except with court approval, nor shall indemnification be made for amounts paid
in settling or otherwise disposing of a threatened or pending action, with or
without court approval, or for expenses incurred in defending a threatened or
pending action which is settled or otherwise disposed of without court approval.
Indemnification under the Bylaws is mandatory in the case of an agent of the
Company (present or past) who is successful on the merits in defense of a suit
against him or her in such capacity. In all other cases where indemnification is
permitted by the Bylaws, a determination to indemnify such person must be made
by a majority of a quorum of disinterested directors, a majority of
disinterested shareholders, or the court in which the suit is pending.
The Company has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in the
Articles of Incorporation and Bylaws. Among other things, these agreements
provide that the Company will indemnify, subject to certain requirements, each
of the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Company, on account of services by such person as a director or officer
of the Company, or as a director or officer of any other company or enterprise
to which the person provides services at the request of the Company.
CERTAIN TRANSACTIONS
In June 1998 the Company sold its Turbo Commander aircraft to Summit
Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers, for
$880,000 represented by a note secured by a first priority security interest on
the aircraft. The note bears interest at the prime rate and is due and payable
in full no later than June 25, 1999. The terms of such sale were considered by
the Company's Board of Directors to be as favorable as would have been obtained
from an unaffiliated third party.
In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers providing for indemnification rights
in certain circumstances. See "Management--
Indemnification of Officers and Directors."
In November 1997, the Company entered into Executive Employment Agreements
with (i) Mr. Steven S. Myers, the President, Chief Executive Officer and
Chairman of the Board of the Company, and (ii) Mr. Kenneth W. Colbaugh, the
Executive Vice President, Chief Operating Officer and a director of the Company.
The Executive Employment Agreements were approved by the Company's Board of
Directors. See "Management--Employment Agreements."
The terms of the Company's bank facility provide for the maintenance of
certain financial covenants. The Company obtained a waiver from the bank from
compliance with certain of the covenants, the principal covenant being the
Company's tangible net worth requirement at December 31, 1997. The waiver was
conditioned upon the Company completing an initial public offering. If the
Company did not complete an initial public offering, the Company's principal
shareholder had agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.
46
<PAGE> 48
Paula K. Myers, the wife of Steven S. Myers, has served in various
executive capacities to the Company since its founding, recently serving as a
director, Vice President and Secretary of the Company. In October 1997, Mrs.
Myers resigned from all her positions with the Company, including those as a
director and Secretary. Mrs. Myers was paid compensation from the Company
totalling $550,000, $150,000 and $81,000, respectively, during the Company's
fiscal years ended December 31, 1995, 1996 and 1997.
In January 1997, the Company repurchased 1,995,125 shares of its Common
Stock representing 13.4% of its then outstanding Common Stock from the following
officers of the Company: Steven S. Myers, Kenneth W. Colbaugh, Thomas F.
Heinsheimer, Charles A. Cullian, and John W. Montgomery, for an aggregate
purchase price of $5.9 million, or $2.94 per share. The purchase price was
determined based on the price paid by outside investors in a recent purchase of
Common Stock from certain shareholders of the Company.
In January 1997, the Company sold its Hawker 800 aircraft (the "Aircraft")
to Summit, a company wholly owned by Steven S. Myers, for a sales price of $5.6
million. Concurrent with the sale, Summit assumed $5.6 million of the Company's
long-term notes payable bearing interest rate of 7.30% and 10.07% per annum, and
Summit paid the Company $5,000 in cash. The Aircraft was purchased by the
Company in April 1996 for $5.8 million. The sales price of the Aircraft was
based on a determination of its fair market value by the Company's Board of
Directors. The Company charters the Aircraft from time to time as required in
connection with Company business through an independent air service chartering
company. During the period from the Aircraft's purchase by Summit through
December 31, 1997, the Company incurred $444,000 in charter fees for the
Aircraft. The terms of use and charter rates paid by the Company concerning the
Aircraft are established by the air service chartering company and are
considered by the Company to be competitive with charter rates and on terms as
favorable as those from unaffiliated third parties for similar aircraft.
In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.3% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were paid in January 1998.
In December 1996, the Company borrowed $667,000 from Steven and Paula Myers
under the terms of a promissory note (the "Company Note"). The Company Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were due and payable on January 31, 1998. In January 1997, in connection with
the sale of the Aircraft to Summit, all obligations under the Company Note were
assumed by Summit.
In September 1996, J. Christopher Lewis, a director of the Company and a
member of the Compensation Committee, and certain affiliates, purchased an
aggregate of 1,702,444 shares of the Company's Common Stock from other
shareholders of the Company for an aggregate purchase price of $5.0 million, or
$2.94 per share. Mr. Lewis was not affiliated with the Company at the time of
the purchase and the price was determined in an arms length negotiation.
Following the consummation of the stock acquisition, Mr. Lewis became a director
of the Company. Mr. Lewis is the sole trustee of a trust which holds shares in
the Company.
In May 1995, Steven and Paula Myers guaranteed the Company's obligations
under a promissory note in the original principal amount of $560,000, which was
incurred to finance the acquisition of the Company's Rockwell Commander
Aircraft. The note provided for interest at an annual rate of 10.74% and was
secured by the aircraft. The note was paid in full in February 1998.
During 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliate of the Company. This write-off represented the Company's termination
of its affiliation with CKC and the amount written off represented all amounts
previously due from CKC. This amount consists of rent, labor charges and
unsecured advances to CKC. Steven S. Myers, the Company's President, Chief
Executive Officer and Chairman of the Board was a controlling shareholder,
director and officer, and Paula K. Myers and Kenneth W. Colbaugh were
47
<PAGE> 49
each directors and shareholders of both CKC and the Company during the
transactions and periods described above.
In January 1993, Kenneth W. Colbaugh purchased Common Stock from the
Company as part of the Company's employee equity ownership program. In
connection with the purchase of shares by Mr. Colbaugh, he became indebted to
the Company under the terms of a Note Secured by Stock Pledge Agreement in the
original principal amount of $316,000 (the "Colbaugh Note"). The Colbaugh Note
provided for interest at a rate of 7.30% per annum, periodic payments out of
Company income distributions to Mr. Colbaugh, and that all amounts due
thereunder were due and payable in January 2003. In January 1997, Mr. Colbaugh
paid in full all amounts owing under the Colbaugh Note.
The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the offering, other than Underwriting Discounts and Commissions.
48
<PAGE> 50
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 21, 1998 and as
adjusted to reflect the sale of Common Stock Offered hereby, by (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, (iv) each Selling Shareholder and (v) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING
NAME OF BENEFICIAL OWNER -------------------- SHARES BEING -------------------
OR IDENTITY OF GROUP(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ---------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Steven S. Myers and Paula K. Myers,
Trustees of the Steven Myers and Paula
Mathis Revocable Trust, dated June 24,
1992(2)...................................... 8,044,162 48.7% 1,608,832 6,435,330 33.8%
Kenneth W. Colbaugh and Robin E.
Colbaugh, Trustees of the K. and
R. Colbaugh Revocable Trust, dated
September 1, 1994(2)......................... 1,005,486 6.1 201,097 804,389 4.2
Ronald and Linda Hunn Trust dated
February 26, 1990(2)......................... 118,852 * 23,770 95,082 *
J. Christopher Lewis(2)(3)................... 1,702,443 10.2 340,489 1,361,954 7.2
RLH SM&A(3).................................. 1,702,443 10.2 340,489 1,361,954 7.2
John W. Montgomery and Dian Y.
Montgomery, Trustee of the J. and
D. Montgomery Revocable Trust, dated
June 24, 1997(2)............................. 123,607 * 24,721 98,886 *
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust dated July 17,
1968(2)...................................... 211,887 * 42,377 169,510 *
Charles A. Cullian(2)........................ 123,607 * 24,721 98,886 *
Ajaykumar K. Patel and Elizabeth Ann
Stillman(2).................................. 56,283 * 5,628 45,027 *
Thomas J. Amrhein(2)......................... 56,283 * 6,283 50,000 *
Wallace T. Bucher(2)......................... 56,283 * 11,256 45,027 *
Charles E. Payne(2).......................... 56,283 * 11,256 45,027 *
Richard E. Collart(2)........................ 56,283 * 11,256 45,027 *
Jodine L. Bergen............................. 2,433 * 551 1,946 *
4460 14th Ave, S.E.
Bellevue, WA 93006
Debra D. Berry............................... 2,433 * 551 1,946 *
16582 Fountain Lane
Huntington Beach, CA 92647
Glenn V. Baeshaar............................ 43,794 * 9,912 35,035 *
18111 -- 114th Avenue, S.E.
Renton, WA 93055
Phillip Bruce................................ 6,083 * 1,377 4,866 *
15277 Presilla Drive
Jamul, CA 91935
Peter John Dokellis.......................... 1,825 * 413 1,460 *
2625 Brogans Bluff
Colorado Springs, CO 80919
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING
NAME OF BENEFICIAL OWNER -------------------- SHARES BEING -------------------
OR IDENTITY OF GROUP(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ---------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
John W. Harris............................... 7,299 * 1,652 5,839 *
789 Grayling Bay
Costa Mesa, CA 92626
Stanley Hee.................................. 195,005 1.2 44,210 156,004 *
Trustee, Hee Family Trust
25774 Piuma Road
Calabasas, CA 91302
Carl F. Kaun................................. 7,299 * 1,652 5,839 *
10179 Case Place
Cupertino, CA 95014
John W. Harms................................ 7,299 * 1,652 5,839 *
1089 Stone Brook Lane
Costa Mesa, CA 92627
Dr. Robert W. Krueger........................ 11,788 * 2,668 9,430 *
1016 Moraga Drive
Los Angeles, CA 90049
Dr. Amos Lu.................................. 12,165 * 2,753 9,732 *
783 Stephanie Court
Great Falls, VA 22066-2839
Dr. Amos Lu.................................. 12,165 * 2,753 9,732 *
Trustee, Amos Lu Small Fund Living Trust
783 Stephanie Court
Great Falls, VA 22066-2839
Alred E. Lyle................................ 19,464 * 4,405 15,571 *
11511 Gilbert Street
Garden Grove, CA 92641
Dr. Robert C. Miller......................... 25,547 * 5,782 20,438 *
10449 Calumet Grove Drive
Fairfax, VA 22032-3807
Irene S. Murphy.............................. 243 * 55 194 *
15606 Flatbush
Norwalk, CA 90650
Patricia D. Nelson........................... 2,433 * 551 1,946 *
3648 Pennsylvania Place
Claremont, CA 91711
Roger H. Skinner............................. 327,239 2.0 74,191 261,791 1.4
9251 Rubio Avenue
North Hill, CA 91343
Janice C. Stringfellow....................... 243 * 55 194 *
10317 Yellow Pine Drive
Vienna, VA 22180
Thelma G. Welter............................. 24,330 * 5,507 19,464 *
Trustee, Thelma G. Welter Living Trust
923 Promentary Drive West
Newport Beach, CA 92660
Guy A. Ackerson(4)........................... 102,966 * 15,000 87,966 *
Robin M. Pettit(4)........................... 5,768 * 425 5,343 *
Joseph G. Smith(4)........................... 7,131 * 1,500 5,631 *
Sean M. Kelly(4)............................. 3,876 * 800 3,076 *
Paul E. Scesney(4)........................... 14,668 * 3,320 10,668 *
David H. Kellogg(4).......................... 29,069 * 6,579 19,069 *
All directors and executive officers
as a group (8 persons)....................... 11,139,113 67.4 2,222,848 8,916,265 46.8
</TABLE>
50
<PAGE> 52
- ------------------------------
* Less than 1%
(1) Mr. Myers is the President, Chief Executive Officer, and Chairman of the
Board of the Company; Mr. Colbaugh is the Executive Vice President, Chief
Operating Officer and a director of the Company; Mr. Hunn is the Vice
President, Chief Financial Officer and Secretary of the Company; Mr. Lewis
is a director of the Company; Messrs. Montgomery, Heinsheimer, Patel and
Cullian are Vice Presidents of the Company; and Mr. Amrhein is the President
and General Manager of SAC. Mr. Hee is the former Senior Vice President,
Secretary and member of the Board of Directors of SAC; Mr. Skinner is the
former President, Chief Executive Officer and Chairman of the Board of
Directors of SAC; Dr. Lu is a Vice President of SAC.
(2) Address is c/o SM&A Corporation, 4695 MacArthur Court, Eighth Floor, Newport
Beach, California 92660.
(3) Includes shares owned by Mr. Lewis, a director of the Company and shares
over which Mr. Lewis has voting and investment power as a general partner of
RLH SM&A, a general partnership.
(4) Address is c/o Decision-Science Applications, Inc., 1110 North Glebe Road,
Suite 400, Arlington, Virginia.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. The following description of the Company's capital stock is qualified in
all respects by reference to the Company's Amended and Restated Articles of
Incorporation ("Articles of Incorporation"), which is an exhibit to the
Registration Statement incorporating this Prospectus.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote and may not cumulate their votes.
The Common Stock is not entitled to preemptive rights and is not subject to
redemption or conversion. Upon liquidation, dissolution or winding-up of the
Company, the assets (if any) legally available for distribution to shareholders
are distributable ratably among the holders of the Common Stock after payment of
all debts and liabilities of the Company and the liquidation preference of any
outstanding class or series of Preferred Stock. All outstanding shares of Common
Stock are, and the shares of Common Stock to be issued pursuant to this offering
will be, when issued and delivered, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to any series of Preferred Stock that the Company may issue in the
future.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors, without action by the holders of the Common Stock, may
fix or alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of Preferred Stock. The Board of Directors,
without shareholder approval, can issue shares of Preferred Stock with rights
that could adversely affect the rights of the holders of Common Stock. No shares
of Preferred Stock presently are outstanding, and the Company has no present
plans to issue any such shares. The issuance of shares of Preferred Stock could
adversely affect the voting power of holder of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company
or other corporate action.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation, Glendale, California.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 19,034,582 shares of
Common Stock outstanding. Of these shares, 8,150,000 shares (including the
5,000,000 shares sold pursuant to this offering) will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by an "affiliate" of the Company within the meaning of Rule 144 adopted
under the Securities Act. Any such affiliate would be subject to the resale
limitations of Rule 144.
The remaining shares of outstanding Common Stock are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including an
exemption contained in Rule 144. In general, under Rule 144 as currently in
effect, any person (or persons whose shares are aggregated for purposes of Rule
144) who has beneficially owned restricted securities, as that term is defined
in Rule 144, for at least one year (including, in the case of a nonaffiliate
holder, any period of ownership of preceding nonaffiliate holders) is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock of the
Company, or (ii) the average weekly trading volume in Common Stock during the
four calendar weeks preceding such sale, provided that certain public
information about the Company, as required by Rule 144, is then available and
the seller complies with the manner of sale and notification requirements of the
rule. A person who is not an affiliate and has not been an affiliate within
three months prior to the sale and has, together with any previous owners who
were not affiliates, beneficially owned restricted securities for at least two
years is entitled to sell such shares under Rule 144(k) without regard to any of
the volume limitations described above. None of the Restricted Shares are
presently eligible for sale upon compliance with Rule 144(k).
In connection with the acquisition of SAC, the Company agreed to certain
price protection provisions with respect to the Common Stock issued in that
transaction, which may result in an increase or decrease in the number of
outstanding shares of Common Stock. The price protection provisions are
applicable each time the former SAC shareholders are permitted to sell their
shares of Common Stock (a "Liquidation Event") during the 12 month period
following the Acquisition. Upon the occurrence of a Liquidation Event, if the
market value (as determined in accordance with the SAC acquisition agreement) of
the Common Stock is more than $4 below the price at which such stock was issued,
the Company is required to issue additional shares of Common Stock with a value
sufficient to cover the amount below the $4 floor. Conversely, if such market
value of the Common Stock is more than $4 above the price at which when such
stock was issued, the former SAC shareholders must surrender to the Company
shares of their Common Stock with a value sufficient to cover the amount in
excess of the $4 ceiling.
REGISTRATION RIGHTS AGREEMENTS
In connection with the Acquisitions, each of the former shareholders of SAC
and DSA received certain registration rights pursuant to the terms of a
registration rights agreement (the "Registration Rights Agreement"). The
Registration Rights Agreement provides for two types of registration rights
designed to allow the SAC and DSA shareholders to register and thus sell their
shares of SM&A Common Stock acquired in their respective Acquisitions. Should
SM&A determine to register shares of SM&A Common Stock solely for cash (other
than certain excluded registrations) within two years following the Effective
Date, it will afford the SAC and DSA shareholders the right to include in the
registration their respective shares of SM&A Common Stock. SAC and DSA
shareholders electing to have their shares of SM&A Common Stock included in such
registration have agreed to pay all underwriter and broker fees and commissions
incident to such sale. SM&A may exclude shares of SM&A Common Stock from such
registration in certain circumstances, such as where there is a determination of
the underwriter of such offering that the amount of shares sought to be included
in the offering is not compatible with the success of the offering. Should the
underwriter limit the number of shares sought to be included in the offering,
the number of shares sought to be registered by each SAC and DSA shareholder
electing to participate in the offering will be reduced pro-rata.
52
<PAGE> 54
In addition, beginning February 1, 1999, each group of SAC and DSA
shareholders, respectively (by vote of the holders of 35% of the outstanding
shares of SM&A Common Stock received in the Merger then outstanding, or without
regard to percentage, if the aggregate offering would exceed $2 million), may
demand on two occasions that SM&A register their respective shares for sale on
Form S-3 (provided that at that time SM&A is able to file a registration
statement on that form); SAC and DSA shareholders who elect to participate in
such registration will be able to sell their respective shares of SM&A Common
Stock on the open market for a period of one year following the effective date
of such registration. Such demand registrations are subject to a number of
limitations as set forth in the Registration Rights Agreement.
In certain circumstances, the SAC and DSA shareholders may elect to include
the SM&A Common Stock deposited in escrow in any such registration. Proceeds of
the sale of such shares will be deposited in escrow and will be subject to
forfeiture to the same extent as if such shares of SM&A Common Stock had not
been sold.
Beginning two years after the Effective Date, holders of shares of SM&A
Common Stock issued pursuant to each of the Acquisitions may be able to sell
such shares in the open market under Rule 144. At that time, the respective
rights of the SAC and DSA shareholders to participate in or demand registration
of their shares of SM&A Common Stock will cease.
STOCK OPTIONS
As of August 20, 1998, the Company had outstanding options to purchase,
subject to certain vesting requirements, 804,500 shares of the Company's Common
Stock granted pursuant to the 1997 Stock Option Plan. The Company has registered
on a Registration Statement on Form S-8 all 1,500,000 shares of Common Stock
underlying the options that are outstanding or issuable pursuant to the 1997
Stock Option Plan. In connection with the acquisition of SAC, the Company
converted certain existing SAC nonqualified common stock options into the
Acquisition Options. A total of 175,925 Acquisition Options were granted in
connection with the acquisition of SAC. As a condition to the acquisition of
SAC, holders of Acquisition Options agreed not to exercise the Acquisition
Options until May 29, 1999, provided, however, if the employment of any SAC
employee optionholder should terminate prior to May 29, 1999, such terminated
employee shall have until June 29, 1999 to exercise any vested options in favor
of such employee as of the date of such termination.
No predictions can be made of the effect, if any, that future sales of
shares of Common Stock, and grants of options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market prices of the Common Stock.
See "Principal and Selling Shareholders," "Description of Capital Stock" and
"Underwriting."
53
<PAGE> 55
UNDERWRITING
Subject to certain terms and conditions of an Underwriting Agreement dated
, 1998 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Lehman Brothers Inc. and Legg Mason
Wood Walker Incorporated (the "Representatives"), have agreed severally to
purchase from the Company and the Selling Shareholders, and the Company and the
Selling Shareholders have agreed severally to sell to each of the Underwriters,
an aggregate of 5,000,000 shares of Common Stock at the public offering price
per share less the underwriting discounts and commissions set forth on the cover
of this Prospectus. The number of shares of Common Stock that each Underwriter
has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc.........................................
Legg Mason Wood Walker, Incorporated........................
----------
Total............................................. 5,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are purchased.
The Underwriters propose to initially offer the shares of Common Stock in
part directly to the public at the price to the public set forth on the cover
page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow to certain other
dealers, a concession not in excess of $ per share. After this offering, the
offering price and other selling terms may be changed by the Underwriters.
Certain Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 calendar days after the date of the Underwriting
Agreement, to purchase from time to time, in whole or in part, up to an
aggregate of 750,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such options solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of the Selling Shareholders and the executive officers
and directors of the Company has agreed, subject to certain exceptions, not to:
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership
54
<PAGE> 56
of any Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the date
of this Prospectus without the prior written consent of DLJ. In addition, during
such period, the Company has also agreed not to file any registration statement
with respect to, and each of its executive officers, directors and certain
stockholders of the Company (including the Selling Shareholders) has agreed,
subject to certain exceptions, not to make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
without DLJ's prior written consent.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
In the event the Common Stock does not constitute an excepted security
under the provisions of Regulation M promulgated by the Commission, the
Underwriters and dealers may engage in passive market making transactions in
accordance with Rule 103. In general, a passive market maker may not bid for or
purchase shares of Common Stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Stock during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic later-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with this offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end any of these activities at any time.
The Company's common stock is listed for quotation on the Nasdaq National
Market under the symbol "WINS."
55
<PAGE> 57
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rutan & Tucker, Costa Mesa, California. Certain matters
will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los
Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997, have
been included herein and in the Registration Statement, in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of DSA as of January 31, 1998 and
1997, and for each of the three years in the period ended January 31, 1998
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of SAC as of June 27, 1997 and June
28, 1996, and for each of the three years in the period ended June 27, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
While all material elements of the contracts and documents referenced in this
Prospectus are contained herein, statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the full text of such
contract or other document which is filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and the
exhibits and schedules thereto. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by the Company's independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.
56
<PAGE> 58
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF SM&A
Independent Auditors' Report................................ F-2
Balance Sheets--December 31, 1996 and 1997.................. F-3
Statements of Earnings--Years ended December 31, 1995, 1996
and 1997.................................................. F-4
Statements of Shareholders' Equity--Years ended December 31,
1995, 1996 and 1997....................................... F-5
Statements of Cash Flows--Years ended December 31, 1995,
1996 and 1997............................................. F-6
Notes to Financial Statements............................... F-7
Consolidated Balance Sheet--June 30, 1998 (unaudited)....... F-12
Consolidated Statements of Operations--six months ended June
30, 1997 and 1998 (unaudited)............................. F-13
Consolidated Statements of Cash Flows--six months ended June
30, 1997 and 1998 (unaudited)............................. F-14
Notes to Consolidated Financial Statements (unaudited)...... F-16
FINANCIAL STATEMENTS OF SAC
Report of Independent Auditors.............................. F-19
Consolidated Balance Sheets--June 27, 1997 and June 28,
1996...................................................... F-20
Consolidated Statements of Operations--Years ended June 27,
1997, June 28, 1996 and June 30, 1995..................... F-21
Consolidated Statements of Shareholders' Equity--Years ended
June 27, 1997, June 28, 1996, and June 30, 1995........... F-22
Consolidated Statements of Cash Flows--Years ended June 27,
1997, June 28, 1996 and June 30, 1995..................... F-23
Notes to Consolidated Financial Statements.................. F-24
Unaudited Consolidated Balance Sheet--April 3, 1998......... F-32
Unaudited Consolidated Statements of Operations--nine months
ended April 3, 1998 and March 28, 1997.................... F-33
Unaudited Consolidated Statements of Cash Flows--nine months
ended April 3, 1998 and March 28, 1997.................... F-34
Notes to Unaudited Consolidated Financial Statements........ F-35
FINANCIAL STATEMENTS OF DSA
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets--January 31, 1998 and 1997...... F-37
Consolidated Statements of Earnings--Years ended January 31,
1998, 1997 and 1996....................................... F-38
Consolidated Statements of Stockholders' Equity--Years ended
January 31, 1998, 1997 and 1996........................... F-39
Consolidated Statements of Cash Flows--Years ended January
31, 1998, 1997 and 1996................................... F-40
Notes to Consolidated Financial Statements.................. F-41
Unaudited Consolidated Balance Sheet--July 31, 1998......... F-47
Unaudited Consolidated Statements of Operations--six months
ended July 31, 1998 and 1997.............................. F-48
Unaudited Consolidated Statements of Cash Flows--six months
ended July 31, 1998 and 1997.............................. F-49
Notes to Unaudited Consolidated Financial Statements........ F-50
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Steven Myers & Associates, Inc.:
We have audited the accompanying balance sheets of Steven Myers &
Associates, Inc. as of December 31, 1996 and 1997 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Steven Myers & Associates,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
January 9, 1998, except for the
common stock conversion
discussed in Note 5
as to which the date is
January 21, 1998
F-2
<PAGE> 60
STEVEN MYERS & ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS (Note 4)
Current assets:
Cash...................................................... $ 1,927 $ 150
Accounts receivable, net of allowance of $27 and $0 at
December 31, 1996 and 1997, respectively............... 3,637 4,245
Other accounts receivable................................. 186 8
Prepaid expenses and other current assets................. 45 414
------- -------
Total current assets.............................. 5,795 4,817
Property and equipment, net (notes 3 and 4)................. 5,869 378
Other assets................................................ 156 136
------- -------
Total assets...................................... $11,820 $ 5,331
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 367 $ 333
Current portion of long-term debt (note 4)................ 1,259 786
Accrued salaries, wages and payroll taxes................. 3,839 2,574
Accrued bonus............................................. 474 736
Other liabilities......................................... 135 287
------- -------
Total current liabilities......................... 6,074 4,716
Long-term debt, excluding current portion (note 4).......... 4,991 6,943
------- -------
Total liabilities................................. 11,065 11,659
Shareholders' equity (deficit) (note 5):
Common stock, no par value. Authorized 50,000,000 shares
of common stock; issued and outstanding 14,895,000 and
12,900,000, at December 31, 1996 and 1997,
respectively........................................... 5 5
Additional paid-in capital................................ 316 316
Stock subscription note receivable (note 2)............... (51) --
Due from shareholder (note 2)............................. (632) (679)
Retained earnings (accumulated deficit)................... 1,117 (5,970)
------- -------
Total shareholders' equity (deficit).............. 755 (6,328)
Commitments (notes 4 and 7)
------- -------
Total liabilities and shareholders' equity........ $11,820 $ 5,331
======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 61
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $20,777 $25,699 $36,962
Cost of revenues............................................ 12,313 14,512 20,529
------- ------- -------
Gross profit........................................... 8,464 11,187 16,433
Selling, general and administrative expenses (note 9)....... 7,793 10,749 6,927
------- ------- -------
Operating income....................................... 671 438 9,506
Other expense (income):
Interest expense.......................................... 62 420 505
Other (income) expense, net............................... (69) (556) 37
------- ------- -------
Earnings before income taxes........................... 678 574 8,964
Income tax expense (note 6)................................. 10 9 147
------- ------- -------
Net earnings........................................... $ 668 $ 565 $ 8,817
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
PRO FORMA SUPPLEMENTAL DATA (UNAUDITED):
Historical earnings before income taxes..................... $ 574 $ 8,964
Pro forma adjustment to selling, general and administrative
expenses.................................................. 2,475 (1,007)
---------- ----------
Pro forma earnings before income taxes...................... 3,049 7,957
Pro forma income tax expense................................ 1,219 3,183
---------- ----------
Pro forma net earnings................................. $ 1,830 $ 4,774
========== ==========
Pro forma earnings per share........................... $ 0.12 $ 0.37
========== ==========
Weighted average common shares used in the calculation
of pro forma supplemental net income per share........ 14,893,000 12,948,000
========== ==========
</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 of $2.7
million 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 to be effected upon the
consummation of the initial public offering.
Supplemental net income per share has been computed by dividing
supplemental net income by the weighted average number of shares of common stock
outstanding during the period. Supplemental net income per share information is
calculated under Statement of Financial Accounting Standard No. 128, "Earnings
per Share."
F-4
<PAGE> 62
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
(NOTE 5) STOCK RETAINED TOTAL
-------------------- ADDITIONAL SUBSCRIPTION DUE EARNINGS SHAREHOLDERS'
SHARES PAID-IN NOTE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL RECEIVABLE SHAREHOLDER DEFICIT) (DEFICIT)
----------- ------ ---------- ------------ ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994, as previously
reported............... 1,172,000 $5 $316 $(303) $ -- $ 96 $ 114
Exchange of shares....... 14,895,000 -- -- -- -- -- --
Net earnings............. -- -- -- -- -- 668 668
Collection of stock
subscription
receivable............. -- -- -- 89 -- -- 89
Tax-free distribution.... -- -- -- 9 -- (212) (203)
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1995................... 14,895,000 5 316 (205) -- 552 668
Net earnings............. -- -- -- -- -- 565 565
Note due from shareholder
(note 2)............... -- -- -- -- (632) -- (632)
Collection of stock
subscription
receivable............. -- -- -- 154 -- -- 154
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1996................... 14,895,000 5 316 (51) (632) 1,117 755
Net earnings............. -- -- -- -- -- 8,817 8,817
Collection of stock
subscription
receivable............. -- -- -- 51 -- -- 51
Note due from shareholder
(note 2)............... -- -- -- -- (47) -- (47)
Dividends declared (note
9)..................... -- -- -- -- -- (10,041) (10,041)
Repurchase and retirement
of common stock........ (1,995,000) -- -- -- -- (5,863) (5,863)
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1997................... 12,900,000 $5 $316 $ -- $(679) $ (5,970) $ (6,328)
========== == ==== ===== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 63
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 668 $ 565 $ 8,817
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for doubtful accounts...................... -- 27 (27)
Depreciation and amortization........................ 175 448 139
Gain on sale of fixed asset.......................... -- -- (137)
Changes in assets and liabilities:
Accounts receivable............................... (713) (1,377) (581)
Other accounts receivables........................ (2) (183) 178
Prepaid expenses and other current assets......... (18) (20) (369)
Other assets...................................... (3) (133) 20
Accounts payable.................................. (34) 300 (34)
Accrued salaries, wages and payroll taxes......... 408 2,487 (1,265)
Accrued bonus..................................... 14 132 262
Other liabilities................................. (292) 135 152
----- ------- --------
Net cash provided by operating activities......... 203 2,381 7,155
----- ------- --------
Cash flows from investing activities:
Net purchases of property and equipment................... (325) (5,890) (146)
Proceeds from sale of fixed assets........................ -- -- 6
Due to (from) shareholder................................. 200 (632) (47)
----- ------- --------
Net cash used in investing activities............. (125) (6,522) (187)
----- ------- --------
Cash flows from financing activities:
Increase in long-term debt................................ 63 5,645 7,108
Distribution to shareholders.............................. (212) -- (10,041)
Repurchase of common stock................................ -- -- (5,863)
Decrease in stock subscription note receivable............ 98 154 51
----- ------- --------
Net cash provided by (used in) financing
activities...................................... (51) 5,799 (8,745)
----- ------- --------
Net increase (decrease) in cash................... 27 1,658 (1,777)
Cash at beginning of period................................. 242 269 1,927
----- ------- --------
Cash at end of period....................................... $ 269 $ 1,927 $ 150
===== ======= ========
Supplemental disclosures:
Cash paid during the year for:
Interest............................................. $ 64 $ 421 $ 505
Income taxes......................................... $ 1 $ -- $ 100
===== ======= ========
</TABLE>
Supplemental schedule of noncash investing activity:
In 1997, the Company sold the Hawker Jet to an affiliated company for
$5,635. Terms of payment included $5 cash and transfer of the related long-term
notes payable of $5,630 (note 4).
See accompanying notes to financial statements.
F-6
<PAGE> 64
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Steven Myers & Associates, Inc. (the Company) was incorporated in
California on January 25, 1985. The Company's primary business is providing
proposal management and contract support services.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the double declining and straight-line method over the estimated useful lives of
the assets. Estimated useful lives range from five to ten years.
Revenue Recognition
The Company derives most of its revenue from professional service
activities. The majority of these activities are provided under "time and
expenses" billing arrangements, and revenues are recorded as work is performed.
Revenues are directly related to the total number of hours billed to clients and
the associated hourly billing rates. Revenues are also derived from success fees
offered to clients as a pricing option, and recorded as revenue only upon the
attainment of the specified incentive criteria. This success fee is billable by
the Company when a contract is won by the client.
Income Taxes
The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code and similar statutes in the state of
California. Accordingly, the Company's taxable income is treated as if it were
distributed to the shareholders, who are responsible for payment of taxes
thereon. Additionally, in accordance with state laws regarding S corporations,
the Company is subject to a 1.5% California franchise tax. Deferred taxes are
provided on items for which there are temporary differences in recording such
items for financial and income tax reporting purposes.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, other accounts
receivables, accounts payable and other accrued liabilities are measured at cost
which approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Supplemental Net Income per Share
Historical net income per common share is not presented because it is not
meaningful.
(2) STOCK SUBSCRIPTION NOTE RECEIVABLE AND DUE FROM SHAREHOLDER
In 1993, the Company entered into a stock subscription agreement with an
officer of the Company for common stock valued at $316,000. Included in the
accompanying balance sheet is a stock subscription
F-7
<PAGE> 65
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
receivable balance of $51,000 at December 31, 1996. The stock subscription
receivable balance was paid in full during 1997.
Included in shareholders' equity at December 31, 1996 and 1997 are amounts
due from an officer and principal shareholder of the Company totaling $632,000
and $679,000, respectively. The incremental increase of $47,000 represents
interest accrued at a rate of 7.3%. This balance is to be paid by February 1,
1998 by offsetting dividends to the shareholder against the receivable.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Aircraft and automobile.......................... $ 6,746 $ 958
Furniture and equipment.......................... 385 511
Leasehold improvements........................... -- 19
------- -------
7,131 1,488
Less accumulated depreciation.................... (1,262) (1,110)
------- -------
$ 5,869 $ 378
======= =======
</TABLE>
(4) DEBT
In 1995, the Company refinanced an aircraft loan for the corporate aircraft
(Turbo Commander). The new agreement provided for a long-term note in the
principal amount of $560,000, of which there was a remaining principal balance
of $536,000 and $517,000 at December 31, 1996 and 1997, respectively. The note
bears annual interest at a fixed rate of 10.74% and is payable monthly, expiring
in June 2010. The note is secured by the aircraft.
In April 1996, the Company purchased a Hawker 800 jet for $5,788,000 and
financed the purchase through a bank. The financing arrangement consisted of a
note in the amount of $4,962,000 bearing interest at 10.07%, payable annually,
with the full principle balance due and payable in April 2001. The note is
secured by the Hawker jet. In January 1997, the Company sold the Hawker jet to a
company which is owned by an officer and principal shareholder.
The Company also financed the acquisition of an automobile and certain
office equipment through capital leases. These leases bear interest at 7.25% and
15.71%, respectively, and are payable monthly. Future minimum lease payments
under these capital lease agreements as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1998................................................. $ 32
1999................................................. 31
2000................................................. 10
----
73
Less amount representing interest.................... (10)
----
Present value of minimum lease payments.............. 63
Less current portion................................. (26)
----
$ 37
====
</TABLE>
F-8
<PAGE> 66
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
On January 2, 1997, the Company entered into a credit agreement with a bank
under which it may borrow up to $8,000,000. The agreement, as amended on July
21, 1997, has two parts: a $4,000,000 revolving line of credit is available with
a sub-limit of $2,000,000 to finance a portion of the repurchase of the
Company's stock and a $4,000,000 term loan which is also available to finance
the repurchase of Company stock. Bank debt at December 31, 1997 consisted of
$3,659,000 and $3,490,000 outstanding under the revolving line of credit and the
term loan, respectively, which amounts were used by the Company for general
corporate purposes and to fund the purchase of Company stock from various
shareholders. The revolving line of credit bears interest at the Bank's prime
rate of 8.5% at December 31, 1997 and is due January 2, 1999. The term loan
expires in 2001, is payable in graduated quarterly installments ranging from
$170,000 to $230,000, and bears interest at LIBOR plus 2.50%. The term loan
interest rate was 8.66% at December 31, 1997. The loans are secured by
substantially all of the Company's assets.
A summary of debt is provided as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Bank debt......................................... $ -- $7,149
Aircraft loans.................................... 5,498 517
Shareholder note payable.......................... 667 --
Capital leases.................................... 85 63
------- ------
6,250 7,729
Less current portion of long-term debt............ (1,259) (786)
------- ------
$ 4,991 $6,943
======= ======
</TABLE>
Included in short-term debt at December 31, 1996 was a $667,000 note due to
an officer and principal shareholder of the Company. The note, which bore
interest at 7.30% per annum, pertained to an advancement for working capital
purposes and was assumed by Summit Aviation Inc. (SAI) as part of the Hawker
sales transaction.
The terms of the bank agreement provide for the maintenance of financial
covenants. The Company has obtained a waiver from the bank from compliance with
certain of the covenants, the principal covenant being the Company's tangible
net worth requirement of $(4,450,000) at December 31, 1997. The waiver is
conditioned upon the Company completing an Initial Public Offering. If the
Company does not complete an Initial Public Offering, the Company's principal
shareholder has agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.
On January 9, 1997, the Company sold its Hawker jet to SAI, a company owned
by one of the shareholders, for a purchase price of approximately $5,635,000.
Concurrent with the sale, the Company transferred $5,630,000 of long-term notes
payable to SAI bearing interest at rates of 7.30% and 10.07% per annum,
respectively, and SAI paid the Company $5,000 in cash. The sale was finalized
and recorded in the second quarter of 1997 and resulted in a gain of $137,000.
(5) COMMON STOCK
In November 1994, the Board of Directors approved the recapitalization of
the Company through the amendment of the Articles of Incorporation. The
amendment authorized all outstanding common shares to be exchanged for a new
series of common stock designated as Series A. In total, up to 1,000,000 shares
of Series A common stock were authorized. Additionally, the issuance of up to
2,000,000 shares of a new Series B common stock were authorized. The Series A
and Series B common stock are identical in all respects
F-9
<PAGE> 67
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
and have equal rights and privileges, except that Series B common stock has no
voting rights. The amendment had no effect on the ownership structure of the
Company.
On January 21, 1998, the Company amended its articles of incorporation to
authorize the issuance of up to 50,000,000 shares of common stock and up to
10,000,000 shares of preferred stock. On that same date, the Company converted
each issued and outstanding share of Series A and B common stock into 12.7078
shares of common stock, or an aggregate of 12,900,000 Shares outstanding as of
December 31, 1997. The financial statements have been revised to reflect this
conversion.
(6) INCOME TAXES
For all periods presented, the Company has provided for income taxes at the
appropriate California statutory state income tax rate imposed on S
Corporations.
The provision for income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
---- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
State...................................... $10 $ 9 $147
=== === ====
</TABLE>
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are established for temporary
differences at tax rates expected to be in effect when such assets or
liabilities are realized or settled. Net deferred tax assets are considered
immaterial and do not have a significant impact on the financial results of the
Company.
(7) COMMITMENTS
Leases
In June 1997, the Company entered into a ten year lease agreement for a new
office facility, at which time the lease agreement on the old facility was
terminated for a penalty of $28,000. Additionally, the Company has entered into
various lease agreements for office equipment. Future minimum lease payments
under noncancelable operating leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1998................................................. $ 435
1999................................................. 451
2000................................................. 468
2001................................................. 487
2002................................................. 492
Thereafter........................................... 2,478
------
$4,811
======
</TABLE>
Rent expense totaled $177,000, $184,000 and $392,000 for years ended
December 31, 1995, 1996 and 1997, respectively.
F-10
<PAGE> 68
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(8) CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
majority of the Company's receivables are from large companies in the aerospace
and defense industries. The Company controls credit risk through credit
approvals and monitoring procedures. Credit losses have historically been
minimal.
Revenue from major customers is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Customer:
A........................................ 23% 19% 10%
B........................................ 27 23 22
C........................................ -- 10 10
D........................................ -- -- --
E........................................ 10 18 13
F........................................ 10 -- --
G........................................ -- -- 11
H........................................ -- -- 15
</TABLE>
(9) COMPENSATION TO THREE SENIOR EXECUTIVE SHAREHOLDERS
Included in selling, general and administrative expense is total
compensation paid to three senior executive shareholders in the amount of
$4,642,000, $5,175,000 and $1,693,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
In fiscal 1997, the Company changed the manner of distributions to
shareholders. Dividends in the amount of $10,041,000 were declared and paid
during fiscal 1997.
(10) EMPLOYEE BENEFIT PLAN AND STOCK OPTION PLAN
The Steven Myers & Associates 401(k) Plan and Trust is a defined
contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan
covers all employees of the Company. Contributions are made to the Plan by
participants only.
The Company adopted the 1997 Stock Option Plan in December 1997. The 1997
Stock Option Plan, which is administered by the Compensation Committee of the
Board of Directors, provides for the granting of options to purchase an
aggregate of 1,500,000 shares of the Company's common stock to directors,
employees, and consultants of the Company. Upon consummation of the Offering,
the Company intends to grant to certain employees and directors of the Company
options to purchase of 790,000 shares of common stock. The exercise price per
share will be equal to the initial public offering price.
F-11
<PAGE> 69
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current Assets:
Cash & cash equivalents................................ $16,217
Accounts receivable, net allowance for doubtful
accounts.............................................. 9,636
Costs and estimated earnings in excess of billings on
contracts in progress, net of allowance............... 2,011
Inventory.............................................. 198
Advances to employees..................................... --
Other accounts receivable.............................. 72
Prepaid expenses and other current assets.............. 684
-------
Total current assets.............................. 28,818
Goodwill, net............................................... 13,859
Notes receivable, officers.................................. 1,124
Property and equipment, net................................. 1,346
Other assets................................................ 822
-------
Total assets...................................... $45,969
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.................................... $ 1,065
Current portion of long-term debt......................... 11
Accrued salaries, wages, and payroll taxes................ 4,332
Accrued bonuses........................................... 815
Income taxes payable...................................... 841
Other liabilities......................................... 31
-------
Total current liabilities......................... 7,095
Deferred rents.............................................. 52
Deferred tax liability...................................... 161
Other deferreds............................................. 492
Long-term debt, excluding current portion................... 534
-------
Total liabilities................................. 8,334
Shareholders' equity:
Common stock, no par value................................ 158
Additional paid in capital................................ 39,953
Retained earnings......................................... (2,476)
-------
Total shareholders' equity........................ 37,635
-------
Total liabilities and shareholders' equity........ $45,969
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 70
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Revenues................................................ $15,773 $24,121
Cost of Revenues............................................ 8,657 13,499
------- -------
Gross Profit.............................................. 7,116 10,622
Selling, general and administrative expenses................ 2,763 4,637
------- -------
Operating income.......................................... 4,353 5,985
Other (income) expense:
Interest expense.......................................... 248 66
Other income, net......................................... (198) (1,220)
------- -------
Earnings before income taxes.............................. 4,303 7,139
Income tax expense.......................................... 28 2,936
------- -------
Net earnings.............................................. $ 4,275 $ 4,203
=======
Earnings per common share:
Basic..................................................... $ 0.28
=======
Diluted................................................... $ 0.28
=======
Weighted average common shares used computing per share
amounts:
Basic..................................................... 14,825
=======
Diluted................................................... 15,042
=======
Pro forma supplemental data (unaudited):
Earnings before income taxes, as reported................. $ 4,303 $ 7,139
Pro forma adjustment to selling, general and
administrative expenses................................ 562 --
------- -------
Pro forma earnings before income tax expense.............. 3,741 7,139
Pro forma income tax expense.............................. 1,496 2,936
------- -------
Pro forma net earnings.................................... $ 2,245 $ 4,203
======= =======
Pro forma earnings per common share:
Basic..................................................... $ 0.17 $ 0.28
======= =======
Diluted................................................... $ 0.17 $ 0.28
======= =======
Weighted average common shares used in computing pro forma
pro forma per share amounts:
Basic..................................................... 12,948 14,825
======= =======
Diluted................................................... 12,948 15,042
======= =======
</TABLE>
The pro forma adjustments to the historical SM&A financial statements
include additional salaries for the three 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 effected upon the consummation
of the initial public offering.
Supplemental earnings per share has been computed by dividing supplemental
net income by the weighted average number of shares of common stock outstanding
during the period. Supplemental net income 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.
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 71
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net Earnings.............................................. $ 4,275 $ 4,203
Adjustments to reconcile net earnings to net cash provided
by
operating activities:
Provision for doubtful accounts...................... -- 2
Depreciation and amortization........................ 62 140
Gain on sale of fixed assets......................... (137) (821)
Changes in assets and liabilities:
Accounts receivable............................... (1,287) (553)
Prepaid expenses and other current assets......... (391) (439)
Other assets...................................... (10) 83
Accounts payable.................................. (266) (1,178)
Accrued salaries, wages, and payroll taxes........ (1,432) 280
Accrued bonuses................................... 190 79
Income taxes payable.............................. -- 789
Deferred tax liability............................ -- 161
Other deferreds................................... -- (40)
Other liabilities................................. (47) (463)
-------- -------
Net cash provided by operating activities....... 957 2,243
Cash flows from investing activities:
Cash acquired in the SAC acquisition...................... -- 223
Net purchases of property and equipment................... (102) (136)
Net proceeds from sale of property and equipment.......... 6 --
Repayment from stockholder................................ (768) 679
-------- -------
Net cash (used in) provided by investing
activities................................... (864) 766
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 51 22,474
Advances (repayments) of long-term debt................... 5,271 (8,706)
Distributions to shareholders............................. (1,230) (710)
Common stock repurchase................................... (5,863) --
-------- -------
Net cash (used in) provided by financing
activities................................... (1,771) 13,058
Net (decrease) increase in cash.............. (1,678) 16,067
-------- -------
Cash at beginning of period................................. 1,927 150
Cash at end of period....................................... $ 249 $16,217
======== =======
Supplemental disclosure:
Cash paid during the period for:
Interest..................................... $ 159 $ 149
======== =======
Income taxes................................. $ 28 $ 1,967
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 72
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>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Tangible assets acquired at fair value................. $10,537
Costs in excess of net assets acquired................. 12,575
Liabilities assumed at fair value...................... (5,755)
-------
Total consideration 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 affiliated company
for $5,635,000. Terms of payment included $5,000 cash and transfer of the
original long-term notes payable of $5,630,000.
F-15
<PAGE> 73
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
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 underwriting
discounts and commissions 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.
F-16
<PAGE> 74
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
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.
F-17
<PAGE> 75
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<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
=======
</TABLE>
On August 20, 1998, the Company, through an Agreement and Plan of Merger
and Reorganization ("Merger Agreement"), acquired Decision-Science Applications,
Inc. ("DSA") for approximately $28 million in a stock for stock and cash
exchange merger. The merger is 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.
F-18
<PAGE> 76
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 each of the three years in the period ended June 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated 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 each of the three years
in the period ended June 27, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Washington, D.C.
October 3, 1997
F-19
<PAGE> 77
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
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 expenses.......................................... 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-20
<PAGE> 78
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenue.................................... $25,582,679 $28,635,607 $27,251,278
Costs and expenses:
Costs of revenue:
Direct costs................................... 14,248,081 15,622,059 14,712,394
Overhead....................................... 8,357,574 8,666,240 8,491,171
----------- ----------- -----------
22,605,655 24,288,299 23,203,565
General and administrative........................ 1,830,459 2,005,204 4,210,347
Bid and proposal, and research and development.... 697,245 614,929 806,008
Equity in losses of Savant Corporation............ 638,834 61,166 --
Interest expense and other (income) loss, net..... 42,421 (20,323) 1,598
----------- ----------- -----------
25,814,614 26,949,275 28,221,518
----------- ----------- -----------
Income (loss) before income taxes................... (231,935) 1,686,332 (970,240)
Income tax expense (benefit)........................ 156,814 615,780 (418,257)
----------- ----------- -----------
Net income (loss)................................... $ (388,749) $ 1,070,552 $ (551,983)
=========== =========== ===========
Net income (loss) per common share:
Basic............................................. $ (1.11) $ 3.08 $ (1.44)
Diluted........................................... $ (1.11) $ 2.56 $ (1.44)
Weighted average common shares used in computing per
share amounts:
Basic............................................. 349,613 347,831 382,131
Diluted........................................... 349,613 417,481 382,131
</TABLE>
See accompanying notes.
F-21
<PAGE> 79
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
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-22
<PAGE> 80
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ (388,749) $ 1,070,552 $ (551,983)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 392,641 356,499 606,775
Deferred income taxes........................... 225,000 360,000 (604,948)
Deferred rent................................... (389,936) (759,401) 1,296,237
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) (408,211)
Costs and estimated earnings in excess of
billings on contracts in progress.......... (764,591) (222,715) (176,446)
Prepaid expenses and other assets............ (433,461) 80,443 (439,413)
Accounts payable............................. 38,869 668,663 20,833
Other liabilities............................ (257,378) 481,044 (470,830)
----------- ----------- -----------
Net cash (used in) provided by operating
activities...................................... (431,572) 1,265,566 (727,986)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment................ (419,002) (731,528) (364,763)
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) (364,763)
----------- ----------- -----------
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) (10,711)
Sale of minority interest in subsidiary........... -- (16,000) --
Purchase and retirement of common stock........... (286,292) (103,760) (1,497,080)
Proceeds from sale of common stock................ 47,900 174,101 225,312
----------- ----------- -----------
Net cash provided by financing activities......... 1,421,608 43,422 (1,282,479)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... (853,547) 299,427 (2,375,228)
Cash and cash equivalents at beginning of year.... 1,208,426 908,999 3,284,227
----------- ----------- -----------
Cash and cash equivalents at end of year.......... $ 354,879 $ 1,208,426 $ 908,999
=========== =========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE> 81
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. Staminet, Inc. is a computer systems integrator and
Internet provider, specializing in 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.
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
F-24
<PAGE> 82
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 purposes of calculating basic earnings per share as
such shares are deemed to be held by the Company. 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.
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-25
<PAGE> 83
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
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>
FISCAL YEAR ENDING OPERATING 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
payments of $597,670 under non-cancelable operating leases are included on the
balance sheet as deferred rent at June 27, 1997.
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
F-26
<PAGE> 84
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
5. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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
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-27
<PAGE> 85
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at June 27, 1997:
NQSOP OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
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, JUNE 30,
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
NUMERATOR:
Net (loss) income (no reconciling items for basic or
diluted earnings per share calculations)........... $(388,749) $1,070,552 $(551,983)
========= ========== =========
DENOMINATOR:
Denominator for weighted average basic earnings per
share.............................................. 349,613 347,831 382,131
EFFECT OF DILUTIVE SECURITIES:
Employee stock options................................ -- 69,650 --
--------- ---------- ---------
Denominator for diluted earnings per share adjusted
weighted average shares and assumed conversions....... 349,613 417,481 382,131
========= ========== =========
Basic earnings per share................................ $ (1.11) $ 3.08 $ (1.44)
--------- ---------- ---------
Diluted earnings per share.............................. $ (1.11) $ 2.56 $ (1.44)
--------- ---------- ---------
</TABLE>
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, 1996 and 1995 was approximately $315,000, $667,000 and
$444,000, respectively.
F-28
<PAGE> 86
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
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 in the
year ended June 27, 1997 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, JUNE 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible for tax
purposes...................................... $353,411 $424,354 $746,479
Project reserves................................. 120,013 207,053 187,670
Equity in losses of Savant Corporation........... 273,000 -- --
Depreciation..................................... 24,168 11,980 9,918
-------- -------- --------
Total deferred tax assets.......................... 770,592 643,387 944,067
Valuation allowance.............................. (273,000) -- --
-------- -------- --------
497,592 643,387 944,067
-------- -------- --------
Deferred tax liabilities:
Unbilled receivables............................. 157,613 -- --
Prepaid expenses................................. 20,477 44,387 40,205
Other............................................ 100,502 155,000 99,862
-------- -------- --------
Total deferred tax liabilities..................... 278,592 199,387 140,067
-------- -------- --------
Net deferred tax assets............................ $219,000 $444,000 $804,000
======== ======== ========
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal......................................... $(42,713) $212,128 $ 152,000
State........................................... (25,473) 43,652 34,691
-------- -------- ---------
Total current..................................... (68,186) 255,780 186,691
Deferred:
Federal......................................... 182,000 286,000 (527,948)
State........................................... 43,000 74,000 (77,000)
-------- -------- ---------
Total deferred.................................... 225,000 360,000 (604,948)
-------- -------- ---------
$156,814 $615,780 $(418,257)
======== ======== =========
</TABLE>
The Company made income tax payments of approximately $327,000, $254,000
and $428,000 during fiscal 1997, 1996 and 1995, respectively.
F-29
<PAGE> 87
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
7. INCOME TAXES (CONTINUED)
Income tax expense for each of the three years ending June 27, 1997, June
28, 1996 and June 30, 1995 varies from the amount which would have been computed
using statutory rates as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Tax computed at the federal statutory rate........ $(79,000) $573,000 $(330,000)
State income taxes, net of Federal income tax
benefit or charge............................... (12,000) 84,000 (49,000)
Valuation allowance on equity in losses in Savant
Corporation..................................... 273,000 -- --
Permanent differences and other................... (25,186) (41,220) (39,257)
-------- -------- ---------
Income tax (benefit)/expense...................... $156,814 $615,780 $(418,257)
======== ======== =========
</TABLE>
8. RESEARCH AND DEVELOPMENT
The Company incurred research and development costs of approximately
$103,000, $57,000 and $82,000 for fiscal 1997, 1996 and 1995, 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.
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.
F-30
<PAGE> 88
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997
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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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
</TABLE>
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-31
<PAGE> 89
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
APRIL 3, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current Assets:
Cash...................................................... $ 300
Accounts receivable....................................... 4,963
Costs and estimated earnings in excess of billings on
contracts in progress, net allowance................... 1,955
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-32
<PAGE> 90
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
APRIL 3, 1998 MARCH 28, 1997
------------- --------------
(DOLLARS IN THOUSANDS)
<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-33
<PAGE> 91
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
APRIL 3, 1998 MARCH 28, 1997
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss)................................................ $ (27) $ (170)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Provision for costs and estimated earnings in excess of
current billings...................................... 11 15
Depreciation and amortization.......................... 609 335
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 (used in) 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 used in 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 and retirement of common stock................... (167) (350)
------- -------
Net cash (used in) provided by financing
activities...................................... (115) 1,205
------- -------
Net 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-34
<PAGE> 92
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED APRIL 3, 1998 AND MARCH 28, 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 April 3, 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 April 3, 1998 and March 28, 1997 and the
statements of shareholders' equity for the nine months ended April 3, 1998 and
March 28, 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 and
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.
F-35
<PAGE> 93
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Decision-Science Applications, Inc.:
We have audited the accompanying consolidated balance sheets of
Decision-Science Applications, Inc. and subsidiary as of January 31, 1998 and
1997, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the three years in the period ended January 31, 1998.
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
Decision-Science Applications, Inc. and subsidiary as of January 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
April 13, 1998
F-36
<PAGE> 94
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 30,831 $ 698,321
Accounts receivable....................................... 12,687,706 10,174,220
Prepaid expenses and other assets......................... 276,821 236,490
Refundable income taxes................................... 697,000 --
----------- -----------
Total current assets.............................. 13,692,358 11,109,031
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment................................... 4,067,829 3,437,679
Leasehold improvements.................................... 506,656 429,603
----------- -----------
4,574,485 3,867,282
Less accumulated depreciation and amortization............ (3,366,054) (2,743,567)
----------- -----------
1,208,431 1,123,715
----------- -----------
OTHER ASSETS:
Capitalized software development costs -- net of
accumulated amortization -- $732,067 and $494,294,
respectively........................................... 1,486,527 1,107,241
DEFERRED TAXES ON INCOME.................................... 250,700 --
----------- -----------
$16,638,016 $13,339,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank...................................... $ 1,795,000 $ --
Accounts payable and accrued expenses..................... 939,709 565,807
Accrued salaries, benefits, and amounts withheld.......... 2,771,725 2,955,129
Unearned revenue.......................................... 144,799 237,362
Income taxes payable...................................... -- 524,000
Deferred taxes on income.................................. 4,088,000 2,559,500
----------- -----------
Total current liabilities......................... 9,739,233 6,841,798
----------- -----------
LONG-TERM NOTES PAYABLE..................................... 20,739 19,162
ACCRUED RENT................................................ 374,879 523,006
DEFERRED TAXES ON INCOME.................................... -- 322,000
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share; authorized,
1,000,000 shares; issued, 115,900 shares............... 1,159 1,159
Retained earnings......................................... 6,568,185 6,160,061
----------- -----------
6,569,344 6,161,220
Less shares of Common Stock in treasury, at cost -- 8,076
shares -- 1998; 29,467 shares -- 1997.................. (66,179) (527,199)
----------- -----------
6,503,165 5,634,021
----------- -----------
$16,638,016 $13,339,987
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE> 95
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CONTRACT REVENUES................................... $36,888,310 $30,670,236 $24,203,744
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of contract services......................... 31,263,866 25,241,811 19,938,474
General and administrative........................ 2,732,497 2,320,676 1,663,409
Other expenses.................................... 1,988,284 1,045,209 671,231
----------- ----------- -----------
35,984,647 28,607,696 22,273,114
----------- ----------- -----------
903,663 2,062,540 1,930,630
INTEREST AND OTHER INCOME........................... 112,630 163,962 86,423
INTEREST EXPENSE.................................... (11,026) (29,986) (28,515)
----------- ----------- -----------
EARNINGS BEFORE TAXES ON INCOME..................... 1,005,267 2,196,516 1,988,538
TAXES ON INCOME..................................... 391,000 900,500 724,200
----------- ----------- -----------
NET EARNINGS........................................ $ 614,267 $ 1,296,016 $ 1,264,338
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE> 96
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- RETAINED -------------------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
------- ------ ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1995.......... 115,900 $1,159 $3,656,082 39,509 $(659,843) $2,997,398
Net earnings..................... -- -- 1,264,338 -- -- 1,264,338
Stock option plan activity....... -- -- (86,476) (7,232) 175,299 88,823
Repurchase of common stock....... -- -- -- 7,161 (197,580) (197,580)
Tax benefit from exercise of
stock options................. -- -- 44,400 -- -- 44,400
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1996.......... 115,900 1,159 4,878,344 39,438 (682,124) 4,197,379
Net earnings..................... -- -- 1,296,016 -- -- 1,296,016
Stock option plan activity....... -- -- (126,899) (15,257) 372,893 245,994
Repurchase of common stock....... -- -- -- 5,286 (217,968) (217,968)
Tax benefit from exercise of
stock options................. -- -- 112,600 -- -- 112,600
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1997.......... 115,900 1,159 6,160,061 29,467 (527,199) 5,634,021
Net earnings..................... -- -- 614,267 -- -- 614,267
Stock option plan activity....... -- -- (206,143) (26,363) 686,005 479,862
Repurchase of common stock....... -- -- -- 4,972 (224,985) (224,985)
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1998.......... 115,900 $1,159 $6,568,185 8,076 $ (66,179) $6,503,165
======= ====== ========== ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE> 97
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net earnings to net cash (used in)
provided by operating activities:
Net earnings.......................................... $ 614,267 $ 1,296,016 $ 1,264,338
Depreciation and amortization......................... 860,260 605,940 723,695
Write-off of investment in joint venture.............. 270,000 -- --
Interest added to principal of notes payable.......... 1,577 1,535 1,543
Deferred taxes on income.............................. 955,900 373,325 683,594
Accrued rent.......................................... (148,127) (316,284) (299,281)
Decrease (increase) in:
Accounts receivable................................ (2,513,486) 102,703 (1,608,119)
Prepaid expenses and other assets.................. (40,331) (143,981) 30,442
Refundable income taxes............................ (697,000) 149,000 384,000
Increase (decrease) in:
Accounts payable and accrued expenses.............. 373,802 175,530 (386,321)
Accrued salaries, benefits, and amounts withheld... (183,404) 1,103,574 156,145
Unearned revenue................................... (92,563) 157,955 (13,712)
Income taxes payable............................... (524,000) 524,000 --
----------- ----------- -----------
Net cash (used in) provided by operating
activities.................................. (1,123,105) 4,029,313 936,324
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (707,203) (485,125) (441,644)
Capitalized software development costs................ (617,059) (583,212) (437,909)
Investment in joint venture........................... (270,000) -- --
----------- ----------- -----------
Net cash used in investing activities......... (1,594,262) (1,068,337) (879,553)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit agreement............. 1,795,000 -- 2,300,000
Repayments under line-of-credit agreement............. -- (2,300,000) (2,250,000)
Repayments of long-term notes payable................. -- (1,805) --
Stock option plan activity............................ 479,862 245,994 88,823
Repurchase of common stock............................ (224,985) (217,968) (197,580)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 2,049,877 (2,273,779) (58,757)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (667,490) 687,197 (1,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 698,321 11,124 13,110
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 30,831 $ 698,321 $ 11,124
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest................ $ 9,449 $ 33,739 $ 28,515
=========== =========== ===========
Cash paid during the year for taxes................... $ 656,141 $ 1,688 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Reduction in current tax liability resulting from tax
benefit from exercise of stock options............. $ -- $ 112,600 $ 44,400
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE> 98
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Decision-Science Applications, Inc. (the
Company) is a privately owned technical services corporation. DSA's key areas of
expertise are in information systems, software development, electrical
engineering, telecommunications and physics.
Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, DSA Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Contract Revenues -- Substantially all the Company's services are performed
for the United States Government under various cost reimbursable and fixed-price
contracts. For financial reporting purposes, the Company records revenue from
fixed-price contracts on the percentage-of-completion method and from cost-
reimbursable contracts, including cost-plus-fixed-fee contracts, on the basis of
reimbursable costs plus a pro rata portion of the fee. Contract costs for
services supplied to the U.S. Government, including indirect expenses, are
subject to audit by the Government's representatives. All contract revenues are
recorded in amounts that are expected to be realized upon final settlement.
Government audits have been completed through fiscal year 1997.
Software Revenues -- The Company has a Master Development and Distribution
Agreement for the licensing of several software products to a manufacturer of
test instruments. The Company receives royalties from the instrument
manufacturer as software product units are sold and distributed. The Company
recognizes royalty revenue as payments are received from the instrument
manufacturer.
Unbilled Receivables -- Unbilled receivables include certain costs and a
portion of the fee or expected profit which is billable upon completion of the
contracts or the completion of certain tasks under terms of the contracts.
Depreciation and Amortization -- The cost of furniture and equipment is
depreciated from the date of installation using accelerated and straight-line
methods over the estimated useful lives of the various classes of property,
which range from five to eight years.
The cost of leasehold improvements is amortized on the straight-line method
based on the shorter of the estimated useful lives of the improvements or
remaining lease period.
Capitalized Software Development Costs -- The Company capitalizes certain
product related software development costs after technological feasibility has
been reached. These costs are amortized on the greater of the straight-line
method over the product's remaining estimated economic life or the ratio of the
product's current gross revenues to the total of the product's current and
anticipated future gross revenues. Amortization costs for the years ended
January 31, 1998, 1997, and 1996, were approximately $238,000, $104,000, and
$180,000, respectively.
Income Taxes -- Income taxes are accounted for using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
utilizes the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the
future tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-41
<PAGE> 99
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
Cash and Cash Equivalents -- For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Stock Option Plan -- The Company accounts for its stock-based compensation
plan under APB Opinion No. 25. In 1997, the Company adopted the disclosures
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Reclassifications -- Certain reclassifications have been made to prior-year
balances to conform to the current-year presentation.
2. INVESTMENT IN JOINT VENTURE
On January 1, 1996, the Company entered into an agreement which established
SMD Software LLC, a limited liability company (LLC), with SpaceLabs Medical,
Inc. The Company contributed internally developed software for a 45% interest.
The book value of the contributed software was $0.00. During fiscal year 1998,
the Company made an additional capital contribution of $270,000 to the joint
venture. This additional investment was subsequently written down to $0.00
because of the uncertainty of future earnings from the joint venture and the
realizability of this investment. Therefore, no investment has been recorded in
the financial statements of the Company as of and for the years ended January
31, 1997 and 1998. The investment is accounted for under the equity method.
Profits or losses are allocated based upon the respective ownership interest of
each partner.
The Company recorded approximately $700,000 and $1,000,000 of revenues from
sales to SMD Software LLC, during the years ended January 31, 1998 and 1997,
respectively.
3. ACCOUNTS RECEIVABLE
At January 31, accounts receivable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Billed.................................... $11,607,341 $ 9,486,590
Unbilled.................................. 1,080,365 687,630
----------- -----------
$12,687,706 $10,174,220
=========== ===========
</TABLE>
4. NOTE PAYABLE TO BANK
Effective June 30, 1997, the Company renewed a line of credit with a bank
to provide for borrowings up to $2,750,000 at 1/2 of 1% over the bank's prime
rate, secured by all accounts receivable of the Company. Borrowings at January
31, 1998, amounted to $1,795,000. The agreement requires the Company to maintain
certain working capital and other financial ratios. The agreement, unless
renewed, expires on June 30, 1999.
F-42
<PAGE> 100
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
5. LONG-TERM NOTES PAYABLE
At January 31, notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Notes payable to employees and employees' families: the
notes bear interest at prime less 1/2 of 1%; the
balance includes principal and accumulated interest and
is payable eighteen months after written request from
the holders of the notes and is subordinated to any
Company bank indebtedness; at the Company's discretion,
payments may be made prior to the due date............. $20,739 $19,162
======= =======
</TABLE>
6. TAXES ON INCOME
The provision for taxes on income includes the following for the years
ended January 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................. $(271,000) $495,200 $ 36,000
State................................... (116,000) 116,800 5,200
--------- -------- --------
(387,000) 612,000 41,200
--------- -------- --------
Deferred:
Federal................................. 623,000 167,300 605,000
State................................... 155,000 121,200 78,000
--------- -------- --------
778,000 288,500 683,000
--------- -------- --------
$ 391,000 $900,500 $724,200
========= ======== ========
</TABLE>
Deferred Income Taxes -- The principal components of the deferred portion
of the provision for income taxes for the years ended January 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Accrual to cash conversion............... $ 814,000 $ 351,000 $827,000
Capitalized software..................... 133,000 (168,000) (90,000)
Net operating loss....................... (227,000) -- (79,000)
Other.................................... (97,000) (15,700) (53,000)
State income taxes....................... 155,000 121,200 78,000
--------- --------- --------
$ 778,000 $ 288,500 $683,000
========= ========= ========
</TABLE>
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax liability at January 31, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current:
Accrual to cash conversion...................... $(3,009,000) $(2,208,000)
Capitalized software............................ (521,000) --
State taxes..................................... (558,000) (403,000)
Other........................................... -- 52,000
----------- -----------
Current deferred tax liability.................... $(4,088,000) $(2,559,000)
=========== ===========
</TABLE>
F-43
<PAGE> 101
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Noncurrent:
Alternative minimum tax credit.................. $ 227,000 $ --
Capitalized software............................ -- (388,000)
Fixed asset basis difference.................... 23,700 86,000
Other........................................... -- (20,000)
----------- -----------
Noncurrent deferred tax asset (liability)......... $ 250,700 $ (322,000)
=========== ===========
</TABLE>
Effective and Statutory Rate Reconciliation - The differences between the
effective rate in the provision for income taxes and the statutory rate for
federal income taxes for the years ended January 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 35% 35% 35%
======== ======== ========
Provision computed at federal statutory
rate..................................... $352,000 $769,000 $696,000
State income taxes, net of federal
benefit.................................. 39,000 86,000 43,000
Other...................................... -- 45,500 (14,800)
-------- -------- --------
$391,000 $900,500 $724,200
======== ======== ========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company maintains a profit-sharing retirement plan and trust, which is
qualified as to form under Sections 40l(a) and 401(k) of the Internal Revenue
Code. It is Company policy to contribute annually an amount equal to a certain
percentage of qualified employees' salaries. Employees may elect to make
voluntary contributions on either a pretax or after-tax basis, or both, subject
to certain plan and statutory limitations. The Company's contributions for the
years ended January 31, 1998, 1997, and 1996, were $1,187,800, $1,211,744, and
$1,027,475, respectively.
The Company has an Employee Stock Ownership Plan, which is qualified under
Section 401(a) of the Internal Revenue Code. All permanent employees with two
years' service are eligible for the plan. Only the Company may contribute to the
plan. All contributions are discretionary and may be paid in cash or in shares
of Company stock. Contributions will be allocated to eligible participants based
on the ratio that each such eligible participant's compensation for the plan
year bears to the total compensation of all such eligible participants for the
plan year. The Company made no contributions during the years ended January 31,
1998, 1997, and 1996.
8. STOCKHOLDERS' EQUITY
In accordance with the terms of a stock purchase agreement, the Company has
an option to repurchase outstanding shares should certain events, as defined in
the agreement, occur. The repurchase price is the book value of stock as of the
end of the month in which such events occur.
The Company has a stock option plan which allows for the granting of
incentive options to Company officers and employees to purchase shares of common
stock at an option price set by the Board of Directors to approximate fair
market value on the date of the grant. All options granted expire five years
from the date of grant. A total of 750,000 shares of common stock has been
reserved for this plan.
F-44
<PAGE> 102
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
Stock option activity for the years ended January 31, 1998, 1997, and 1996,
is as follows:
<TABLE>
<CAPTION>
END OF YEAR
---------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING OPTION PRICE EXERCISABLE OPTION PRICE
----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Outstanding at February 1, 1995........ 132,134 $19.07
Granted.............................. 63,220 $27.96
Exercised............................ (7,232) $12.28
Canceled............................. (14,959) $16.82
-------
Outstanding at January 31, 1996........ 173,163 $23.79 154,794 $21.77
======= ======
Granted.............................. 38,490 $36.78
Exercised............................ (15,257) $24.44
Canceled............................. (16,720) $25.78
Forfeited............................ (2,526) $25.78
-------
Outstanding at January 31, 1997........ 177,150 $26.34 114,285 $23.24
======= ======
Granted.............................. 12,655 $44.32
Exercised............................ (26,363) $26.02
Canceled............................. (57,663) $21.09
Forfeited............................ (2,859) $17.20
-------
Outstanding at January 31, 1998........ 102,920 $31.84 67,093 $29.27
======= ======= ======
Option Price Range..................... $21.46 to $44.32
</TABLE>
In 1997, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to continue
to account for its stock-based compensation plan under APB Opinion No. 25. For
SFAS No. 123 purposes, the fair value of each option has been estimated as of
the date of grant using the minimum value method with a risk-free interest rate
of 6% and an expected life of approximately five years. Using these assumptions,
the fair value of the stock options is approximately $139,000, $437,000, and
$350,000 for the years ended January 31, 1998, 1997, and 1996, respectively,
which would be amortized over the vesting period of the options. Had
compensation expense been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net earnings for the years ended
January 31, 1998, 1997, and 1996, would be reduced to the following pro forma
amounts:
<TABLE>
<S> <C>
1998
Net income:
As reported............................................ $ 614,267
Pro forma.............................................. 590,693
1997
Net income:
As reported............................................ $1,296,016
Pro forma.............................................. 1,227,884
1996
Net income:
As reported............................................ $1,264,338
Pro forma.............................................. 1,236,358
</TABLE>
The resulting pro forma compensation expense may not be representative of
that expected in future years.
F-45
<PAGE> 103
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
9. COMMITMENTS
Lease Obligations -- The Company leases office space in Virginia, Texas,
Colorado, and New York. The lease of the New York facility expires in 2001. The
lease of the San Antonio facility expires in 2003. The lease of the Colorado
facility expires in 2000. The lease of the Virginia facility provides for a rent
abatement arrangement during the first two years of the lease term that expires
in 1999. The Company is accounting for the cost of these leases by recognizing
rent expense on a straight-line basis over the lease term. The leases contain an
escalation clause related to increases in the Consumer Price Index and provides
options for both extension and expansion. During the year the Company acquired
additional spaces in Virginia and Texas Offices, which did not affect the lease
expiration periods. The following is a composite schedule, by year, of minimum
rental payments as of January 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31, AMOUNT
----------- ----------
<S> <C>
1999................................................... $2,082,000
2000................................................... 273,000
2001................................................... 194,000
2002................................................... 160,000
2003................................................... 13,000
----------
Total minimum lease payments........................... $2,722,000
==========
</TABLE>
Rental expense for the years ended January 31, 1998, 1997, and 1996, was
$1,915,241, $1,708,531, and $1,614,624, respectively. Rental of a portion of the
Company's leased space in Virginia resulted in revenue of $64,100, $58,759, and
$13,035, for the years ended January 31, 1998, 1997, and 1996, respectively.
F-46
<PAGE> 104
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JULY 31, 1998
-------------
<S> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,845,647
Accounts receivable....................................... 10,391,378
Prepaid expenses and other current assets................. 305,879
-----------
Total current assets................................... $13,542,904
-----------
Property and Equipment:
Furniture and equipment................................... 4,313,653
Leasehold improvements.................................... 559,665
-----------
4,873,318
Less accumulated depreciation and amortization............ (3,684,454)
-----------
Net furniture, equipment and leaseholds................ 1,188,864
-----------
Other Assets:
Capitalized software development costs.................... 1,670,208
Equity in joint venture................................... 66,272
Deferred taxes on income.................................. 250,700
-----------
Total assets........................................... $16,718,948
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,024,540
Accrued expenses.......................................... 3,532,580
Unearned revenue.......................................... 375,967
Deferred taxes on income.................................. 4,061,356
-----------
Total current liabilities.............................. 8,994,443
Notes payable, excluding current portion.................... 21,633
Accrued rent................................................ 214,646
-----------
Total liabilities...................................... 9,230,722
-----------
Stockholders Equity:
Common stock.............................................. 1,159
Retained earnings......................................... 7,576,133
Less shares of Common Stock in treasury at cost........... (89,066)
-----------
Total stockholders' equity............................. 7,488,226
-----------
Total liabilities and stockholders' equity............. $16,718,948
===========
</TABLE>
F-47
<PAGE> 105
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Contract revenues........................................... $16,995,428 $17,587,526
Costs and expenses:
Costs and contract services............................... 13,762,995 14,725,647
General and administrative................................ 1,561,249 1,345,784
Other expenses............................................ 17,553 60,594
----------- -----------
Total costs and expenses of revenues................... 15,341,797 16,132,025
----------- -----------
1,653,631 1,455,501
Interest and other income................................... 51,327 70,873
Interest expense............................................ 22,450 4,300
----------- -----------
Earnings before income taxes................................ 1,682,508 1,522,074
Taxes on income............................................. 673,000 623,600
----------- -----------
Net earnings................................................ $ 1,009,508 $ 898,474
=========== ===========
</TABLE>
F-48
<PAGE> 106
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Cash flows from operations:
Net earnings.............................................. $ 1,009,508 $ 898,474
Depreciation and amortization............................. 520,354 354,364
Accrued rent.............................................. (160,233) (14,019)
Interest added to notes payable........................... 894 1,853
Deferred taxes on income.................................. 673,000 623,600
Decrease (increase) in:
Accounts receivable.................................... 2,296,328 (1,685,248)
Prepaid expenses....................................... (29,058) 61,057
Accounts payable....................................... 84,861 786,731
Accrued expenses....................................... 760,855 (138,952)
Unearned revenue....................................... 231,168 --
Income taxes payable................................... (2,675) (634,249)
----------- -----------
Net cash provided by operations...................... 5,385,002 253,611
Cash flows from investing activities:
Purchase of property and equipment........................ (298,833) (422,936)
Increase capitalized software............................. (385,635) (338,083)
Investment in joint venture............................... (66,272) --
----------- -----------
Net cash used in investing activities................ (750,740) (761,019)
Cash flows from financing activities:
Borrowings under line-of-credit agreement................. 500,000 --
Repayments under line-of-credit agreement................. (2,295,000) --
Stock option plan activity................................ 13,968 67,865
Repurchase of common stock................................ (38,414) --
----------- -----------
Net cash (used in) provided by financing
activities.......................................... (1,819,446) 67,865
Net increase (decrease) in cash and cash equivalents........ 2,814,816 (439,543)
Cash and cash equivalents, beginning of period.............. 30,831 698,321
----------- -----------
Cash and cash equivalents, end of period.................... $ 2,845,647 $ 258,778
=========== ===========
</TABLE>
F-49
<PAGE> 107
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Decision-Science Applications, Inc. ("DSA") have been prepared on a basis
consistent with the rules of the Securities and Exchange Commission for 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 July 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
In addition, these financial statements should be read in conjunction with
the DSA's audited financial statements and notes thereto for the year ended
January 31, 1998.
NOTE 2. BUSINESS COMBINATION
On August 20, 1998, DSA was acquired by SM&A Corporation for approximately
$28 million in a stock-for-stock and cash exchange merger. The transaction was
accounted for using the purchase method of accounting. The preliminary
allocation of the purchase price to the net assets acquired follows, and results
could change.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock consideration paid.................................... $14,375
Cash paid................................................... 14,075
Acquisition expenses........................................ 250
-------
Total consideration............................... 28,700
Less book value of net assets acquired...................... 7,241
-------
Estimated goodwill................................ $21,459
=======
</TABLE>
The purchase price included 714,839 shares of common stock of SM&A
Corporation, valued as of July 21, 1998 based on an average market price (20-day
trading price of $20.11).
F-50
<PAGE> 108
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 13
Recapitalization........................ 13
Prior S Corporation Status.............. 13
Price Range of Common Stock and Dividend
Policy................................ 14
Capitalization.......................... 15
Selected Financial Data................. 16
Unaudited Pro Forma Condensed Combined
Financial Information................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 32
Management.............................. 40
Certain Transactions.................... 46
Principal and Selling Shareholders...... 49
Description of Capital Stock............ 51
Shares Eligible For Future Sale......... 52
Underwriting............................ 54
Legal Matters........................... 56
Experts................................. 56
Additional Information.................. 56
Index to Financial Statements........... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
LEGG MASON WOOD WALKER
INCORPORATED
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the estimated expenses incurred in connection
with the offering described in this Registration Statement.
<TABLE>
<S> <C>
Registration fee............................................ $44,102.50
NASD filing fee............................................. 15,450
Printing and engraving expenses............................. *
Nasdaq fee.................................................. 17,500
Blue sky qualification fees and expenses.................... *
Legal fees and expenses..................................... *
Accountants' fees and expenses.............................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ------------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant and its officers and
directors, and by the Registrant of the Underwriters for certain liabilities
arising under the Securities Act or otherwise.
The Company's Articles of Incorporation provide that the liability of the
Company's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its shareholders except for liability: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interests of
the Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction for which a director derived an
improper personal benefit; (iv) for acts or omission that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions, or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute, for approval of
certain improper distributions to shareholders or certain loans or guarantees.
The Articles also provide that the Company is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Company's Bylaws or through agreements with such
agents or both, for breach of duty to the Company and its shareholders, in
excess of the indemnification to agents or both, for breach of duty to the
Company and its shareholders, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code.
The Bylaws of the Company provide for indemnification of the Company's
officers, directors, employees, and other agents to the extent and under the
circumstances permitted by California law. The Bylaws further provide that no
indemnification shall be made in the case of a derivative suit in respect to any
claim as to which such person has been adjudged to be liable to the corporation,
except with court approval, nor shall
II-1
<PAGE> 110
indemnification be made for amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval, or for expenses
incurred in defending a threatened or pending action which is settled or
otherwise disposed of without court approval. Indemnification under the Bylaws
is mandatory in the case of an agent of the Company (present or past) who is
successful on the merits in defense of a suit against him or her in such
capacity. In all other cases where indemnification is permitted by the Bylaws, a
determination to indemnify such person must be made by a majority of a quorum of
disinterested directors, a majority of disinterested shareholders, or the court
in which the suit is pending.
The Company has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in the
Articles of Incorporation and Bylaws. Among other things, these agreements
provide that the Company will indemnify, subject to certain requirements, each
of the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Company, on account of services by such person as a director or officer
of the Company, or as a director or officer of any other company or enterprise
to which the person provides services at the request of the Company.
The inclusion of the above provisions in the Articles of Incorporation and
Bylaws and the existence of the indemnification agreements may have the effect
of reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Registrant and its shareholders.
At present, there is no litigation or proceeding pending involving a director of
the Registrant as to which indemnification is being sought, nor is the
Registrant aware of any threatened litigation that may result in claims for
indemnification by any director.
The Registrant's Articles of Incorporation provide that the Registrant may
indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 29, 1998, the Registrant acquired Space Applications Corporation
("SAC") in a stock-for-stock reverse triangular merger. In connection with such
acquisition and in exchange for all of the issued and outstanding SAC common
stock and options, the Registrant 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 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 Registrant 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 Registrant in connection with
the transaction.
On August 20, 1998, the Registrant acquired Decision-Science Applications,
Inc. ("DSA") in a stock-for-stock and cash forward triangular merger. In
connection with such acquisition and in exchange for all of the issued and
outstanding DSA common stock, the Registrant issued an aggregate of 714,839
shares of its common stock and $14,035,419 cash to the shareholders of DSA,
consisting mainly of DSA employees, executives and directors. 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 Registrant 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
Registrant in connection with the transaction.
II-2
<PAGE> 111
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.+
2.1 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Space Applications
Corporation, SAC Acquisition, Inc. and the individual
shareholders named therein (filed on June 4, 1998 as Exhibit
2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference).
2.2 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Decision-Science
Applications, Inc., DSA Acquisition, Inc., and the
individual shareholders named therein (filed on August 21,
1998 as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
3.1 Articles of Incorporation, as amended and restated (filed on
January 27, 1998 as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.2 Bylaws of the Registrant, as amended and restated (filed on
January 5, 1998 as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.3 Certificate of Ownership as filed with the California
Secretary of State on August 6, 1998 (filed on August 19,
1998 as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
4.1 Specimen stock certificate.+
5.1 Opinion of Rutan & Tucker, LLP.*
10.1 1997 Stock Option Plan, and related form of Stock Option
Agreement (filed on January 5, 1998 as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.2 Form of Indemnification Agreement (filed on November 21,
1997 as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.3 Office Facilities Lease (filed on November 21, 1997 as
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
10.4 Hawker Aircraft Sale Agreement (filed on November 21, 1997
as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.5 Employment Agreement with Steven S. Myers (filed on November
21, 1997 as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.6 Employment Agreement with Kenneth W. Colbaugh (filed on
November 21, 1997 as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.7 Security and Loan Agreement dated January 2, 1997 between
Imperial Bank and the Registrant, First Amendment and
Addendum thereto and related Note and Addendum thereto and
LIBOR Addendum to Note (filed on November 21, 1997 as
Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
</TABLE>
II-3
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A.
and the Registrant and related Aircraft Security
Agreement--Chattel Mortgage, Security Agreement and
Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.9 Steven S. Myers Promissory Note (filed on November 21, 1997
as Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.10 Company Note (filed on November 21, 1997 as Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.11 Executive Bonus Plan (filed on January 5, 1998 as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.12 Securities Purchase Agreement dated September 25, 1996
(filed on January 5, 1998 as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.13 Investor Rights Agreement dated September 25, 1996 (filed on
January 5, 1998 as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.14 Security and Loan Agreement and Addendum, Exhibit
"A"--Waiver to Certain Provisions between Imperial Bank and
the Registrant (filed on January 16, 1998 as Exhibit 10.14
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.15 Registration Rights Agreement dated May 29, 1998 by and
among the Registrant and certain shareholders of Space
Applications Corporation identified therein.*
10.16 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner.*
10.17 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee.*
10.18 Escrow Agreement dated May 29, 1998 by and among the
Registrant, Space Applications Corporation, Stanley Y.H.
Hee, First American Trust Company and certain shareholders
identified therein.*
10.19 Registration Rights Agreement dated August 20, 1998 by among
Registrant and certain shareholders of Decision-Science
Applications, Inc. set forth therein (filed on August 21,
1998 as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
10.20 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Guy A. Ackerson
(filed on August 21, 1998 as Exhibit 10.2 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.21 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Gary L. Lucas (filed
on August 21, 1998 as Exhibit 10.3 to the Registrant's
Current Report on Form 8-K and incorporated herein by
reference).
10.22 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Dana R. Raucher
(filed on August 21, 1998 as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.23 Escrow Agreement dated August 20, 1998 by and among
Registrant, Decision-Science Applications, Inc., First
American Trust Company and certain shareholders identified
therein (filed on August 21, 1998 as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
</TABLE>
II-4
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 Note dated June 25, 1998 for sale of Turbo Commander
aircraft.*
21 Subsidiaries of the Registrant.*
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of Deloitte & Touche LLP.*
23.4 Consent of Rutan & Tucker, LLP (included in the opinion
filed herewith as Exhibit 5.1).
24 Power of Attorney (included on the signature page hereof).*
27 Financial Data Schedule.*
</TABLE>
- ------------------------------
* Filed herewith.
+ To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule VIII--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or the
notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State of
California, on August 24, 1998.
SM&A CORPORATION
By: /s/ STEVEN S. MYERS
------------------------------------
Steven S. Myers,
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Messrs.
Steven S. Myers and Ronald Hunn his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, at any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, or any Registration Statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith or in connection with the registration of the Common
Stock under the Securities Exchange Act of 1934, as amended, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
that each of said attorneys-in-fact and agents, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<C> <S> <C>
/s/ STEVEN S. MYERS Chairman of the Board, President August 24, 1998
- --------------------------------------------------- and Chief Executive Officer
Steven S. Myers (Principal Executive Officer)
/s/ KENNETH W. COLBAUGH Director, Executive Vice August 24, 1998
- --------------------------------------------------- President and Chief Operating
Kenneth W. Colbaugh Officer
/s/ J. CHRISTOPHER LEWIS Director August 24, 1998
- ---------------------------------------------------
J. Christopher Lewis
/s/ RONALD A. HUNN Senior Vice President, August 24, 1998
- --------------------------------------------------- Chief Financial Officer and
Ronald A. Hunn Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ JAMES R. MELLOR Director August 24, 1998
- ---------------------------------------------------
James R. Mellor
/s/ MALCOLM R. CURRIE Director August 24, 1998
- ---------------------------------------------------
Malcolm R. Currie
</TABLE>
II-6
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.+
2.1 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Space Applications
Corporation SAC Acquisition, Inc. and the individual
shareholders named therein (filed on June 4, 1998 as Exhibit
2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference).
2.2 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Decision-Science
Applications, Inc., DSA Acquisition, Inc. and the individual
shareholders named therein (filed on August 21, 1998 as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
and incorporated herein by reference).
3.1 Articles of Incorporation, as amended and restated (filed on
January 27, 1998 as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.2 Bylaws of the Registrant, as amended and restated (filed on
January 5, 1998 as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.3 Certificate of Ownership as filed with the California
Secretary of State on August 6, 1998 (filed on August 19,
1998 as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
4.1 Specimen stock certificate.+
5.1 Opinion of Rutan & Tucker, LLP.*
10.1 1997 Stock Option Plan, and related form of Stock Option
Agreement (filed on January 5, 1998 as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.2 Form of Indemnification Agreement (filed on November 21,
1997 as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.3 Office Facilities Lease (filed on November 21, 1997 as
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
10.4 Hawker Aircraft Sale Agreement (filed on November 21, 1997
as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.5 Employment Agreement with Steven S. Myers (filed on November
21, 1997 as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.6 Employment Agreement with Kenneth W. Colbaugh (filed on
November 21, 1997 as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.7 Security and Loan Agreement dated January 2, 1997 between
Imperial Bank and the Registrant, First Amendment and
Addendum thereto and related Note and Addendum thereto and
LIBOR Addendum to Note (filed on November 21, 1997 as
Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A.
and the Registrant and related Aircraft Security
Agreement--Chattel Mortgage, Security Agreement and
Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.9 Steven S. Myers Promissory Note (filed on November 21, 1997
as Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.10 Company Note (filed on November 21, 1997 as Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.11 Executive Bonus Plan (filed on January 5, 1998 as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.12 Securities Purchase Agreement dated September 25, 1996
(filed on January 5, 1998 as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.13 Investor Rights Agreement dated September 25, 1996 (filed on
January 5, 1998 as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.14 Security and Loan Agreement and Addendum, Exhibit
"A"--Waiver to Certain Provisions between Imperial Bank and
the Registrant (filed on January 16, 1998 as Exhibit 10.14
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.15 Registration Rights Agreement dated May 29, 1998 by and
among the Registrant and certain shareholders of Space
Applications Corporation identified therein.*
10.16 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner.*
10.17 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee.*
10.18 Escrow Agreement dated May 29, 1998 by and among the
Registrant, Space Applications Corporation, Stanley Y.H.
Hee, First American Trust Company and certain shareholders
identified therein.*
10.19 Registration Rights Agreement dated August 20, 1998 by among
Registrant and certain shareholders Decision-Science,
Applications, Inc. set forth therein (filed on August 21,
1998 as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
10.20 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Guy A. Ackerson
(filed on August 21, 1998 as Exhibit 10.2 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.21 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Gary L. Lucas (filed
on August 21, 1998 as Exhibit 10.3 to the Registrant's
Current Report on Form 8-K and incorporated herein by
reference).
10.22 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Dana R. Raucher
(filed on August 21, 1998 as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.23 Escrow Agreement dated August 20, 1998 by and among
Registrant, Decision-Science Applications, Inc., First
American Trust Company and certain shareholders identified
therein (filed on August 21, 1998 as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.24 Note dated June 25, 1998 for sale of Turbo Commander
aircraft.*
21 Subsidiaries of the Registrant.*
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of Deloitte & Touche LLP.*
23.4 Consent of Rutan & Tucker, LLP (included in the opinion
filed herewith as Exhibit 5.1).
24 Power of Attorney (included on the signature page hereof).*
27 Financial Data Schedule.*
</TABLE>
- ------------------------------
* Filed herewith.
+ to be filed by amendment.
<PAGE> 1
EXHIBIT 5.1
August 24, 1998
SM&A Corporation
4695 MacArthur Court, Eighth Floor
Newport Beach, CA 92660
Gentlemen:
At your request, we have examined the form of Registration Statement on
Form S-1 (the "Registration Statement") which has been filed by SM&A
Corporation (the "Company") with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"), for the purpose
of registering 5,750,000 shares of Common Stock of the Company (including
2,500,000 shares registered on behalf of selling shareholders and 750,000 shares
which may be sold by selling shareholders pursuant to the exercise of the
underwriters' over-allotment option).
We have examined the proceedings relating to the issuance of your
presently outstanding shares of Common Stock and are also familiar with
proceedings taken and proposed to be taken in connection with the issuance and
sale of securities in the manner set forth in the Registration Statement, as
amended.
Subject to the completion of the proceedings contemplated in connection
with the foregoing matters, we are of the opinion that:
(i) all of the issued and outstanding securities of the Company have been
duly and validly authorized and issued, and are fully paid and nonassessable;
and
(ii) all of the securities included in the Registration Statement for sale
by the Company have been duly authorized and, when issued and sold in the
manner set forth in the Registration Statement will, upon such issuance and
sale, be validly and legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Respectfully submitted;
/s/ RUTAN & TUCKER, LLP
<PAGE> 1
EXHIBIT 10.15
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of the
29th day of May, 1998, by and among STEVEN MYERS & ASSOCIATES, INC., a
California corporation ("SM&A") and Roger H. Skinner and Stanley Y.H. Hee,
individually and as attorney for all other shareholders of Space Applications
Corporation listed on Schedule 1.0 attached hereto (collectively, with Skinner
and Hee, the "SAC Shareholders").
R E C I T A L S:
- - - - - - - -
A. SM&A, Space Applications Corporation ("SAC") and SAC Acquisition
Corporation ("Subsidiary"), a wholly owned subsidiary of SM&A, entered into that
certain Agreement and Plan of Reorganization and Merger dated May 18, 1998 (the
"Merger Agreement") pursuant to which Subsidiary will merge into SAC (the
"Merger"). Pursuant to the Merger, SM&A will issue shares of Common Stock of
SM&A (the "SM&A Stock") to the SAC Shareholders.
B. SM&A and the SAC Shareholders desire to set forth in a single
agreement the registration rights to be granted to the SAC Shareholders, and the
covenants to be made in connection therewith, with respect to the shares of SM&A
Stock issued to the SAC Shareholders pursuant to the Merger.
NOW, THEREFORE, for good and valuable consideration, the SAC
Shareholders and SM&A agree as follows:
1. Definitions.
For purposes of this Agreement:
(a) The term "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or ordering of effectiveness of such registration
statement or document;
(b) The term "Registrable Securities" means (i) shares of SM&A Stock
issuable to the SAC Shareholders upon the conversion of the common stock of SAC
as a result of the Merger, and (ii) any SM&A Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution (including a stock split, stock
dividend, recapitalization or similar event) with respect to, or in exchange for
or in replacement of, SM&A Stock referred to in (i) above, excluding in all
cases, however, any Registrable Securities sold by a person in a transaction in
which his rights under this Agreement are not assigned;
(c) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of SM&A Stock outstanding which are
Registrable Securities, and the number of shares of SM&A Stock issuable pursuant
to then exercisable or convertible securities which would be Registrable
Securities upon issuance;
-1-
<PAGE> 2
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 12 hereof; and
(e) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the Securities and Exchange Commission ("SEC") which permits inclusion or
incorporation of substantial information by reference to other documents filed
by SM&A with the SEC.
2. Request for Registration.
(a) If SM&A shall receive at any time after February 1, 1999, a written
request from the Holders of at least thirty-five percent (35%) of the
Registrable Securities then outstanding that SM&A file a registration statement
on Form S-3 under the Act covering the registration of at least thirty-five
percent (35%) of the Registrable Securities then outstanding (or a lesser
percent if the aggregate offering price would exceed $2,000,000), then SM&A
shall, within ten (10) days of the receipt thereof, give written notice of such
request to all Holders and shall, subject to the limitations of Section 2(b),
use its best efforts to effect, at the earliest possible date, but in any event
within forty-five (45) days of the date of the original written request from the
Holders, file the registration on registration statement under the Act on Form
S-3 covering all Registrable Securities which the Holders thereof request to be
registered within twenty (20) days of the mailing of such notice by SM&A in
accordance with Section 18 below.
(b) If the Holders initiating the registration request under this
Section 2 ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise SM&A
as a part of their request made pursuant to this Section 2 and SM&A shall
include such information in the written notice referred to in Section 2(a). The
underwriter with respect to such Form S-3 registration only will be selected by
a majority in interest of the Initiating Holders and shall be reasonably
acceptable to SM&A. In such event, the right of any Holder to include his
Registrable Securities in such registration on Form S-3 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their
Registrable Securities through such underwriting shall (together with SM&A as
provided in Section 4(e)) enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting in the
manner set forth above it being understood that each Holder shall be required to
make only those representations (if any) as would be customary for a holder of a
similar percentage of similar securities. Notwithstanding any other provision of
this Section 2, if the managing underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated equally among all Holders thereof, including the
Initiating Holders, on a percentage basis (as nearly as practicable) equal to
the percentage of SM&A Stock requesting registration and permitted by such
underwriters to be sold by SM&A shareholders existing immediately prior to the
Merger. To the extent Registrable Securities requested to be registered are
excluded from
-2-
<PAGE> 3
the offering pursuant to the immediately preceding sentence, the Holders of such
Registrable Securities shall have the right to one additional demand
registration pursuant to this Section 2.
SM&A may include in the registration under this Section 2 any other
shares of SM&A Stock (including issued and outstanding shares of SM&A Stock as
to which the holders thereof have contracted with SM&A for "piggyback"
registration rights) so long as the inclusion in such registration of such
shares (i) will not, in the opinion of the managing underwriter, interfere with
the successful marketing in accordance with the intended method of sale or other
disposition of all the shares of Registrable Securities sought to be registered
by the Holder or Holders of Registrable Securities pursuant to this Section 2
and (ii) will not result in the exclusion from such registration of any
Registrable Securities. If it is determined as provided above that there will be
such interference, the other shares of SM&A Stock sought to be included shall be
excluded to the extent deemed appropriate by the managing underwriter.
(c) SM&A is obligated to effect only two (2) such registrations pursuant
to this Section 2 except as provided in Section 2(b).
(d) Notwithstanding the foregoing, if SM&A shall furnish to Holders
requesting a registration statement pursuant to this Section 2, a certificate
signed by the President of SM&A stating that in the good faith judgment of the
Board of Directors of SM&A, it would be seriously detrimental to SM&A and its
stockholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, SM&A shall have
the right to defer taking action with respect to such filing for a period of not
more than ninety (90) days after receipt of the request of the Initiating
Holders; provided, however, that SM&A may not utilize this right more than once
in any twelve (12) month period.
(e) SM&A shall not be required to prepare and file a registration
statement pursuant to this Section 2 which would become effective within one
hundred eighty (180) days following the effective date of a registration
statement filed by SM&A with the SEC pertaining to an underwritten public
offering of securities for cash for the account of SM&A if the Initiating
Holders' request for registration is received by SM&A subsequent to such time as
SM&A in good faith gives written notice to the holders of Registrable Stock that
SM&A is commencing to prepare a registration statement and SM&A is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective.
A registration requested pursuant to this Section 2 shall not be deemed
to have been effected until such time as a registration statement with respect
thereto has become effective in compliance with the provisions of the Act.
3. SM&A Registration.
If (but without any obligation to do so) SM&A proposes to register
(including for this purpose a demand registration effected by SM&A for
shareholders of SM&A existing prior to the Merger) any of its common stock under
the Act in connection with the public offering of such common stock solely for
cash (other than a registration relating solely to the sale of securities in an
employee benefit plan or a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement
-3-
<PAGE> 4
covering the sale of the Registrable Securities), then SM&A shall, at such time,
promptly give each Holder written notice of such registration. Upon the written
request of each Holder given within twenty (20) days after mailing of such
notice by SM&A in accordance with Section 18, SM&A shall, subject to the
provisions of Section 8, cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered
subject to the terms, conditions and contractual obligations of such
underwritten offering. SM&A reserves the right to withdraw any proposed
registration in which Holders have requested to participate pursuant to this
Section 3.
4. Obligations of SM&A.
Whenever required under this Agreement to effect the registration of any
Registrable Securities, SM&A shall, as soon as reasonably practicable:
(a) prepare and (using its best efforts to do so, but in any event
within forty-five (45) days of the date of a written request) file with the SEC
a registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective, and, upon
the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for up to one
(1) year;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to keep such registration statement
effective and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement;
(c) furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use its best efforts to register and qualify the SM&A Stock covered
by such registration statement under such other securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Holders, provided
that SM&A shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions and use its best efforts to cause
all Registrable Securities covered by such registration statement to be
registered with or approved by such other federal or state governmental agencies
or authorities as may be necessary in the opinion of counsel to SM&A and counsel
to the Holder or Holders of Registrable Securities to enable the Holder or
Holders thereof to consummate the disposition of such Registrable Securities;
(e) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement;
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<PAGE> 5
(f) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act or the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing and at
the request of any such Holder promptly prepare and furnish to it a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made;
(g) furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Agreement, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Agreement, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing SM&A for the purposes of such registration, in form and substance
as is customarily given to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of SM&A, in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
to the Holders requesting registration of Registrable Securities;
(h) use its best efforts (a) to list all Registrable Securities covered
by such registration statement on such national securities exchange on which
Registrable Securities of the same class and, if applicable, series covered by
such registration statement are then listed, if any, or on the National
Association of Securities Dealers Automated Quotation System, Inc. ("NASDAQ") if
the Registrable Securities are quoted on NASDAQ; and
(i) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make available to its securities holders, as
soon as reasonably practicable and if required by law, an earnings statement
covering the period of at least twelve (12) months, but not more than eighteen
(18) months, beginning with the first full calendar month after the effective
date of such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder, and
promptly furnish to each such Holder of Registrable Securities a copy of any
amendment or supplement to such registration statement or prospectus.
5. Furnish Information.
It shall be a condition precedent to the obligations of SM&A to take any
action pursuant to this Agreement with respect to the Registrable Securities of
any selling Holder that such Holder shall furnish to SM&A such information
regarding itself, the Registrable Securities held
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<PAGE> 6
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
6. Expenses of Demand Registration.
All expenses other than underwriting discounts and commissions incurred
in connection with registrations, filings or qualifications pursuant to Section
2, including, without limitation, all registration, filing and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for SM&A,
and the reasonable fees and disbursements of one counsel for the selling Holders
(as selected by a majority in interest of the selling Holders) shall be borne by
SM&A; provided, however, that SM&A shall not be required to pay for any expenses
of any registration proceeding begun pursuant to Section 2 if the registration
request is subsequently withdrawn at the request of the Holders of a majority of
the Registrable Securities to be registered (in which case all Holders
participating in such registration shall bear such expenses), unless the Holders
of a majority of the Registrable Securities agree to forfeit one of their demand
registration rights provided under Section 2. Notwithstanding the foregoing,
however, if at the time of the withdrawal, the Holders of the Registration
Securities have learned of a material adverse change in the condition, business
or prospectus of SM&A from that known to the Holders of the Registerable
Securities at the time of their request, of which SM&A had knowledge at the time
of the request, the Holders of such Registrable Securities shall not be required
to pay any of said expenses or to forfeit the right to one demand registration.
7. Expenses of SM&A Registration.
SM&A shall bear and pay all expenses incurred in connection with any
registration, filing or qualification of Registrable Securities with respect to
the registrations pursuant to Section 3 for each Holder (which right may be
assigned as provided in Section 12), including, without limitation, all
registration, filing, and qualification fees, printers and accounting fees
relating or apportionable thereto and the reasonable fees and disbursements of
one counsel for the selling Holders selected by a majority in interest of the
selling Holders, but excluding underwriting discounts and commissions relating
to Registrable Securities.
8. Underwriting Requirements.
In connection with any offering involving an underwriting of shares of
SM&A's capital stock, SM&A shall not be required under Section 3 to include any
of the Holders' securities in such underwriting unless they accept the terms of
the underwriting as agreed upon between SM&A and the underwriters selected by it
(or by other persons entitled to select the underwriters) (provided, however,
that each Holder shall be required to make only those representations (if any)
as would be customary for a holder of a similar percentage of similar securities
unless required by such underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success
of the offering by SM&A. If the total amount of securities, including
Registrable Securities, requested to be included in such offering exceeds the
amount of securities sold other than by SM&A that the
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<PAGE> 7
underwriters determine in their sole discretion is compatible with the success
of the offering, then SM&A shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the offering (provided such participation is, on a percentage basis, equal to
the proportion of SM&A Stock held by SM&A shareholders existing prior to the
Merger which is included in such underwriting to that which such SM&A
shareholders requested to be included in such underwriting).
9. Delay of Registration.
No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Agreement.
10. Indemnification.
In the event any Registrable Securities are included in a registration
statement under this Agreement:
(a) To the extent permitted by law, SM&A will indemnify and hold
harmless each Holder, any underwriter (as defined in the Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934
Act"), and their respective directors, officers, partners, shareholders,
employees, agents, representatives and affiliates, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively, a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by SM&A of the Act, the 1934 Act, any state securities law or any rule
or regulation promulgated under the Act, the 1934 Act or any state securities
law; and SM&A will pay to each such Holder, underwriter or controlling person,
and his respective directors, officers, partners, shareholders, employees,
agents, representatives and affiliates as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 10(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of SM&A (which consent shall not be
unreasonably withheld), nor shall SM&A be liable in any such case for any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
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<PAGE> 8
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless SM&A, each of its directors, each of its officers who has
signed the registration statement, each person, if any, who controls SM&A within
the meaning of the Act, any underwriter, any other Holder selling securities in
such registration statement and any controlling person of any such underwriter
or other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay, as incurred, any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this Section 10(b), in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, that, in no event shall any indemnity
under this Section 10(b) exceed the gross proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this Section 10
of notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 10, deliver to the indemnifying party
a written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other indemnified parties
which may be represented without conflict by one counsel) shall have the right
to retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding or if the indemnifying party
shall fail to assume responsibility for such defense. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if actually prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 10, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 10.
No indemnifying party shall, without the consent of the indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as a term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation or which requires action other than the payment of money by the
indemnifying party.
(d) If the indemnification provided for in this Section 10 shall for any
reason be held by a court of competent jurisdiction to be unavailable to an
indemnified party under subparagraph (a) or (b) hereof in respect of any loss,
claim, damage or liability, or any action in respect thereof, then, in lieu of
the amount paid or payable under subparagraph (a) or (b)
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<PAGE> 9
hereof, the indemnified party and the indemnifying party under subparagraph (a)
or (b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating the same), (i) in such proportion as is appropriate to
reflect the relative fault of SM&A and the Holders of Registrable Securities
covered by the registration statement in connection with the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations (the
relative fault of SM&A and such Holders to be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact related to
information supplied by SM&A or such Holders and the parties' relative intent,
knowledge access to information and opportunity to correct or prevent such
statement or omission) or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by SM&A and such Holders from the
offering of the securities covered by such registration statement. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Such Holders' obligations to contribute as
provided in this subparagraph (d) are several in proportion to the relative
value of their respective Registrable Securities covered by such registration
statement and not joint. In addition, no person shall be obligated to contribute
hereunder any amounts in payment for any settlement of any action or claim
effected without such person's consent, which consent shall not be unreasonably
withheld or delayed.
(e) Indemnification and contribution similar to that specified in the
preceding subdivisions of this Section 10 (with appropriate modifications) shall
be given by SM&A and each Holder of Registrable Securities with respect to any
required registration or other qualification of securities under any federal or
state law, rule or regulation of any governmental authority other than the Act.
(f) The indemnification and contribution required by this Section 10
shall be made by prompt periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(g) The obligations of SM&A and Holders under this Section 10 shall
survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
11. Reports Under Securities Exchange Act of 1934.
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Holder to sell securities of SM&A to the public without
registration or pursuant to a registration on Form S-3, SM&A agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
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(b) take such action as is necessary to enable the Holders to utilize
Form S-3 for the sale of their Registrable Securities, such action to be taken
as soon as ordinarily required after the end of the fiscal year in which the
first registration statement filed by SM&A for the offering of its Common Stock
to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other documents
required of SM&A under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by SM&A that it has
complied with the reporting requirements of SEC Rule 144, the Act and the 1934
Act, or that it qualifies as a registrant whose securities may be resold
pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the
most recent annual or quarterly report of SM&A and such other reports and
documents so filed by SM&A, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration or
pursuant to such form.
12. Assignment of Registration Rights.
The rights to cause SM&A to register Registrable Securities pursuant to
this Agreement may be assigned (but only with all related obligations) by a
Holder to a transferee or assignee of such securities who, after such assignment
or transfer, holds at least shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided SM&A is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of shares
of Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership who are partners or retired partners
of such partnership (including spouses and ancestors, lineal descendants and
siblings of such partners or spouses who acquire Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership; provided that all such assignees and transferees who would not
qualify individually for assignment of registration rights shall have a single
attorney-in-fact for the purpose of exercising any rights, receiving notices or
taking any action under this Agreement.
13. Amendment of Registration Rights.
Any provision of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of SM&A and the
holders of a majority of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each Holder of any Registrable Securities then outstanding, each future
holder of all such Registrable Securities, and SM&A.
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14. Termination of Registration Rights.
No Holder shall be entitled to exercise any right provided for in this
Agreement after such time as the Holder would be able to dispose of its
Registrable Securities pursuant to SEC Rule 144.
15. Governing Law.
This Agreement shall be governed by and construed under the laws of the
State of California as applied to agreements among California residents entered
into and to be performed entirely within California without giving effect to
conflicts of law principles.
16. Entire Agreement.
This Agreement represents the entire agreement between and among the SAC
Shareholders and SM&A with respect to the subject matter hereof and supersedes
any prior oral or written agreements concerning the same.
17. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
18. Notices.
Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given upon
personal delivery to the party to be notified or upon deposit with the United
States Post Office, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by ten (10) days' advance written notice to the other parties.
19. Successors and Assigns.
Subject to the limitations set forth in Section 12 hereof, this
Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by the parties and their respective successors and permitted
assigns.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first above written.
SM&A: STEVEN MYERS & ASSOCIATES, INC.
By: /s/ KENNETH W. COLBAUGH
---------------------------------
Its: Chief Operating Officer
Address:
____________________________________
____________________________________
____________________________________
SAC SHAREHOLDERS:
By: /s/ STANLEY Y. H. HEE
---------------------------------
Stanley Y. H. Hee
---------------------------------
(Print name and title)
Address:
____________________________________
____________________________________
____________________________________
By: /s/ ROGER H. SKINNER
---------------------------------
Roger H. Skinner
---------------------------------
(Print name and title)
Address:
____________________________________
____________________________________
____________________________________
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<PAGE> 13
SHAREHOLDERS: /s/ STANLEY Y.H. HEE
------------------------------------
STANLEY Y.H. HEE, as attorney-in-
fact for the Shareholders identified
on Schedule 1.0 hereto
____________________________________
____________________________________
____________________________________
____________________________________
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<PAGE> 1
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
AGREEMENT dated as of May 29, 1998 between SPACE APPLICATIONS
CORPORATION ("Employer") and ROGER H. SKINNER ("Employee").
W I T N E S S E T H:
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WHEREAS, Employer has been acquired in a reverse triangular merger
transaction by Steven Myers & Associates, Inc. ("SM&A");
WHEREAS, Employee was the Chief Executive Officer and a major
shareholder of Employer immediately prior to such acquisition;
WHEREAS, Employer desires to retain the services of Employee and
Employee desires to be employed by Employer upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereto agree as follows:
1. Employment.
The Employer hereby employs Employee, and Employee hereby agrees to
serve, as Executive Transition Advisor or in such other comparable executive
position as shall be assigned to Employee by Employer's Board of Directors, for
the period hereinafter defined. Employee agrees to perform services related to
the transition consistent with such office concerning the Acquisition and as
shall from time to time be assigned to Employee by Employer's Board of Directors
relating to such transition and, in the absence of such assignment, such
services customary to such office as are necessary to the operations of
Employer. The employment hereunder is not contemplated to be full time, but on
an as needed basis to assist with the transition of Employer within the SM&A
organization.
2. Term of Employment.
The employment hereunder shall be for the period (the "Term of
Employment") which shall commence on the date hereof and shall end on the first
anniversary of the date set forth above, unless earlier terminated (a) upon
death of Employee, (b) at the option of Employer, upon 20 days' prior written
notice to Employee, in the event of the inability of Employee to perform his
duties hereunder, whether by reason of injury (physical or mental), illness or
otherwise, incapacitating Employee for a continuous period exceeding 180 days of
(c) upon the discharge of Employee by the Board of Directors of Employer for
"cause" as defined herein. For purposes of this Agreement, an event or
occurrence constituting "cause" shall mean:
<PAGE> 2
(i) Employee's willful failure or refusal after notice
thereof, to perform specific directives of the Board of Directors of
Employer, when such directives are consistent with the scope and nature
of Employee's duties and responsibilities as set forth in Section 1
hereof;
(ii) Dishonesty of Employee materially and adversely
affecting Employer;
(iii) Drunkenness or use of drugs which interferes with the
performance of Employee's duties and responsibilities under this
Agreement, continuing after warning;
(iv) Employee's conviction of a felony or of any crime
involving moral turpitude, fraud or misrepresentation;
(v) Any gross or willful conduct of Employee resulting in
substantial loss of Employer, substantial damage to Employer's
reputation or theft or defalcation from Employer;
(vi) Gross incompetence on the part of Employee in the
performance of the duties and responsibilities under this Agreement; and
(vii) Any material breach (not covered by any of the clauses
(i) through (vi)) of any of the provisions of this Agreement if such
breach is not cured within 10 days after written notice thereof to
Employee by Employer or, if not curable within 10 days, if Employee has
taken material steps to cure within such 10 day period and such cure
occurs within 30 days of such breach.
In addition, upon the expiration of the Term of Employment, Employer
shall have the option, in its sole and absolute discretion, to retain Employee
as a consultant to Employee for an additional one year period, on terms and
conditions to be agreed upon by the parties at such time. Employee has no duty
or obligation to mitigate damages and no sums earned by Employee from other
employment shall offset the obligation of Employer hereunder.
3. Compensation.
(a) Base Salary. As compensation for services hereunder and in
consideration of his agreement not to compete as set forth in Section 4, during
the Term of Employment Employer shall pay Employee an annual salary of $150,000
which shall be payable in appropriate installments to conform with the regular
payroll dates for salaried personnel of Employer.
(b) Other Benefits. The fringe benefits, perquisites, and other benefits
of employment enjoyed by Employee during the year prior to the execution of this
Agreement will continue during the Term of Employment.
(c) Payment Upon Early Termination. In the event of early termination of
employment for any reason specified in Section 2(a), (b) or (c) hereof, Employer
shall no longer be obligated to make any salary payments of any kind whatsoever
to Employee or Employee's
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<PAGE> 3
estate. However, any salary payments earned but not yet made shall be made by
Employer to Employee or Employee's estate. Upon and after termination of
employment for whatever reason specified in Section 2 hereof, Employee shall be
entitled to such benefits other than salary payments to which Employee has
become entitled under the terms of any plan or program referred to in this
Section 3.
4. Covenant Not to Compete; Intellectual Property; Confidentiality.
(a) Covenant Not to Compete. During the Term of Employment and for one
year thereafter, Employee will not, within any jurisdiction in which Employer or
any of its affiliates is duly qualified to do business, or within any marketing
area in which Employer or any of its affiliates is doing business, directly or
indirectly own, manage, operate, control, be employed by or participate in the
ownership, management, operation or control of, or be connected in any manner
with, any business in the area of "competitive procurements", such being the
business currently conducted by Space Applications Corporation as of the date of
this Agreement. For these purposes, Employee's ownership of securities of public
company not in excess of 1% of any class of such securities shall not be
considered to be competition with Employer.
For a period of twelve (12) months after termination of Employee's
employment with Employer, Employee agrees to refrain from interfering with the
employment relationship between Employer and its other employees by soliciting
any of such individuals to participate in independent business ventures and
agrees to refrain from soliciting business from any client or prospective client
of Employer for Employee's benefit or for any entity in which Employee has an
interest or is employed.
It is the desire and intent of the parties that the provisions of this
Section 4(a) shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
If any particular provisions or portion of this Section 4(a) shall be
adjudicated to be invalid or unenforceable, this Section 4(a) shall be deemed
amended to delete therefrom such provision or portion adjudicated to be invalid
or unenforceable, such amendment to apply only with respect to the operation of
this Section 4(a) in the particular jurisdiction in which such adjudication is
made.
(b) Intellectual Property. During the Term of Employment, Employee will
disclose to Employer all ideas, inventions and business plans developed by
Employee during such period which relate directly or indirectly to the business
of Employer or affiliates, including without limitation any process, operation,
product or improvement which may be patentable or copyrightable. Employee agrees
that such will be the property of Employer and that Employee will at Employer's
request and cost do whatever is necessary to secure the rights thereto by
patent, copyright or otherwise to Employer.
(c) Confidentiality. Employee agrees that Employee will not divulge to
anyone (other than Employer or any persons employed or designated by Employer)
any knowledge or information of any type whatsoever of a confidential nature
relating to the business of Employer or any of its subsidiaries or affiliates,
including without limitation all types of trade secrets (unless readily
ascertainable from public or published information or trade sources). Employee
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<PAGE> 4
further agrees not to disclose, publish or make use of any such knowledge or
information of a confidential nature without the prior written consent of
Employer unless required by law.
5. Reimbursement of Expenses.
Employee shall be entitled to be reimbursed for reasonable travel and
other expenses incurred in connection with Employee's services to Employer
pursuant to and during the term of this Agreement upon a basis consistent with
the policies of the Company, including, without limitation, commute expenses to
the Newport Beach offices of Employer's parent, Steven Myers & Associates, Inc.
from Employee's residence within Southern California.
6. Breach By Employee.
Both parties recognize that the services to be rendered under this
Agreement by Employee are special, unique and extraordinary in character, and
that in the event of the breach by Employee of the terms and conditions of this
Agreement to be performed by Employee, or in the event Employee performs
services for any person, firm, corporation or other entity engaged in a
competing line of business with Employer, the Employer shall be entitled, if it
so elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to obtain damages for any breach of
this Agreement, or to enforce the specific performance thereof by Employee, or
to enjoin Employee from performing services for any such other person, firm,
corporation or other entity. No breach by or termination of Employee hereunder
shall affect Employee's rights under any agreement respecting the merger
referred to in the introduction to this Agreement.
7. Assignment.
This Agreement is a personal contract and, except as specifically set
forth herein, the rights and interests of Employee herein may not be sold,
transferred, assigned, pledged or hypothecated. The rights and obligations of
Employer hereunder shall be binding upon and run in favor of the successors and
assigns of Employer provided that Employer not assign this Agreement without
Employee's written consent. In the event of any attempted assignment or transfer
of rights hereunder by Employee contrary to the provisions hereof, Employer
shall have no further liability for payments hereunder.
8. Governing Law; Captions.
This Agreement contains the entire agreement between the parties and
shall be governed by the law of the State of California. It may not be changed
orally, but only by agreement in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought, and
consented to in writing by each of the parties hereto. Section headings are for
convenience of reference only and shall not be considered a part of this
Agreement.
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<PAGE> 5
9. Prior Employment Agreements.
This Agreement supersedes and terminates all prior agreements between
the parties relating to the subject matter herein addressed including that
certain Employment Agreement by and between Employer and Employee dated
_________ which, as of the date hereof, is of no further force or effect.
10. Notices.
Any notice or other communication required or permitted hereunder shall
be sufficiently given if delivered in person or sent by telex, telecopy or by
registered or certified mail, postage prepaid, in the case of Employee,
addressed as follows:
Roger H. Skinner
9251 Rubio Avenue
Sepulveda, CA 91343
with a copy to:
Rosenfeld, Meyer & Susman, LLP
9601 Wilshire Blvd, 4th Floor
Beverly Hills, CA 90210
Attn: David D. Wexler, Esq.
and,
in the case of Employer, addressed to it as follows:
Space Applications Corporation
c/o Steven Myers & Associates, Inc.,
4695 MacArthur Boulevard, Eighth Floor
Newport Beach, California 92660
Attention: Chief Operating Officer
with a copy to:
Rutan & Tucker
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
Attention: Thomas J. Crane, Esq.
or such other address or number as shall be furnished in writing by either party
to the other, and such notice or communication shall be deemed to have been
given as of the date so delivered, sent by telecopier, telex or mailed.
-5-
<PAGE> 6
IN WITNESS WHEREOF, Employer has by its appropriate officer signed this
Agreement and Employee has signed this Agreement, on and as of the day and year
first above written.
EMPLOYER: SPACE APPLICATIONS CORPORATION,
a California corporation
By: /s/ KENNETH W. COLBAUGH
---------------------------------
Its: President
EMPLOYEE: /s/ ROGER H. SKINNER
----------------------------------
ROGER H. SKINNER
-6-
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
AGREEMENT dated as of May 29, 1998 between SPACE APPLICATIONS
CORPORATION ("Employer") and STANLEY Y.H. HEE ("Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Employer has been acquired in a reverse triangular merger
transaction by Steven Myers & Associates, Inc. ("SM&A");
WHEREAS, Employee was the Chief Executive Officer and a major
shareholder of Employer immediately prior to such acquisition;
WHEREAS, Employer desires to retain the services of Employee and
Employee desires to be employed by Employer upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereto agree as follows:
1. Employment.
The Employer hereby employs Employee, and Employee hereby agrees to
serve, as Executive Transition Advisor or in such other comparable executive
position as shall be assigned to Employee by Employer's Board of Directors, for
the period hereinafter defined. Employee agrees to perform services related to
the transition consistent with such office concerning the Acquisition and as
shall from time to time be assigned to Employee by Employer's Board of Directors
relating to such transition and, in the absence of such assignment, such
services customary to such office as are necessary to the operations of
Employer. The employment hereunder is not contemplated to be full time, but on
an as needed basis to assist with the transition of Employer within the SM&A
organization.
2. Term of Employment.
The employment hereunder shall be for the period (the "Term of
Employment") which shall commence on the date hereof and shall end on the first
anniversary of the date set forth above, unless earlier terminated (a) upon
death of Employee, (b) at the option of Employer, upon 20 days' prior written
notice to Employee, in the event of the inability of Employee to perform his
duties hereunder, whether by reason of injury (physical or mental), illness or
otherwise, incapacitating Employee for a continuous period exceeding 180 days of
(c) upon the discharge of Employee by the Board of Directors of Employer for
"cause" as defined herein. For purposes of this Agreement, an event or
occurrence constituting "cause" shall mean:
<PAGE> 2
(i) Employee's willful failure or refusal after notice
thereof, to perform specific directives of the Board of Directors of
Employer, when such directives are consistent with the scope and nature
of Employee's duties and responsibilities as set forth in Section 1
hereof;
(ii) Dishonesty of Employee materially and adversely
affecting Employer;
(iii) Drunkenness or use of drugs which interferes with the
performance of Employee's duties and responsibilities under this
Agreement, continuing after warning;
(iv) Employee's conviction of a felony or of any crime
involving moral turpitude, fraud or misrepresentation;
(v) Any gross or willful conduct of Employee resulting in
substantial loss of Employer, substantial damage to Employer's
reputation or theft or defalcation from Employer;
(vi) Gross incompetence on the part of Employee in the
performance of the duties and responsibilities under this Agreement; and
(vii) Any material breach (not covered by any of the clauses
(i) through (vi)) of any of the provisions of this Agreement if such
breach is not cured within 10 days after written notice thereof to
Employee by Employer or, if not curable within 10 days, if Employee has
taken material steps to cure within such 10 day period and such cure
occurs within 30 days of such breach.
In addition, upon the expiration of the Term of Employment, Employer
shall have the option, in its sole and absolute discretion, to retain Employee
as a consultant to Employee for an additional one year period, on terms and
conditions to be agreed upon by the parties at such time. Employee has no duty
or obligation to mitigate damages and no sums earned by Employee from other
employment shall offset the obligation of Employer hereunder.
3. Compensation.
(a) Base Salary. As compensation for services hereunder and in
consideration of his agreement not to compete as set forth in Section 4, during
the Term of Employment Employer shall pay Employee an annual salary of $150,000
which shall be payable in appropriate installments to conform with the regular
payroll dates for salaried personnel of Employer.
(b) Other Benefits. The fringe benefits, perquisites, and other benefits
of employment enjoyed by Employee during the year prior to the execution of this
Agreement will continue during the Term of Employment.
-2-
<PAGE> 3
(c) Payment Upon Early Termination. In the event of early termination of
employment for any reason specified in Section 2(a), (b) or (c) hereof, Employer
shall no longer be obligated to make any salary payments of any kind whatsoever
to Employee or Employee's estate. However, any salary payments earned but not
yet made shall be made by Employer to Employee or Employee's estate. Upon and
after termination of employment for whatever reason specified in Section 2
hereof, Employee shall be entitled to such benefits other than salary payments
to which Employee has become entitled under the terms of any plan or program
referred to in this Section 3.
4. Covenant Not to Compete; Intellectual Property; Confidentiality.
(a) Covenant Not to Compete. During the Term of Employment and for one
year thereafter, Employee will not, within any jurisdiction in which Employer or
any of its affiliates is duly qualified to do business, or within any marketing
area in which Employer or any of its affiliates is doing business, directly or
indirectly own, manage, operate, control, be employed by or participate in the
ownership, management, operation or control of, or be connected in any manner
with, any business in the area of "competitive procurements", such being the
business currently conducted by Space Applications Corporation as of the date of
this Agreement. For these purposes, Employee's ownership of securities of public
company not in excess of 1% of any class of such securities shall not be
considered to be competition with Employer.
For a period of twelve (12) months after termination of Employee's
employment with Employer, Employee agrees to refrain from interfering with the
employment relationship between Employer and its other employees by soliciting
any of such individuals to participate in independent business ventures and
agrees to refrain from soliciting business from any client or prospective client
of Employer for Employee's benefit or for any entity in which Employee has an
interest or is employed.
It is the desire and intent of the parties that the provisions of this
Section 4(a) shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
If any particular provisions or portion of this Section 4(a) shall be
adjudicated to be invalid or unenforceable, this Section 4(a) shall be deemed
amended to delete therefrom such provision or portion adjudicated to be invalid
or unenforceable, such amendment to apply only with respect to the operation of
this Section 4(a) in the particular jurisdiction in which such adjudication is
made.
(b) Intellectual Property. During the Term of Employment, Employee will
disclose to Employer all ideas, inventions and business plans developed by
Employee during such period which relate directly or indirectly to the business
of Employer or affiliates, including without limitation any process, operation,
product or improvement which may be patentable or copyrightable. Employee agrees
that such will be the property of Employer and that Employee will at Employer's
request and cost do whatever is necessary to secure the rights thereto by
patent, copyright or otherwise to Employer.
-3-
<PAGE> 4
(c) Confidentiality. Employee agrees that Employee will not divulge to
anyone (other than Employer or any persons employed or designated by Employer)
any knowledge or information of any type whatsoever of a confidential nature
relating to the business of Employer or any of its subsidiaries or affiliates,
including without limitation all types of trade secrets (unless readily
ascertainable from public or published information or trade sources). Employee
further agrees not to disclose, publish or make use of any such knowledge or
information of a confidential nature without the prior written consent of
Employer unless required by law.
5. Reimbursement of Expenses.
Employee shall be entitled to be reimbursed for reasonable travel and
other expenses incurred in connection with Employee's services to Employer
pursuant to and during the term of this Agreement upon a basis consistent with
the policies of the Company, including, without limitation, commute expenses to
the Newport Beach offices of Employer's parent, Steven Myers & Associates, Inc.
from Employee's residence within Southern California.
6. Breach By Employee.
Both parties recognize that the services to be rendered under this
Agreement by Employee are special, unique and extraordinary in character, and
that in the event of the breach by Employee of the terms and conditions of this
Agreement to be performed by Employee, or in the event Employee performs
services for any person, firm, corporation or other entity engaged in a
competing line of business with Employer, the Employer shall be entitled, if it
so elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to obtain damages for any breach of
this Agreement, or to enforce the specific performance thereof by Employee, or
to enjoin Employee from performing services for any such other person, firm,
corporation or other entity. No breach by or termination of Employee hereunder
shall affect Employee's rights under any agreement respecting the merger
referred to in the introduction to this Agreement.
7. Assignment.
This Agreement is a personal contract and, except as specifically set
forth herein, the rights and interests of Employee herein may not be sold,
transferred, assigned, pledged or hypothecated. The rights and obligations of
Employer hereunder shall be binding upon and run in favor of the successors and
assigns of Employer provided that Employer not assign this Agreement without
Employee's written consent. In the event of any attempted assignment or transfer
of rights hereunder by Employee contrary to the provisions hereof, Employer
shall have no further liability for payments hereunder.
-4-
<PAGE> 5
8. Governing Law; Captions.
This Agreement contains the entire agreement between the parties and
shall be governed by the law of the State of California. It may not be changed
orally, but only by agreement in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought, and
consented to in writing by each of the parties hereto. Section headings are for
convenience of reference only and shall not be considered a part of this
Agreement.
9. Prior Employment Agreements.
This Agreement supersedes and terminates all prior agreements between
the parties relating to the subject matter herein addressed including that
certain Employment Agreement by and between Employer and Employee dated
_________ which, as of the date hereof, is of no further force or effect.
10. Notices.
Any notice or other communication required or permitted hereunder shall
be sufficiently given if delivered in person or sent by telex, telecopy or by
registered or certified mail, postage prepaid, in the case of Employee,
addressed as follows:
Stanley Y.H. Hee
_________________
_________________
with a copy to:
Rosenfeld, Meyer & Susman, LLP
9601 Wilshire Blvd, 4th Floor
Beverly Hills, CA 90210
Attn: David D. Wexler, Esq.
and,
in the case of Employer, addressed to it as follows:
Space Applications Corporation
c/o Steven Myers & Associates, Inc.,
4695 MacArthur Boulevard, Eighth Floor
Newport Beach, California 92660
Attention: Chief Operating Officer
with a copy to:
Rutan & Tucker
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
Attention: Thomas J. Crane, Esq.
or such other address or number as shall be furnished in writing by either party
to the other, and such notice or communication shall be deemed to have been
given as of the date so delivered, sent by telecopier, telex or mailed.
-5-
<PAGE> 6
IN WITNESS WHEREOF, Employer has by its appropriate officer signed this
Agreement and Employee has signed this Agreement, on and as of the day and year
first above written.
EMPLOYER: SPACE APPLICATIONS CORPORATION,
a California corporation
By: /s/ KENNETH W. COLBAUGH
---------------------------------
Its: President
EMPLOYEE: /s/ STANLEY Y.H. HEE
---------------------------------
STANLEY Y.H. HEE
-6-
<PAGE> 1
EXHIBIT 10.18
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") dated as of May 29, 1998 is
among STEVEN MYERS & ASSOCIATES, INC., a California corporation ("SM&A") SPACE
APPLICATIONS CORPORATION, a California corporation ("SAC"), the shareholders of
SAC as identified on Schedule 1 hereto, STANLEY Y.H. HEE (the "SAC
Representative"), and FIRST AMERICAN TRUST COMPANY, as escrow agent (the "Escrow
Agent").
PRELIMINARY STATEMENT
Pursuant to an Agreement and Plan of Reorganization and Merger dated as
of May 29, 1998 (the "Merger Agreement"), by and among SM&A, SAC, SAC
Acquisition, Inc., a wholly owned subsidiary of SM&A, and Roger H. Skinner, SM&A
is acquiring SAC through the merger of SAC Acquisition, Inc. with and into SAC.
Capitalized terms used herein and not otherwise defined have the meanings
ascribed to them in the Merger Agreement.
The holders of the Company Stock outstanding immediately prior to the
Effective Time (the "Shareholders") have agreed to indemnify SM&A as provided in
Article 9 of the Merger Agreement through the deposit of 81,974 shares of SM&A
Stock (the "Escrow Shares") pursuant to Section 2.8 of the Merger Agreement. A
list of all Shareholders and their pro rata interest in the Escrow Shares is
attached hereto as Schedule 2.
The parties hereto agree as follows:
1. Establishment of Escrow.
SM&A has delivered to the Escrow Agent and the Escrow Agent acknowledges
receipt of the Escrow Shares in the form of a single stock certificate. The
Escrow Shares shall be held in escrow in the name of the Escrow Agent or its
nominee, subject to the terms and conditions set forth herein. Unless and until
the Escrow Shares are returned to SM&A or delivered to the Shareholders pursuant
to the terms of this Agreement, the Escrow Agent shall vote the Escrow Shares in
accordance with the written instructions of the SAC Representative.
Escrow Agent shall invest any cash held by it pursuant to this Agreement
in interest bearing accounts or certificates of deposit with such bank(s) or
financial institution(s) as it deems advisable.
2. Amounts Earned on Escrow Shares; Tax Matters.
All amounts earned on the Escrow Shares (dividends or other
distributions, and interest earned thereon) shall be distributed pro rata to the
Shareholders on a quarterly basis. All interest
<PAGE> 2
earned on cash deposited by Shareholders pursuant to Section 3.3, shall be paid
to the Shareholders entitled thereto on a quarterly basis. The parties agree
that to the extent required by applicable law, including Section 468B(g) of the
Internal Revenue Code of 1986, as amended (the "Code"), the Shareholders will
include all amounts earned on the Escrow Shares and all interest earned on cash
deposits in their gross income for federal, state and local income tax
(collectively, "income tax") purposes and pay any income tax resulting
therefrom. As a condition to a Shareholder's right to replace Escrow Shares with
Escrow Funds as provided in Section 3.3, such Shareholder shall have previously
furnished to the Escrow Agent all information necessary to enable the Escrow
Agent to comply with the reporting and backup withholding obligations of the
Code
3. Claims Against Escrow Shares.
3.1 At any time or times prior to the Expiration Date (as defined in
Section 5) SM&A may make claims against the Escrow Shares and "Escrow Funds" (as
defined in Section 3.3) for amounts due for indemnification under Article 9 of
the Merger Agreement. SM&A shall notify the SAC Representative and the Escrow
Agent in writing of each such claim ("Notice of Claim"), including a brief
description of the amount and nature of such claim. If the amount subject to the
claim is unliquidated, SM&A shall make a good faith estimate as to the amount of
the claim for purposes of determining the number of Escrow Shares and/or amount
of Escrow Funds, if any, to be withheld by the Escrow Agent if such claim is not
resolved or otherwise adjudicated by the Expiration Date. Such good faith
estimate shall be included in the Notice of Claim. If the SAC Representative
shall dispute a claim or SM&A's estimate as to the amount of the claim, the SAC
Representative shall give written notice thereof to SM&A and to the Escrow Agent
within 30 days after the date SM&A's Notice of Claim was given to the SAC
Representative, in which case the Escrow Agent shall continue to hold the Escrow
Shares/Escrow Funds in accordance with the terms of this Agreement; otherwise,
such liquidated claim shall be deemed to have been acknowledged to be payable
out of the Escrow Shares/Escrow Funds in the full amount thereof as set forth in
the Notice of Claim and the Escrow Agent shall use its best efforts to pay such
liquidated claim from the Escrow Shares/Escrow Funds to SM&A within three
business days after expiration of said 30-day period. Unliquidated claims shall
not be paid until liquidated. Disputes as to the SM&A's good faith estimate of a
claim shall be resolved as provided in Section 4.1. The value of Escrow Shares
and Escrow Funds paid to satisfy a claim under this Agreement shall be allocated
pro rata among the Shareholders based on their proportionate interests in the
aggregate Escrow Shares and Escrow Funds. With respect to each Shareholder, the
amount paid to satisfy a claim under this Agreement shall be deducted first from
the Escrow Funds and then, to the extent necessary, from the Escrow Shares
allocable to such Shareholder. If the amount of the claim exceeds the aggregate
value of the Escrow Shares/Escrow Funds
-2-
<PAGE> 3
subject thereto, the Escrow Agent shall have no liability or
responsibility for any deficiency.
3.2 The Escrow Agent shall effect the payment of Escrow Shares to SM&A
by surrendering such Escrow Shares to SM&A's stock transfer agent (U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, CA 91204 ("UST")) for
cancellation upon receipt by the Escrow Agent of a copy of a letter from SM&A to
UST, instructing UST to issue a new certificate to the Escrow Agent for the
remaining Escrow Shares after giving effect to such payment. The value per share
of the Escrow Shares for purposes of this Agreement shall be the Average Closing
Price for the Base Period. All claims paid out of the Escrow Shares shall be
rounded to the nearest whole share. The Escrow Agent shall not be responsible
for and shall have no liability in connection with determining whether the
transfer of any Escrow Shares complies with federal or state securities laws.
3.3 In the event that the Escrow Shares become eligible for sale
pursuant to Rule 144 under the Securities Act or are entitled to be included in
a registration statement filed by SM&A pursuant to the Securities Act ("Eligible
Escrow Shares"), then a Shareholder may sell (pursuant to Rule 144 or an
effective registration statement) all or any portion of his allocation of the
Eligible Escrow Shares; provided that such Shareholder has arranged, to SM&A
satisfaction, for the deposit into escrow of the proceeds from the sale of such
Eligible Escrow Shares. The funds deposited by a Shareholder pursuant to this
Section 3.3 ("Escrow Funds") shall be held by the Escrow Agent and subject to
the terms and conditions of this Agreement.
3.4 If the SAC Representative shall give notice to SM&A and the Escrow
Agent pursuant to Section 3.1 disputing an SM&A claim, no distribution of the
Escrow Shares/Escrow Funds shall be made by the Escrow Agent to SM&A or to the
Shareholders of the Set Aside Amount (as defined in Section 4.1) with respect to
such claim until either: (i) such disputed claim has been resolved as evidenced
by a written notice executed by SM&A and the SAC Representative instructing the
Escrow Agent as to the distribution of such Set Aside Amount or a portion
thereof; or (ii) such dispute shall have been adjudicated in accordance with the
arbitration procedures described in Section 4.2.
4. Disputed Claims.
4.1 If the SAC Representative shall dispute an indemnification claim of
SM&A as provided in Section 3, the Escrow Agent shall set aside a portion of the
Escrow Shares/Escrow Funds equal to the amount of the claim as set forth in the
Notice of Claim (the "Set Aside Amount"), which amount may subsequently be
modified by arbitration. If the SAC Representative shall dispute the Set Aside
Amount as provided in Section 3, the Escrow
-3-
<PAGE> 4
Shares/Escrow Funds constituting the Set Aside Amount shall be withheld pursuant
to the immediately preceding sentence until otherwise determined by arbitration.
The Set Aside Amount shall be allocated pro rata among the Shareholders based
upon their percentage interests in the aggregate Escrow Shares/Escrow Funds.
With respect to each Shareholder, the amount constituting the Set Aside Amount
shall be deducted first from the Escrow Funds and then, to the extent necessary,
from the Escrow Shares allocable to such shareholder. In the event SM&A notifies
the Escrow Agent in writing that it has made out-of-pocket expenditures or
anticipates that it will incur legal expenses in connection with any such
disputed claim with respect to which it is entitled to be indemnified under the
Merger Agreement, a portion of the Escrow Shares/Escrow Funds equal to such
reasonable incurred or anticipated expenditures shall also be set aside and
added to and become a part of the Set Aside Amount; provided, that in the event
that it shall be agreed (as evidenced by a written notice executed by SM&A and
the SAC Representative as described in Section 3.4) or determined through an
arbitration proceeding described in Section 4.2 that SM&A is not entitled to
indemnification with respect to such claim or such expenses, SM&A shall not be
entitled to the portion of the Escrow Shares/Escrow Funds set aside for such
expenses.
4.2 If, within 60 days after the SAC Representative sends notice of a
dispute, the Escrow Agent has not received written notice executed by SM&A and
the SAC Representative to the effect that the disputed indemnification claim has
been resolved, the indemnification claim shall be referred to an arbitrator
chosen by agreement of the SAC Representative and SM&A. If no agreement is
reached regarding selection of the arbitrator within 30 days after written
request from either party to the other, SM&A or the SAC Representative may
submit the matter in dispute to JAMS, to be settled by arbitration in Orange
County, California in accordance with the commercial arbitration rules of such
association. SM&A and the SAC Representative agree to act in good faith to
select mutually an arbitrator. The fees and expenses of any arbitration shall be
borne equally by the Shareholders as a group and SM&A, unless and until the
arbitrator determines otherwise. Any fees or expenses attributable to the
Shareholders as a group shall be payable only out of the Escrow Shares/Escrow
Funds. In no event shall the Escrow Agent be responsible for any fees or
expenses of any party to any arbitration proceedings. The determination of the
arbitrator as to the amount, if any, of the indemnification claim that is
properly allowable shall be conclusive and binding upon the parties hereto and
judgment may be entered thereon in any court having jurisdiction thereof,
including, without limitation, any Superior Court in the State of California.
The Escrow Agent shall make payments of such claim, as and to the extent
allowed, to SM&A within three business days following its receipt of a copy of
the arbitration award determination.
-4-
<PAGE> 5
5. Termination and Distribution of Escrow Shares.
5.1 This Agreement shall terminate two (2) years after the Effective
Time (as defined in Section 1.2 of the Merger Agreement) (the "Expiration
Date"); provided that this Agreement shall continue in effect until the
resolution of all outstanding indemnification claims as to which the Escrow
Agent has received notice pursuant to Section 3 hereof on or prior to the
Expiration Date.
5.2 SM&A shall provide the Escrow Agent with reasonable advance notice
of the expected Expiration Date and shall confirm the occurrence of such as soon
as practicable thereafter. On the Expiration Date or as soon thereafter as is
practicable, the Escrow Agent shall distribute the remaining Escrow
Shares/Escrow Funds less (i) the number of Escrow Shares and amount of Escrow
Funds constituting any then existing Set Aside Amounts, and (ii) the number of
Escrow Shares and amount of Escrow Funds equal to the amount specified in any
Notice of Claim delivered to the Escrow Agent prior to the Expiration Date with
respect to which no Set Aside Amount has yet been established and the Escrow
Agent has not otherwise been instructed by SM&A and the SAC Representative. At
such time thereafter as any remaining indemnification claim hereunder has been
resolved and the Escrow Agent has received a written notice executed by SM&A and
the SAC Representative to that effect (or a copy of an arbitration award
pursuant to Section 4.2 to that effect) and any amounts to be distributed to
SM&A in connection therewith have been so distributed, the Escrow Agent shall
distribute any portion of the remaining Escrow Shares/Escrow Funds withheld in
respect of such claim to the Shareholders based on their relative percentage
interest in such Escrow Share and/or Escrow Funds. Upon the resolution of all
outstanding indemnification claims hereunder, the Escrow Agent shall distribute
the remaining amount, if any, of the Escrow Shares/Escrow Funds to the
Shareholders based on their relative percentage interest in such Escrow Share
and/or Escrow Funds and this Agreement shall terminate. SM&A shall not be
required to issue certificates for fractional shares in any distribution of
Escrow Shares pursuant to this Agreement, but rather shall pay to the Escrow
Agent for distribution to the Shareholders an amount in cash (without interest)
determined by multiplying each Stockholder's fractional interest by the Average
closing Price for the Base Period. The Escrow Agent shall effect such
distributions of Escrow Shares as it is required to make to the Shareholders
under this Agreement by surrendering such Escrow Shares to UST for cancellation
upon receipt by the Escrow Agent of a copy of a letter from SM&A to UST,
instructing such transfer agent to issue such shares to the Shareholders based
upon their relative interests therein. The combination of Escrow Shares and
Escrow Funds to be withheld under this Section 5.3 as Set Aside Amounts or
pursuant to a Notice of Claim (for which no set aside amount has been
established) shall be determined in accordance with Section 4.1.
-5-
<PAGE> 6
6. The Escrow Agent.
6.1 Notwithstanding anything herein to the contrary, the Escrow Agent
shall promptly dispose of all or any part of the Escrow Shares/Escrow Funds as
directed by a writing jointly signed by the SAC Representative and SM&A. The
reasonable fees and expenses of the Escrow Agent (as set forth on the fee
schedule attached hereto as Schedule 3) in connection with its performance of
this Agreement shall be borne by SM&A. The Escrow Agent shall not be liable for
any act or omission to act under this Agreement, including any and all claims
made against the Escrow Agent as a result of its holding the Escrow
Shares/Escrow Funds in its own name, except for its own gross negligence or
willful misconduct. The Escrow Agent shall not be liable for, and the
Shareholders (only to the extent of their proportionate share of the Escrow
Shares/Escrow Funds) and SM&A shall jointly and severally indemnify the Escrow
Agent against, any losses or claims (including reasonable out-of-pocket
expenses) arising out of, any action taken or omitted in good faith hereunder or
upon the advice of counsel. The Escrow Agent may decline to act and shall not be
liable for failure to act if in doubt as to its duties under this Agreement. The
Escrow Agent may act upon any instrument or signature believed by it to be
genuine and may assume that any person purporting to give any notice or
instruction hereunder, reasonably believed by it to be authorized, has been duly
authorized to do so. The Escrow Agent's duties shall be determined only with
reference to this Agreement and applicable laws, and the Escrow Agent is not
charged with knowledge of or any duties or responsibilities in connection with
any other document or agreement, including, but not limited to, the Merger
Agreement.
6.2 The Escrow Agent shall have the right at any time to resign
hereunder by giving written notice of its resignation to the parties hereto, at
the addresses set forth herein or at such other address as the parties shall
provide, at least 30 days prior to the date specified for such resignation to
take effect. In such event SM&A and the SAC Representative shall by agreement
appoint a successor escrow agent within said 30 days; if SM&A and the SAC
Representative do not agree upon the selection of a successor escrow agent
within such period, the Escrow Agent may appoint a successor escrow agent. Upon
the effective date of such resignation, the Escrow Shares together with all cash
and other property then held by the Escrow Agent hereunder shall be delivered by
it to such successor escrow agent or as otherwise shall be designated in writing
by SM&A and the SAC Representative.
6.3 In the event that the Escrow Agent should at any time be confronted
with inconsistent or conflicting claims or demands by the parties hereto, the
Escrow Agent shall have the right to interplead said parties in any court of
competent jurisdiction and request that such court determine the respective
rights of such parties with respect to this Agreement and, upon doing so, the
Escrow Agent shall be released from any obligations or liability to either party
as a consequence of any such claims or demands. The
-6-
<PAGE> 7
reasonable fees and costs incurred by the Escrow Agent in interpleading said
parties shall be borne equally by SM&A and the Shareholders as a group.
6.4 The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or through
its agents or attorneys. The Escrow Agent shall not be responsible for and shall
not be under a duty to examine, inquire into or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any amendment or
supplement hereto.
7. SAC Representative.
7.1 The SAC Representative accepts and agrees to discharge diligently
the duties and responsibilities of the SAC Representative set forth in this
Agreement. SM&A and the Escrow Agent shall be entitled to rely upon the
authorization and designation of the SAC Representative under this Section 7.
7.2 The SAC Representative is authorized to take any action it deems
appropriate or necessary to carry out the provisions of, and to determine the
rights of the Shareholders under, this Agreement, including without limitation,
taking any action required or permitted under this Agreement to protect or
enforce the Shareholders' rights to the Escrow Shares/Escrow Funds. The SAC
Representative's authority includes but is not limited to:
(a) receiving all notices or other documents given or to be given
pursuant to this Agreement or in connection with the transactions
contemplated hereby;
(b) engaging special counsel, accountants, investment banks or
other advisors and incurring such other expenses in connection with the
Agreement and the transactions contemplated thereby as are required
therein;
(c) prosecuting and settling any dispute in connection with the
Agreement, including without limitation the resolution of any disputes
related to disbursements of the Escrow Shares/Escrow Funds; and
(d) paying all expenses incurred in connection with the Agreement
and the transactions contemplated thereby out of the Escrow
Shares/Escrow Funds pursuant to Sections 7.5 and 7.8 below.
7.3 In the event of the death, resignation, discharge or incapacity of
the SAC Representative, Shareholders holding a majority of the Escrow
Shares/Escrow Funds shall appoint a successor SAC Representative. Such successor
SAC Representative shall be appointed by an instrument in writing signed by the
-7-
<PAGE> 8
requisite Shareholders, and such appointment shall become effective as to any
such successor SAC Representative when such instrument shall have been delivered
to such person, and that person has consented to such appointment.
7.4 The SAC Representative shall keep the Shareholders reasonably
informed of his decisions of a material nature.
7.5 The reasonable expenses (including the reasonable fees and
disbursements of counsel, accountants and advisors in connection with the
arbitration of a disputed claim or otherwise) incurred by the SAC Representative
in connection with his duties hereunder shall be paid for out of the Escrow
Shares/Escrow Funds by the Escrow Agent as provided in Section 7.8 below and in
an amount not to exceed $100,000. The SAC Representative shall keep adequate and
reasonable books and records of his expenses. Such payment shall not affect the
rights of either SM&A or the Shareholders under the Merger Agreement or Section
11 of this Agreement.
7.6 The SAC Representative shall diligently discharge his duties and
responsibilities under this Agreement. The SAC Representative shall not be
liable to the parties hereto or any Stockholder for any action taken or omitted
by the SAC Representative in good faith, or for any mistake of fact or law,
unless caused by his own gross negligence or willful misconduct. In no event
shall the SAC Representative be responsible or liable for special, indirect or
consequential loss or damages of any kind, regardless of the form of the action.
7.7 The SAC Representative shall be entitled to treat as genuine any
letter or other document furnished to him by SM&A or the Escrow Agent and
reasonably believed by it to be genuine and have been signed and presented by
the proper party or parties.
7.8 The SAC Representative shall not be entitled to any compensation for
services hereunder. To the extent the SAC Representative shall incur
out-of-pocket costs (including the reasonable fees and disbursements of counsel,
accountants and advisors in connection with the arbitration of a disputed claim
or otherwise) in the performance of his duties hereunder, the SAC Representative
shall be authorized to direct the Escrow Agent to reimburse the SAC
Representative for such reasonable expenses out of the Escrow Shares/Escrow
Funds in an amount not to exceed $100,000. The combination of Escrow Shares and
Escrow Funds paid to the SAC Representative hereunder shall be determined in
accordance with Section 3.1 hereof.
7.9 SM&A shall be entitled to treat as genuine any letter or other
document furnished to it by the SAC Representative or the Escrow Agent and
reasonably believed by it to be genuine and have been signed and presented by
the proper party or parties.
-8-
<PAGE> 9
8. Governing Law.
This Agreement is governed by the laws of the State of California
without regard to its conflict of law provisions, and shall inure to the benefit
of and be binding upon the successors, assigns, heirs and personal
representatives of the parties hereto. Service of process in any proceeding
arising under this Agreement (including service of process for the institution
of such proceeding) may be made by certified mail, return receipt requested,
directed to the respective party in accordance with Section 10 below.
9. Counterparts.
This Agreement may be executed in one or more counterparts, all of which
documents shall be considered one and the same document.
10. Notices.
Any notice or other communication required or permitted hereunder shall
be in writing and shall be deemed given when so delivered in person, by
overnight courier, by facsimile transmission (with receipt confirmed by
telephone or by automatic transmission report) or two business days after being
sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
To SM&A: Steven Myers & Associates, Inc.
4695 MacArthur Boulevard,
Eighth Floor
Newport Beach, California 92660
Attention: Chief Operating Officer
Telephone: 714-975-1550
Fax: 714-975-1624
With a copy to: Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
Attn: Thomas J. Crane, Esq.
Telephone: 714-641-5100
Fax: 714-546-9035
To SAC Representative: Stanley Y.H. Hee
25774 Piuma
Calabasas, California 91302
Telephone: 818-222-8771
Fax: 818-222-8771
-9-
<PAGE> 10
With a copy to: Rosenfeld, Meyer & Susman, LLP
9601 Wilshire Blvd, 4th Floor
Beverly Hills, CA 90210
Attn: David D. Wexler, Esq.
Telephone: 310-858-7700
Fax: 310-271-6430
To Escrow Agent: First American Trust Company
2161 San Joaquin Hills Road
Newport Beach, California 92660
Attn: Elizabeth A. Markworth
Telephone: (949) 719-4532
Fax: (714) 667-1613
Addresses may be changed by written notice given pursuant to this section. Any
notice given hereunder may be given on behalf of any party by his counsel or
other authorized representative.
11. Attorney's Fees.
In the event of any litigation among the parties hereto (including,
without limitation, any arbitration proceeding described in Section 4.2 above),
the prevailing party in such litigation or proceeding shall be entitled to
recover all costs incurred in connection therewith, including, without
limitation, reasonable attorneys fees, provided that the costs of any
arbitration proceeding shall be allocated in the manner set forth in Section
4.2.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date first stated above.
SM&A: STEVEN MYERS & ASSOCIATES, INC.,
a California corporation
By: /s/ KENNETH COLBAUGH
---------------------------------
Kenneth Colbaugh,
Chief Operating Officer
SAC: SPACE APPLICATIONS CORPORATION,
a California corporation
By: /s/ ROGER H. SKINNER
---------------------------------
Roger H. Skinner, President
ESCROW AGENT: FIRST AMERICAN TRUST COMPANY
By:________________________________
Its:____________________________
By:________________________________
Its:____________________________
SAC REPRESENTATIVE: /s/ STANLEY Y.H. HEE
------------------------------------
STANLEY Y.H. HEE
SHAREHOLDERS: /s/ STANLEY Y.H. HEE
------------------------------------
STANLEY Y.H. HEE, as attorney-in-
fact for the Shareholders identified
on Schedule 4 hereto
____________________________________
____________________________________
____________________________________
____________________________________
-11-
<PAGE> 12
SCHEDULE 1
Shareholders
------------
(attached hereto)
-12-
<PAGE> 13
SCHEDULE 2
Escrow Interests
<TABLE>
<CAPTION>
Interest In
Stockholder Escrow Shares
----------- -------------
<S> <C>
Allman, Betty B. 73
Bergen, Jodine L. 243
Berry, Debra D. 243
Boeshaar, Glenn V. 4,379
Bruce, Phillip 608
Dai, Dr. Kai K. 49
Dukellis, Peter John 182
Harms, John W. 730
Hee, Stanley 19,500
Hesprich, Glen V. 487
Kaun, Carl F. 730
Kelly, Anne S. 3,041
Knight, Wayne G. 24
Krueger, Dr. Robert W. 1,179
Kuseski, Richard A. 243
Livingston, William A. 487
Love, Glenn E. 243
Lu, Dr. Amos 1,217
Dr. Amos Lu, Trustee of the Amos Lu Small Fund Living Trust 1,217
Lyle, Alred E. 1,946
Mast, Steven R. 243
Miller, Dr. Robert C. 2,555
Morrell, Robert 122
Murphy, Irene S. 24
Nelson, Patricia D. 243
Newell, John W. 973
Space Applications Corporation Employer Stock Trust 3,768
Skinner, Roger H. 32,724
Smith, Clarence E. 2,043
Stringfellow, Janice G. 24
Welter, Thelma G. 2,433
Total 81,974
</TABLE>
-13-
<PAGE> 14
SCHEDULE 3
Escrow Agent Fees
-----------------
(attached hereto)
-14-
<PAGE> 15
SCHEDULE 4
Shareholders For Whom Stanley Y.H. Hee is Attorney-In-Fact
----------------------------------------------------------
(attached hereto)
-15-
<PAGE> 1
EXHIBIT 10.24
PROMISSORY NOTE
JUNE 25, 1998
FOR VALUE RECEIVED, the undersigned Summit Aviation, Inc. (SAI), a California
corporation ("Debtor") HEREBY PROMISES TO PAY to the order of Steven Myers &
Associates, Inc. (SM&A, or "Secured Party"), the principal sum of Eight Hundred
Eighty Thousand Dollars and 00/100 ($880,000.00) including interest as set
forth below under the terms and conditions described herein.
1. INTEREST RATE: This Promissory Note will bear a simple interest rate at the
prime rate, based on a 360-day calendar year, calculated and accrued monthly on
the unpaid principal balance. Interest is to accrue beginning June 25, 1998.
2. PAYMENT TERMS: Debtor shall pay the full principal balance and all accrued
interest no later than June 25, 1999.
3. PERIOD OF PROMISSORY NOTE: This Note is in effect and valid until all
accrued principal and interest has been paid to Secured Party.
4. PREPAYMENT OF PROMISSORY NOTE: This Note may be paid in full or in part at
any time without any prepayment penalties incurred by the Debtor.
5. COLLATERAL: This Note is secured by a first-priority security interest in
the 1978 Turbo Commander 690B-10 aircraft, Serial No. 11492, and bearing FAA
No. N691SM. Debtor holds a clear and properly registered title to such aircraft.
As attested by the signatures below, both parties agree to the terms and
conditions as set forth above.
SUMMIT AVIATION, INC. STEVEN MYERS & ASSOCIATES, INC.
(DEBTOR) (SECURED PARTY)
By: /s/ STEVEN S. MYERS By: /s/ RONALD A. HUNN
-------------------------------- ----------------------------
Name: Steven S. Myers Name: Ronald A. Hunn
Title: President Title: Chief Financial Officer
Tax ID#: 33-0727131 Tax ID#: 33-0080929
Date: June 25, 1998 Date: June 25, 1998
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
1. Space Applications Corporation.
2. Staminet, Inc., a subsidiary of Space Applications Corporation.
3. Decision-Science Applications, Inc.
4. DSA Systems, Inc., a subsidiary of Decision-Science Applications, Inc.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
SM&A Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Selected Financial Data" and "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Orange County, California
August 24, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 3, 1997, with respect to the consolidated
financial statements of Space Applications Corporation and Subsidiary included
in the Registration Statement (Form S-1 No. __________) and related Prospectus
of SM&A Corporation for the registration of 5,000,000 shares of its common
stock.
/s/ ERNST & YOUNG LLP
----------------------------------------
ERNST & YOUNG LLP
Washington, DC
August 24, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SM&A Corporation on
Form S-1 of our report on our audits of the consolidated financial statements
of Decision-Science Applications, Inc. and Subsidiary for the Years Ended
January 31, 1998, 1997, and 1996, dated April 13, 1998, appearing in the
Prospectus, which is part of the Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Washington, DC
August 24, 1998
<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>
