<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 5, 1998
REGISTRATION NO. 333-40725
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STEVEN MYERS & ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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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
(714) 975-1550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RONALD A. HUNN
CHIEF FINANCIAL OFFICER
STEVEN MYERS & ASSOCIATES, INC.
4695 MACARTHUR COURT, EIGHTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(714) 975-1550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
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<S> <C>
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 of
1933, 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 of 1933, please 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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<S> <C> <C> <C> <C>
==========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(1)(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------
Common Stock, no par value...... 3,622,500 shares $14.00 $50,715,000 $15,368
==========================================================================================================
</TABLE>
(1) Includes 472,500 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.
(3) A registration fee of $13,939 has been previously paid.
------------------------
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.
================================================================================
<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 JANUARY 5, 1998
PROSPECTUS
, 1998
3,150,000 SHARES
[SM&A LOGO]
COMMON STOCK
Of the 3,150,000 shares of Common Stock offered hereby, 2,100,000 shares
are being sold by Steven Myers & Associates, Inc. ("SM&A" or the "Company") and
1,050,000 shares are being sold by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $12.00 and $14.00 per share. See "Underwriting" for
information related to the factors to be considered in determining the initial
public offering price.
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "WINS."
------------------------
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.
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- -------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share.......................... $ $ $ $
Total(3)........................... $ $ $ $
- -------------------------------------------------------------------------------------------------------
</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 472,500 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, and 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
SECURITIES CORPORATION
<PAGE> 3
COLOR PHOTOGRAPHY
The inside front cover art depicts a few programs the Company has supported
and four brief Company highlights.
The inside back cover art depicts clients the Company has supported.
This Prospectus contains certain forward-looking statements 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 or 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."
2
<PAGE> 4
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. Unless otherwise indicated, the information in this Prospectus,
including share and per share data, (i) assumes no exercise of the Underwriters'
over-allotment option, and (ii) reflects the conversion prior to consummation of
the offering hereby (the "Offering") of common stock of the Company ("Common
Stock"), of all of the outstanding shares of Series A and Series B Common Stock
of the Company into an aggregate of 12,900,000 shares of Common Stock. See
"Recapitalization."
THE COMPANY
Steven Myers & Associates, Inc. ("SM&A" or the "Company") is the largest
proposal management company in the United States. The Company's proprietary
proposal management processes and team of approximately 150 highly experienced
professionals help its clients to achieve a higher probability of winning the
government and commercial contracts that are critical to their success. The
Company is also significantly expanding systems engineering and program
integration services to aerospace, communications and engineering companies. The
Company's success is evidenced by a compound annual revenue growth rate of
approximately 35%, from $10.7 million for 1993 to $32.9 million for the twelve
months ended September 30, 1997.
The Company has amassed a win rate of 88.8% 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 recent "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. 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 $133.6 billion of government
and commercial procurements. The Company leverages its success in winning
business for its clients and its early involvement in the project life cycle to
extend its services beyond proposal development to systems engineering and
program integration. Such contract support services have grown from 3.0% of the
Company's revenues for 1994 to 18.4% for the nine months ended September 30,
1997.
The Company's core business consists of providing proposal management
services to its clients. For programs in excess of $100 million, the Company
assembles a dedicated team that manages all phases of the proposal development
process from strategy formulation through proposal preparation and review to the
proposal submittal and post-submittal process. SM&A's clients include industry
leaders such as Bechtel Corporation, The Boeing Company (including the former
McDonnell Douglas and the aerospace and defense group of Rockwell International
Corporation), Harris Corporation, Hughes Electronics Corporation, ITT
Corporation, Litton Industries, Inc., Lockheed Martin Corporation, Loral Space &
Communications, Ltd., Motorola, Inc. and Raytheon Company. SM&A's 88.8% win rate
covers 375 major proposals managed for its clients, including such high profile
programs as the next generation space-based surveillance program for the Air
Force, the Tomahawk improvement and Sidewinder missile replacement programs for
the Navy, environmental clean up projects for the Department of Energy, and a
new space shuttle design for NASA. SM&A is leveraging its successful win rate in
large programs to penetrate the substantial market for proposals for smaller
programs (generally less than $100 million each) by creating, staffing and
operating Proposal Development Centers ("PDCs"). The Company's PDCs are
typically located within its clients' facilities to bring SM&A's quality and
expertise to smaller client programs and reduce the cost per proposal. The
Company currently operates PDCs for GDE Systems, Inc., Hughes Electronics
Corporation, ITT Corporation, Litton Industries, Inc., Motorola, Inc., and
Raytheon Company. After installation of a PDC, clients typically experience win
rates of two to three times that previously achieved by their internal proposal
teams. The Company anticipates installing PDCs at five additional clients' sites
by the end of 1998.
3
<PAGE> 5
The demand for the Company's services is increasing as the aerospace and
defense industry consolidates. In this highly competitive environment, major
contractors find it is increasingly vital to win new contracts in order to
survive, increasing their incentive to employ the Company's professional
proposal management services. Based on procurement data from the Department of
Defense and NASA, the Company estimates that the annual government proposal
management market is approximately $325 million, and the Company believes that
the market for commercial procurement is at least as large. In addition, the
increasing trend toward utilizing outsourced expertise has created a significant
opportunity for the Company to expand its systems engineering and program
integration services. The Company's participation in the proposal management
process uniquely positions SM&A to extend its involvement into contract support
services and management consulting roles on projects won by its clients. By
leveraging its client relationships and engineering expertise, the Company has
obtained 20 support services contracts in the last 18 months. The Company
estimates the annual market for high-end engineering and consulting services is
approximately $10 billion and the Company's plan is to generate an increasing
percentage of its revenue from these services.
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) the expertise resulting from SM&A's professionals who have
an average of more than 20 years of relevant industry experience; (ii) a proven
track record and superior reputation based on an impressive win rate established
over the past 15 years; (iii) an ability to recruit and retain highly
experienced personnel capable of providing both proposal management and contract
support services; and (iv) deep-rooted client relationships that lead to
multiple engagements and often create additional growth opportunities in
complementary lines of business.
The Company's strategy is to expand its position as the largest proposal
management company and to continue to develop its rapidly growing contract
support services. The key elements of the Company's growth strategy are to (i)
capitalize on trends toward increased outsourcing of proposal management and
contract support functions; (ii) increase the number and scope of the Company's
PDCs; (iii) leverage existing relationships to obtain support services contracts
upon completion of the proposal management stage; (iv) aggressively pursue
opportunities in the growing market for large commercial programs; and (v)
pursue strategic acquisitions that provide the Company with an expeditious and
cost-effective method of expanding into complementary engineering and management
consulting services.
Established as a sole proprietorship in 1982, the Company was incorporated
in California in 1985. The Company's principal executive offices are located at
4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660, and its
telephone number is (714) 975-1550.
4
<PAGE> 6
THE OFFERING
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Common Stock offered by the Company............ 2,100,000 shares
Common Stock offered by the Selling
Shareholders................................. 1,050,000 shares
----------
Total................................ 3,150,000 shares
==========
Common Stock to be outstanding after the
Offering(1).................................. 15,000,000 shares
Use of Proceeds................................ Repayment of existing indebtedness and general
corporate purposes, which may include strategic
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... WINS
</TABLE>
- ------------------------------
(1) Excludes 1,500,000 shares of Common Stock reserved for issuance under the
1997 Stock Option Plan, of which 790,000 are issuable pursuant to options to
be granted upon consummation of this Offering.
RISK FACTORS
Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------------
1992 1993 1994(1) 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Net revenues................ $ 9,407 $10,738 $15,220 $20,777 $25,699 $19,462 $ 26,639
Gross profit................ 3,854 3,622 5,771 8,464 11,187 8,063 11,801
Operating income............ 325 830 878 671 438 656 6,843
Earnings (loss) before
income taxes.............. 306 817 (823) 678 574 741 6,694
Net earnings (loss)......... $ 301 $ 801 $ (811) $ 668 $ 565 $ 734 $ 6,594
======= ======= ======= ======= ======= ======= ========
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Earnings (loss) before income taxes................................... $ 3,049 $ 2,725 $ 5,851
Provision for income taxes............................................ 1,219 1,090 2,340
------- ------- --------
Net earnings (loss)................................................... $ 1,830 $ 1,635 $ 3,511
======= ======= ========
Net earnings per share................................................ $ .12 $ .27
======= ========
Weighted average common shares(4)..................................... 14,893 12,993
======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------------
(IN THOUSANDS)
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 478 $ 478 $ 20,200
Working capital............................................... (1,120) (3,156) 17,331
Total assets.................................................. 7,923 7,923 27,645
Total debt.................................................... 5,066 5,066 --
Total shareholders' equity (deficit).......................... (4,873) (6,909) 17,879
</TABLE>
- ------------------------------
(1) In 1994, the Company wrote off $1.7 million of receivables from California
Kamchatka Company, Inc. ("CKC"), an affiliated entity. See "Certain
Transactions" and Note (10) of the Notes to Financial Statements.
(2) In connection with the Offering, the Company will be converting to a C
corporation under the Internal Revenue Code of 1986, as amended (the
"Code"). Prior to conversion, the Company had been 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 elimination of salaries
and bonuses paid to the three principal executive officers (which have
historically been included in selling, general and administrative expenses)
in excess of $2.7 million in the aggregate (which amount is equal to the
maximum salaries and bonuses payable for 1998 under an executive
compensation program consisting of an Executive Employment Agreement and an
Executive Bonus Plan (the "Executive Compensation Program")), and (b)
adjustments for federal and state income taxes as if the Company had been
taxed as a C corporation at an assumed effective income tax rate of
approximately 40%. For additional pro forma statement of operations data for
1994, 1995, and 1996 and for the nine months ended September 30, 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 the Bank Facility. See "Certain Transactions."
(5) The pro forma balance sheet as of September 30, 1997 reflects only a pro
forma adjustment for a dividend of $2.04 million in undistributed earnings
as of September 30, 1997, which dividend was declared and paid on December
29, 1997.
(6) Adjusted to give effect to the sale by the Company of 2,100,000 shares of
Common Stock offered hereby at an assumed public offering price of $13.00
per share, and the application of the estimated net proceeds therefrom,
including repayment of the Company's indebtedness. See "Use of Proceeds."
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.
DEPENDENCE ON DEFENSE INDUSTRY
For the fiscal year ended December 31, 1996, approximately 82.8% of the
Company's revenues were derived from proposal management services, including
PDCs, related to government procurement contracts. For the foreseeable future,
the Company expects that the percentage of its revenues attributable to such
contracts will continue to be substantial. U.S. Government expenditures for
defense products may decline after fiscal 1997 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
drawdown of U.S. military forces in response to the end of the Cold War. In the
event expenditures for products of the type manufactured by the Company's
clients are reduced and not offset by other new programs or products, there will
be a reduction in the volume of contracts or subcontracts to be bid upon by the
Company's clients and, as a result, a reduction in the volume of proposals
managed by the Company. Unless offset, such reductions could materially and
adversely affect the Company's business, operating results and financial
condition.
RISKS OF GOVERNMENT CONTRACTING
The Company, through its government-contractor clients, is subject to risks
associated with compliance with governmental regulations. The fines and
penalties which could result from noncompliance with appropriate standards and
regulations, or a client's suspension or debarment from the bidding process for
future government contracts could have a material adverse effect on the
Company's business, operating results and financial condition. The Company
relies for the continuance and expansion of its business on a facility security
clearance from the U.S. Government, and individual security clearances, at
various levels, for nearly all members of its staff. There can be no assurance
that necessary security clearances will continue to be made available by the
U.S. Government.
CLIENT CONCENTRATION
SM&A derives a significant portion of its revenues from a relatively
limited number of clients. For example, revenues from the Company's ten most
significant clients accounted for approximately 93.0%, 98.0%, 92.9% and 91.2% of
its total revenues for the nine months ended September 30, 1997 and for the
years ended December 31, 1996, 1995 and 1994, respectively. Three clients,
Lockheed Martin Corporation, Hughes Electronics Corporation and Motorola, Inc.,
accounted for approximately 60.5% of total revenues for the year ended December
31, 1996. Lockheed Martin Corporation is the Company's single largest client,
accounting for approximately 23.0% and 22.9% of the Company's total revenues for
the nine months ended September 30, 1997 and for the year ended December 31,
1996, respectively. 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."
7
<PAGE> 9
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 Bain & Company, 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
88.8% win rate in the proposal management business drops significantly, the
Company's growth prospects could be materially and adversely affected. See
"Business -- Market Opportunity."
MANAGEMENT OF GROWTH
The Company's business involves the delivery of services through an
experienced team of trained professionals. The Company's success depends in
large part upon its ability to attract, develop, motivate and retain
highly-skilled professionals and administrative employees. The Company has
experienced significant growth in recent years and intends to pursue further
growth as part of its business strategy. This growth strategy will require an
increase in the Company's personnel, particularly skilled systems engineers and
program managers. Qualified professionals are currently in great demand and
there is significant competition for employees with the requisite skills from
other major and boutique consulting firms, research firms, government
contractors, proposal management or business acquisition departments of major
corporations and other professional services firms. There can be no assurance
that the Company will be able to attract and retain the qualified personnel
necessary to pursue its growth strategy. There can be no assurance that the
Company will be able to maintain or accelerate its current growth, effectively
manage its expanding operations or achieve planned growth on a timely or
profitable basis. To the extent the Company is unable to manage its growth
effectively and efficiently, the Company's business, financial condition and
results of operations could be materially and adversely affected. See
"Business -- Growth Strategy."
RISKS RELATED TO POSSIBLE ACQUISITIONS
An element of SM&A's growth strategy is to expand its operations through
the acquisition of complementary businesses. The Company has no agreement,
understanding or commitment with respect to any acquisition and is not currently
engaged in such negotiations. In addition, the Company has no prior history of
making acquisitions and there can be no assurance that the Company will be able
to identify, acquire, profitably manage or successfully integrate any such
businesses into the Company without incurring substantial expenses, delays or
other operational or financial problems. Moreover, competitors of the Company
are also soliciting potential acquisition candidates, which could both increase
the price of any acquisition targets and decrease the number of attractive
companies available for acquisition. Further, acquisitions may involve a number
of special risks, including diversion of management's attention, failure to
retain key acquired personnel, increased costs to improve managerial,
operational, financial and administrative systems, legal liabilities, and
increased interest expense and amortization of acquired intangible assets, some
or all of which could materially and adversely affect the Company's business,
operating results and financial condition. Client satisfaction or performance
problems at a single acquired firm could have a materially adverse impact on the
8
<PAGE> 10
reputation of the Company as a whole. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and earnings
or performance at levels historically enjoyed by the Company. The failure of the
Company to manage its acquisition strategy successfully could materially and
adversely affect the Company's business, operating results and financial
condition. See "Business -- Growth Strategy."
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. The Company has
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 to repay approximately $7.5 million of existing
indebtedness as of December 31, 1997 and for general corporate purposes, which
may include strategic acquisitions. Approximately $17.3 million, or 70% of the
net proceeds to be received by the Company, will be allocated to general
corporate purposes. 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."
CONTROL BY PRINCIPAL SHAREHOLDER
Following the consummation of the Offering, Mr. Steven S. Myers (the
"Principal Shareholder") will beneficially own approximately 53.7% of the
Company's outstanding Common Stock (approximately 51.0% if the Underwriters'
over-allotment option granted is exercised in full), and will have the ability
to control 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 expected to be initially 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."
9
<PAGE> 11
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,000,000 shares
of Common Stock outstanding. The Company intends to grant options to directors
and employees to acquire 790,000 shares of Common Stock at the initial public
offering price and subject to certain vesting requirements pursuant to the
Company's 1997 Stock Option Plan. The Company intends to register on a
registration statement on Form S-8, shortly after the date of this Prospectus,
all 790,000 shares of Common Stock underlying the options then outstanding or
issuable under the 1997 Stock Option Plan. Immediately following the completion
of this Offering, a total of 3,150,000 shares of Common Stock will be freely
tradable without restriction. All of the remaining 11,850,000 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. 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."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Offering price for the shares of Common Stock in this Offering is
substantially higher than the book value per share of the Common Stock.
Purchasers of shares of Common Stock in this Offering will therefore incur
immediate and substantial dilution. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering. The initial public
offering price will be determined by negotiations among the Company and the
Representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade after the Offering. See "Underwriting" for
factors to be considered in determining the initial public offering price. The
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in operating results of the Company or its
competitors, the Company's failure to meet securities analysts' expectations,
general conditions in the proposal management and contract support services
markets and the worldwide economy, announcements of technological innovations,
new systems or product enhancements by the Company or its competitors,
acquisitions, changes in government regulations, developments in patents or
other intellectual property rights and changes in the Company's relationships
with clients could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations which have affected the market
price of many service based companies and which have at times been unrelated to
the operating performance of the specific companies whose stocks were affected.
Such fluctuations could adversely affect the market price of the Company's
Common Stock.
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
10
<PAGE> 12
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.
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company hereby, after deducting Underwriting
Discounts and Commissions and other Offering expenses (estimated to be
approximately $600,000), all of which are payable by the Company, are estimated
to be approximately $24.8 million (based on an assumed Offering Price of $13.00
per share). The net proceeds will be used to repay approximately $7.5 million of
existing indebtedness and for general corporate purposes, which may include
future acquisitions of complementary businesses. Approximately $17.3 million, or
70% of the net proceeds to be received by the Company, will be allocated to
general corporate purposes. 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 with respect to any acquisition and is not currently
engaged in such negotiations.
The Company's current indebtedness consists of (i) a revolving line of
credit and a term loan with a bank with maximum principal amounts of $4.0
million each (the "Bank Facility"), and (ii) a note payable to NationsBank in
the original principal amount of $560,000 (the "NationsBank Note"). The interest
rate on the revolving line of credit agreement is the daily prime rate and the
interest rate on the term loan is 2.50% in excess of the London InterBank
Offered Rate. In January 1997, the Company repurchased 13.4% of its outstanding
Common Stock for $5.9 million, using the proceeds from borrowings on the Bank
Facility. The Company has used the revolving line of credit for cash flow
requirements and general corporate purposes, including the payment of dividends
to shareholders. As of December 31, 1997, the revolving line of credit had an
outstanding principal balance of $3.5 million and the term note had an
outstanding principal balance of $3.5 million. The NationsBank Note bears
interest at an annual rate of 10.74% and, as of December 31, 1997, had an
outstanding principal balance of $517,000. Upon the consummation of the
Offering, the Company intends to pay off the outstanding balances of the Bank
Facility and the NationsBank Note in connection with their termination. The
Company is currently negotiating with lenders regarding a new credit facility.
The principal purposes of this Offering are to increase the Company's
equity capital and financial flexibility, create a public market for the Common
Stock, facilitate future access by the Company to the public equity markets,
create a currency for potential acquisitions, enhance the Company's ability to
use the Common Stock as a means of attracting, retaining and incentivizing
senior managers and professionals and provide working capital to fund the
Company's growth strategy. See "Business -- Growth Strategy."
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 October 31, 1997, the Company had outstanding 202,292 shares of
Series A Common Stock and 812,829 shares of Series B Common Stock. Immediately
prior to the Offering, the Company will file 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
Since January 1, 1991, the Company has been treated as an S corporation for
purposes of federal and state income taxes. Accordingly, the Company has not
been subject to regular federal income tax and has been subject to California
income tax at a rate of 1.5% of its taxable income. 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. Effective upon the
date of completion of this Offering, the Company's S corporation status will
terminate, the Company will be taxed as a C corporation, and will become subject
to regular federal and state income taxes.
12
<PAGE> 14
S CORPORATION DIVIDEND
On December 29, 1997, the Company declared and paid a dividend, of $4.4
million, to its then-current shareholders. Of this $4.4 million, $2.04 million
represented undistributed earnings of the Company through September 30, 1997 and
the balance represented earnings for the three months ended December 31, 1997.
Immediately prior to consummating this Offering, the Company will declare an S
corporation dividend, estimated to be $775,000, to its then-current
shareholders, representing all undistributed earnings of the Company from
January 1, 1998 through the date of this Prospectus (the "S Corporation
Dividend"). Purchasers of Common Stock in this Offering will not receive any
portion of the S Corporation Dividend.
DIVIDEND POLICY
In 1997, the Company paid dividends of $1,230,000, $1,945,000, $2,500,000
and $4,365,000 on April 11, July 1, October 1, and December 29, respectively.
The Company anticipates that, after payment of the S Corporation Dividend to its
current shareholders in connection with the termination of the Company's S
corporation status, all future earnings will be retained for development of its
business. See "Prior S Corporation Status." 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.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the sale by the Company of
2,100,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $13.00 per share) and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------------------
(IN THOUSANDS) UNAUDITED)
--------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
<S> <C> <C> <C>
Cash.................................................. $ 478 $ 478 $ 20,200
======== ======== ========
Long term obligations, including current portion...... 5,066 5,066 --
Shareholders' equity (deficit):
Common Stock, no par value, 50,000,000 shares
authorized; 12,900,000 shares issued and
outstanding actual; and 15,000,000 shares issued
and outstanding, as adjusted(1).................. 5 5 5
Preferred Stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding
actual; and no shares issued and outstanding, as
adjusted......................................... -- -- --
Additional paid-in-capital.......................... 316 316 25,104
Due from shareholder................................ (1,367) (1,367) (1,367)
Retained earnings (deficit)......................... (3,827) (5,863) (5,863)
-------- -------- --------
Total shareholders' equity (deficit)........... (4,873) (6,909) 17,879
-------- -------- --------
Total capitalization........................ $ 193 $ (1,843) $ 17,879
======== ======== ========
</TABLE>
- ---------------
(1) Excludes 1,500,000 shares of Common Stock reserved for issuance under the
1997 Stock Option Plan, of which 790,000 are issuable pursuant to options
granted upon the consummation of this Offering.
(2) The pro forma balance sheet as of September 30, 1997 reflects only a pro
forma adjustment for a dividend of $2.04 million in undistributed earnings
as of September 30, 1997, which dividend was declared and paid on December
29, 1997.
(3) Adjusted to give effect to the sale by the Company of 2,100,000 shares of
Common Stock offered hereby at an assumed public offering price of $13 per
share, and the application of the estimated net proceeds therefrom,
including repayment of the Company's indebtedness. See "Use of Proceeds."
14
<PAGE> 16
DILUTION
As of September 30, 1997, the Company had a pro forma deficit net tangible
book value of $(6,909,000) or $(.54) per share of Common Stock. Pro forma
deficit in net tangible book value per share represents tangible book value
(total tangible assets of the Company less its total liabilities) divided by the
total number of shares of Common Stock outstanding after giving effect to the
Recapitalization. Without taking into account any changes in the pro forma
deficit in net tangible book value (i) after September 30, 1997, other than to
give effect to the sale by the Company of 2,100,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $13.00 per share)
and (ii) adjusted to reflect a dividend of its undistributed earnings as of
September 30, 1997 of $2.04 million paid on December 29, 1997, the Company's pro
forma net tangible book value at September 30, 1997 would have been $17,879,000
or $1.19 per share. This represents an immediate increase in the pro forma net
tangible book value of $1.73 per share to existing shareholders and an immediate
dilution of $11.81 per share to persons purchasing Common Stock in this Offering
(the "New Investors"). The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $ 13.00
-------
Pro forma deficit in net tangible book value per share before
the Offering................................................ (.54)
-------
Increase in net tangible book value per share attributable to
New Investors............................................... 1.73
-------
Pro forma net tangible book value per share after the Offering... 1.19
Dilution per share to New Investors(1)........................... $ 11.81
=======
</TABLE>
15
<PAGE> 17
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1995 and
1996, and the balance sheet data as of December 31, 1995 and 1996, have been
derived from the Company's 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 1994 balance sheet data is
derived from the Company's audited financial statements, which are not included
herein. The balance sheet data as of December 31, 1992 and 1993 and the
statement of operations data for each of the two fiscal years ended December 31,
1992 and 1993 has 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 periods
presented. The data for the nine months ended September 30, 1996, and September
30, 1997 has been derived from the Company's 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 period ended September 30, 1997 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1992 1993 1994(1) 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net revenues..................... $ 9,407 $10,738 $15,220 $20,777 $25,699 $19,462 $26,639
Cost of revenues................. 5,553 7,116 9,449 12,313 14,512 11,399 14,838
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 3,854 3,622 5,771 8,464 11,187 8,063 11,801
Selling, general and
administrative expenses........ 3,529 2,792 4,893 7,793 10,749 7,407 4,958
------- ------- ------- ------- ------- ------- -------
Operating income................. 325 830 878 671 438 656 6,843
Other income (expense)........... (19) (13) (1,701) 7 136 85 (149)
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes.......................... 306 817 (823) 678 574 741 6,694
Income tax expense
(benefit)(3)................... 5 16 (12) 10 9 7 100
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).............. $ 301 $ 801 $ (811) $ 668 $ 565 $ 734 $ 6,594
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA(4):
Net revenues............................................................... $25,699 $19,462 $26,639
Cost of revenues........................................................... 14,512 11,399 14,838
------- ------- -------
Gross profit............................................................... 11,187 8,063 11,801
Selling, general and administrative expenses............................... 8,274 5,424 5,801
------- ------- -------
Operating income........................................................... 2,913 2,639 6,000
Other income (expense)..................................................... 136 86 (149)
------- ------- -------
Earnings before income taxes............................................... 3,049 2,725 5,851
Income tax expense......................................................... 1,219 1,090 2,340
------- ------- -------
Net earnings............................................................... $ 1,830 $ 1,635 $ 3,511
======= ======= =======
Net earnings per share..................................................... $ .12 $ .27
======= =======
Weighted average common shares(5).......................................... 14,893 12,993
======= =======
</TABLE>
<TABLE>
<CAPTION>
PROFORMA
AS OF AS OF
AS OF DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------- ------------- -------------
1992 1993 1994 1995 1996 1997 1997(6)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 35 $ 189 $ 242 $ 269 $ 1,927 $ 478 $ 478
Working capital............... 181 868 95 794 (279) (1,120) (3,156)
Total assets.................. 1,210 2,269 2,320 3,034 11,820 7,923 7,923
Total debt(5)(7).............. 346 283 541 605 6,250 5,066 5,066
Total shareholders' equity
(deficit)(5)................ 117 918 114 668 755 (4,873) (6,909)
</TABLE>
(footnotes on the following page)
16
<PAGE> 18
- ------------------------------
(1) In 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliated entity. See "Certain Transactions" and Note (10) of the Notes to
Financial Statements.
(2) In connection with the Offering, the Company will be converting to a C
corporation under the Code. Prior to conversion, the Company had been an S
corporation for federal and certain state income tax purposes. See "Prior S
Corporation Status."
(3) Represents California and other state franchise taxes accrued by the
Company.
(4) For additional pro forma statement of operations data for 1994, 1995, and
1996 and for the nine months ended September 30, 1996 and 1997, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Amounts reflect pro forma adjustments for (a) the elimination
of salaries and bonuses paid to the 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 Plan), and (b) adjustments for federal and state income taxes
as if the Company had been taxed as a C corporation rather than an S
corporation.
(5) 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 the Bank Facility. See "Certain Transactions."
(6) The pro forma balance sheet as of September 30, 1997 reflects only a pro
forma adjustment for a dividend of $2.04 million in undistributed earnings
as of September 30, 1997, which dividend was declared and paid on December
29, 1997. See "S Corporation Dividend."
(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 the principal
shareholder. See Note (4) of the Notes to Financial Statements.
17
<PAGE> 19
RECENT DEVELOPMENTS
The following summary of preliminary pro forma statement of operations data
for the year ended December 31, 1997, is unaudited and subject to completion of
the Company's year-end audit, which is expected to be completed on or before
January 26, 1998.
PRELIMINARY PRO FORMA OPERATING RESULTS(1):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Net revenues............................................................ $25,699 $36,962
Gross profit............................................................ 11,187 16,359
Operating income........................................................ 2,913 8,168
Net earnings............................................................ 1,830 4,744
</TABLE>
- ---------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations" for a description of pro forma
adjustments contained herein.
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%. The Company's compound
annual revenue growth rate was approximately 36%, from $10.7 million for 1993 to
$37.0 million for 1997. Net revenues from proposal management services were
$22.1 million for 1997 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
customer base and number of proposals managed as a result of increased marketing
efforts by the Company. Net revenues from PDCs were $7.1 million for 1997
compared to $7.5 million for the prior year, a decrease of $0.4 million or 5.3%.
This decrease was attributable to a transfer of certain PDC activities to the
proposal management segment by two major clients, and reduced PDC 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 44.3% for 1997 from 43.6% for the prior
year.
Operating income. Operating income was $8.2 million for 1997 compared to
$2.9 million for 1996, an increase of $5.3 million or 182.8%. As a percentage of
net revenues, operating income increased to 22.1% for 1997 from 11.3% the prior
year. The increase as a percentage of net revenues was due primarily to the
stabilization of fixed operating costs relative to the increased revenues in
1997.
Net earnings. Net earnings were $4.7 million for 1997 compared to $1.8
million for 1996, an increase of $2.9 million or 161.1%.
18
<PAGE> 20
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.
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 all clients rates consistent with these labor
classifications. The majority of the billable labor is performed at client
locations, and travel and lodging expenses incurred by the Company's direct
labor employees are reimbursed by the client. 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. The Company offers
to discount labor rates from 5% to 15% 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.
Cost of revenues consists primarily of direct labor, incentives, and travel
and lodging expenses directly related to consulting services rendered by the
Company. The Company's direct labor employees are 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 a proposal will vary
according to the size, complexity, duration and demands of the project. Proposal
terminations, completions and scheduling delays may result in periods when
direct labor employees are not fully utilized. However, lower utilization would
result in minimal downward pressure on margins, as the Company's direct labor
employees are paid a nominal bi-weekly salary, which is offset against payments
for actual hours worked. Amounts paid to direct labor employees in excess of
nominal bi-weekly salary are accrued based on hours billed to clients and paid
to those employees as amounts billed to clients are collected. Cost of revenues
also includes incentive compensation paid to vice presidents. Historically,
these incentives have been based on 1.4% of revenues and are paid to the
respective vice presidents after amounts billed to clients are collected.
Incentive compensation is paid to vice presidents and is paid from revenues
generated from their respective areas of responsibility.
Selling, general and administrative ("SG&A") expenses consist primarily of
executive compensation, administrative labor and incentives, marketing expenses,
office expenses and general overhead. 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 revenues 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.
Historically, executive compensation expense 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 $2.7 million, $4.6 million, and $5.2 million
in 1994, 1995 and 1996, respectively, and $4.0 million and $1.2 million for the
nine months ended September 30, 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.
19
<PAGE> 21
As the Company elected to be taxed as an S corporation, 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 is also taxed as an S corporation in California at the
appropriate statutory tax rate.
RESULTS OF OPERATIONS
The following table sets forth pro forma operating results for the periods
indicated. Amounts reflect pro forma adjustments for (a) the elimination of
salaries and bonuses paid to the three principal executive officers (which have
historically been included in SG&A expenses) in excess of $2.7 million in the
aggregate (which amount is equal to the maximum salaries and bonuses payable for
1998 under the Executive Compensation Program), and (b) adjustments for federal
and state income taxes as if the Company had been taxed as a C corporation at an
assumed effective income tax rate of approximately 40%. The pro forma adjustment
in clause (a) above is made to provide a more meaningful comparison of the
Company's SG&A expenses by recasting historical financials to be consistent with
future levels of executive compensation following termination of the Company's S
corporation status.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $15,220 $20,777 $25,699 $19,462 $26,639
Cost of revenues......................... 9,449 12,313 14,512 11,399 14,838
------- ------- ------- ------- -------
Gross profit............................. 5,771 8,464 11,187 8,063 11,801
SG&A expenses............................ 4,856 5,851 8,274 5,424 5,801
------- ------- ------- ------- -------
Operating income......................... 915 2,613 2,913 2,639 6,000
Other income (expense)................... (1,701) 7 136 86 (149)
------- ------- ------- ------- -------
Earnings (loss) before income taxes...... (786) 2,620 3,049 2,725 5,851
Income tax expense (benefit)............. (314) 1,048 1,219 1,090 2,340
------- ------- ------- ------- -------
Net earnings (loss)...................... $ (472) $ 1,572 $ 1,830 $ 1,635 $ 3,511
======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain pro forma operating data as a
percentage of net revenues for 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Net revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 62.1 59.3 56.5 58.6 55.7
----- ----- ----- ----- -----
Gross profit............................. 37.9 40.7 43.5 41.4 44.3
SG&A expenses............................ 31.9 28.1 32.2 27.8 21.8
----- ----- ----- ----- -----
Operating income......................... 6.0 12.6 11.3 13.6 22.5
Other income (expense)................... (11.2) 0.0 0.5 0.4 (0.5)
----- ----- ----- ----- -----
Earnings (loss) before income taxes...... (5.2) 12.6 11.8 14.0 22.0
Income tax expense (benefit)............. (2.1) 5.0 4.7 5.6 8.8
----- ----- ----- ----- -----
Net earnings (loss)...................... (3.1)% 7.6% 7.1% 8.4% 13.2%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net revenues. Net revenues were $26.6 million for the nine months ended
September 30, 1997 compared to $19.5 million for the nine months ended September
30, 1996, an increase of $7.1 million or 36.4%. Net revenues from proposal
management services were $16.6 million for the nine months ended September 30,
1997 compared to $11.8 million for the comparable nine months of the prior year,
an increase of $4.8 million
20
<PAGE> 22
or 40.7%. This increase was attributable to an increase in the customer base and
number of proposals managed as a result of increased marketing efforts by the
Company. Net revenues from PDCs were $5.1 million for the nine months ended
September 30, 1997 compared to $4.9 million for the comparable nine months of
the prior year, an increase of $0.2 million or 4.1%. The increase was the result
of an increase in billed hours at existing PDCs. Net revenues from contract
support services for the nine months ended September 30, 1997 were $4.9 million
compared to $2.8 million for the nine months of the prior year, an increase of
$2.1 million or 75.0%. The increase was due primarily to the expanding number of
clients utilizing the Company's contract support services in 1997.
Gross profit. Gross profit was $11.8 million for the nine months ended
September 30, 1997 compared to $8.1 million for the nine months ended September
30, 1996, an increase of $3.7 million or 45.7%. As a percentage of net revenues,
gross profit increased to 44.3% for the nine months ended September 30, 1997
from 41.4% for the comparable nine months of 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 $5.8 million for the nine months ended
September 30, 1997 compared to $5.4 million for the nine months ended September
30, 1996, an increase of $0.4 million or 7.4%. The increase was primarily the
result of non-recurring expenses incurred in relocating the Company to a new
expanded facility in June 1997. As a percentage of net revenues, SG&A expenses
declined to 21.8% for the nine months ended September 30, 1997, from 27.8% for
the comparable nine months of the prior year.
Other income (expense). Other expense was $149,000 for the nine months
ended September 30, 1997 compared to income of $86,000 for the nine months ended
September 30, 1996.
Net earnings. Net earnings were $3.5 million for the nine months ended
September 30, 1997 compared to $1.6 million for the nine months ended September
30, 1996, an increase of $1.9 million or 118.8%.
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 PDCs 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 PDCs 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 $0.5 million
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 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 28.1% for the prior year.
21
<PAGE> 23
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 $0.2 million or 12.5%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenues. Net revenues were $20.8 million for 1995 compared to $15.2
million for 1994, an increase of $5.6 million or 36.8%. Net revenues from
proposal management services were $13.6 million for 1995 compared to $13.6
million for the prior year. Net revenues from PDCs were $4.2 million for 1995
compared to $1.1 million for the prior year, an increase of $3.1 million or
281.8%. This increase in PDC revenue was due primarily to the expansion of
existing PDCs at client sites, and the addition of a substantial new PDC in
1995. Net revenues from contract support services were $3.0 million for 1995
compared to $0.5 million for the prior year, an increase of $2.5 million or
500%. This increase was attributable to an increased marketing emphasis for this
segment of the Company's business in 1995.
Gross profit. Gross profit was $8.5 million for 1995 compared to $5.8
million for 1994, an increase of $2.7 million or 46.6%. As a percentage of net
revenues, gross profit increased to 40.7% for 1995 from 37.9% for the prior
year. The increase in gross profit as a percentage of net revenues was primarily
attributable to an hourly rate increase phased in throughout 1995 for new
proposal work started in 1995.
SG&A expenses. SG&A expenses were $5.9 million for 1995 compared to $4.9
million for 1994, an increase of $1.0 million, or 20.4%. The increase was
primarily attributable to the Company increasing indirect staff in 1995 to
improve its administrative support infrastructure and update its computer system
capabilities. Also, prior to 1995 the Company had not utilized advertising
strategies, and in 1995 the Company launched its first advertising campaign. As
a percentage of net revenues, SG&A expenses decreased to 28.1% for 1995, from
31.9% for the prior year.
Other income (expense). Other income was $7,000 for 1995 compared to
expense of $1.7 million for 1994. The Company wrote off $1.7 million of
receivables in 1994 from CKC, an affiliated entity. 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.
Net earnings. Net earnings increased to $1.6 million in 1995 from a net
loss of $472,000 in 1994, an increase of $2.1 million.
22
<PAGE> 24
QUARTERLY RESULTS
The following table sets forth pro forma 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>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA:
Net revenues.......................... $ 5,597 $ 7,546 $ 7,824 $ 4,092 $ 6,237 $ 7,229 $ 8,544 $10,866
Cost of revenues...................... 3,316 4,422 4,544 2,433 3,113 3,865 4,792 6,181
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 2,281 3,124 3,280 1,659 3,124 3,364 3,752 4,685
SG&A expenses......................... 1,615 1,497 2,207 1,720 2,850 1,507 1,818 2,476
------- ------- ------- ------- ------- ------- ------- -------
Operating income...................... 666 1,627 1,073 (61) 274 1,857 1,934 2,209
Other income (expense):
Interest expense.................... 14 17 109 149 145 124 124 130
Miscellaneous income (expense)...... 43 24 149 188 195 174 24 31
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes... 695 1,634 1,113 (22) 324 1,907 1,834 2,110
Income tax expense (benefit).......... 278 654 445 (9) 129 762 734 844
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)................... $ 417 $ 980 $ 668 $ (13) $ 195 $ 1,145 $ 1,100 $ 1,266
======= ======= ======= ======= ======= ======= ======= =======
</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
success of the Company's increase of non-seasonal contract support services
revenue and the increase in the number of PDCs has mitigated the impact of
seasonality during the third quarter of 1997.
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. Accounts
receivable at December 31, 1996 was $3.6 million as compared to the Company's
September 30, 1997 balance of $6.5 million. Due to a large and diverse client
base which consists mostly of Fortune 100 companies, management expects to
continue the trend of timely accounts receivable collections.
The principal use of cash for investing activities during the year ended
December 31, 1996 and the nine months ended September 30, 1997 was for the
purchase of office computer equipment used primarily for enhancing the Company's
data processing, marketing and financial reporting systems. The Company does not
anticipate making any significant capital expenditures in the near future.
Financing activities provided funds of $4.5 million for the nine months
ended September 30, 1997. Net cash used by financing activities totaled
approximately $7.0 million for the nine months ended September 30, 1997. The
primary uses of cash were for the stock repurchase in January and the payment of
dividends. In 1997, the Company repurchased 1,995,125 shares or 13.4% of its
Common Stock for $5.9 million, using the proceeds from borrowings on the Bank
Facility. The Board of Directors of the Company approved the repurchase of
shares to provide liquidity to its shareholders. The Company's Bank Facility
consists of a revolving line of credit and a term loan, each with a maximum loan
amount of $4.0 million. The interest rate on the revolving line of credit
agreement is the daily prime rate and the interest rate on the term loan is
2.50% in excess of the London InterBank Offered Rate. Amounts outstanding under
the Bank Credit Facility are secured by the Company's receivables. The
NationsBank Note bears interest at an annual rate of 10.74% and, as of October
31, 1997, had an outstanding balance of $519,000.
The Company believes the net proceeds from the sale of Common Stock offered
hereby, together with funds generated by operations, will provide adequate cash
to fund its anticipated cash needs, which includes the repayment of all
indebtedness under the Bank Facility and the Note and may include future
acquisitions of
23
<PAGE> 25
complementary businesses, for at least the next twelve months. The Company is
currently negotiating with lenders regarding a new credit facility.
INFLATION
Although the Company's operations are influenced by general economic
trends, the Company does not believe that inflation has had a material impact on
the results of its operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, will
also be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share. Management has not determined
whether the adoption of SFAS 128 will have a material impact on the Company's
combined financial position or results of operations.
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
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. Management has not determined whether the
adoption of SFAS 130 will have a material 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.
24
<PAGE> 26
BUSINESS
INTRODUCTION
The Company is the largest proposal management company in the United
States. The Company's superior proposal management processes and team of
approximately 150 highly experienced professionals help its clients to achieve a
higher probability of winning the government and commercial contracts that are
critical to their success. The Company also is significantly expanding systems
engineering and program integration services to aerospace, communications and
engineering companies. The Company's success is evidenced by a compound annual
revenue growth rate of approximately 30%, from $9.4 million for 1992 to $32.9
million for the twelve months ended September 30, 1997.
The Company has amassed a win rate of 88.8% of all dollars awarded on SM&A
engagements since its inception in 1982. The Company's win rate greatly exceeds
the results disclosed in a recent survey which indicated that a majority of the
companies surveyed considered a 30% win rate as positive. The Company has worked
on or is currently engaged on $133.6 billion of government and commercial
procurements. The Company leverages its success in winning business for its
clients and its early involvement in the project life cycle to extend its
services beyond proposal development to systems engineering and program
integration. Such contract support services have grown from 3.0% of the
Company's revenues for 1994 to 18.4% for the nine months ended September 30,
1997.
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. Likewise, companies competing for small to
mid-size contracts benefit significantly from having on-site PDCs managed by an
outside firm. After a company wins a government or commercial contract, it often
requires contract support services including high-level systems engineering,
program integration and management consulting services 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 markets for proposal management and contract support services are
significant in size. 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
market. Based on procurement data from the Department of Defense and NASA, the
Company estimates that the annual government proposal generation market is
approximately $325 million, and the Company believes that the market for
commercial procurement is at least as large. The Company estimates the annual
market for high-end engineering and management consulting services is
approximately $10 billion.
While already significant in size, the Company believes that a number of
factors are causing the markets for proposal management and contract support
services to continue to grow:
- Consolidation of Aerospace and Defense Industry. The consolidation of the
aerospace and defense industry has resulted in fewer, larger firms as
well as an increased disparity between the resources of such larger firms
and the remaining "smaller" firms. Consequently, the large consolidated
firms are more motivated to win programs because of the substantial
amount of revenues necessary to support their operations. In addition,
the smaller firms have an even greater need to access the resources
necessary to compete with larger firms for programs. Proposal management
services therefore have become increasingly important to competitors of
all sizes.
- "Winner-Take-All" 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 weapon (such as the Navy's Tomahawk missile which was
built
25
<PAGE> 27
for many years by both McDonnell Douglas and Hughes Electronics
Corporation). These competitions are among the most hard fought as the
winner may receive a multi-billion dollar contract for many years of work
and the loser may be required to shut down an existing production
facility and re-assign or lay off several thousand workers. The
procurement of each project therefore has become more important, thus
creating an increased need for the expertise offered by proposal
management specialists.
- Corporate Outsourcing. There has also 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 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.
- New Technology. The rapid technological advances made in recent years
render "old" technology obsolete. Consequently, both the U.S. Government
and private industry are creating new programs to upgrade their products
accordingly. The result is an increased need for proposal management and
contract support services to secure and perform these new 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 Motorola 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.
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.
Proven Track Record in Proposal Management
The Company's superior processes and exceptional management talent have
resulted in a proposal win rate of 88.8% 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 industry's 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).
SM&A's impressive 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.
Size of the Firm
SM&A is the largest proposal management firm in the U.S., with
approximately 150 highly qualified professionals with extensive industry
experience. The Company addresses the needs of its clients in various aspects of
proposal management, systems engineering 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
staff when such needs change. As a result, clients have access to the
26
<PAGE> 28
Company's pool of professional talent without incurring the cost for
professionals when their services are not needed.
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.
A Winning Process
The Company's impressive win rate is the result of the creation and
implementation of a successful, proprietary proposal management process. The
SM&A process is a formal, well documented series of actions, honed by SM&A over
the years, that both increase the probability of a win and reduce the overall
cost of the proposal effort by eliminating "non value-added" work, such as
costly and unnecessary engineering. The Company seeks to secure the protection
of applicable copyright, trade secret and other intellectual property protection
for its proprietary process. The success of the SM&A process is also dependent,
in large part, upon its proper implementation by the Company's proposal
management specialists. Thus, the Company's competitive advantage is derived
from having both a proven winning process and the professionals with the
discipline and experience to successfully implement that process on behalf of a
client.
Client Reliance on SM&A Senior Management Participation
The Company's 14 vice presidents are always "on call" to respond to each
client's needs. Clients depend upon them to help formulate the winning strategy,
respond promptly to changes in the government's procurement plan and quickly
solve problems that may occur during the proposal process. The availability of
SM&A senior management to respond to each client's needs has been a particular
competitive advantage for SM&A.
27
<PAGE> 29
GROWTH STRATEGY
The Company's objectives are to: (i) win and perform for its clients by
continuing to provide the highest level of service and expertise, (ii) provide
an attractive work environment and career path for employees, and (iii) enhance
shareholder value. The key elements in the Company's strategy to achieve these
objectives are to:
- Capitalize on Industry Trends to 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 services that SM&A provides.
SM&A's 88.8% win rate and breadth of impressive staff professionals
facilitate the Company's acquisition of this "must win" business.
Additionally, clients have increasingly come to realize that hiring SM&A
is a defensive move as well as an offensive one. Because SM&A contracts
with the first client that contacts it, hiring SM&A on a proposal for a
large program prevents a competitor from utilizing the Company's
services.
- Increase Number and Scope of the Company's PDCs. SM&A takes advantage of
its proven expertise in proposal development and broadens its potential
market by expanding into smaller proposals through the creation of PDCs.
The Company operated six PDCs in 1997 and expects to be operating up to
11 by the end of 1998. The Company plans to expand its operation of PDCs
through three avenues: (i) capitalizing on its proposal management
expertise to deploy new PDCs at other clients' sites, (ii) building on
its early success in operating PDCs for a specific client to provide
satellite PDCs at the client's other locations, and (iii) expanding the
role of existing PDCs to increase the number of proposals generated by
them. The Company believes that installation of PDCs at its clients'
sites allows the Company to realize a recurring annual income stream and
further strengthens the Company's position as the largest provider of
proposal management services to its clients.
- Leverage Existing Relationships to Obtain Support Services
Contracts. SM&A is able to leverage a successful proposal management
assignment by negotiating support services contracts to perform systems
engineering, management support and specialized services for each
project. The Company is ideally positioned as a result of its early
involvement in the planning process to extend its role beyond the
proposal 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 20 support service
contracts won in the last 18 months.
- 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 the Celestri(TM)
telecommunications system.
- Pursue Strategic Acquisitions. The Company intends to pursue strategic
acquisitions of management consulting and systems engineering firms in
order to penetrate new markets, increase its array of services, and add
qualified professionals to its existing staff. Given the highly
fragmented nature of the contract support services industry, the Company
believes there will be numerous opportunities for such acquisitions.
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There can be no assurance that the Company will successfully achieve any
elements of its growth strategy.
SERVICES
SM&A offers its clients a variety of services to assist both in the
procurement of programs as well as the successful implementation of programs
once they are won.
Proposal Management
SM&A's core business is proposal management. The process whereby SM&A
manages a proposal can be divided into three phases: organization and strategy,
proposal preparation, and post submittal.
Organization and Strategy. Once hired to manage a 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 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. 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.
The proposal process typically requires three to twelve months of intensive
activity at the client's site. The SM&A proposal manager is usually the first
member of the team engaged. The proposal manager is responsible for the
"rightsizing" of the team throughout the effort, and directs the activities of
volume leaders, program planners and production experts.
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. Each of these is adjusted as needed to
reflect changes in the procurement (the emergence of competing teams, the
available government funding, the government's objectives, the government's
award schedule, etc.)
During the months before a formal solicitation, it is normal practice for
the government to issue a series of drafts of its Request for Proposal ("RFP"),
to get feedback from the bidding teams. The SM&A team uses these draft RFPs to
both respond to the government, and to create the early building blocks of the
proposal.
Proposal Preparation. The SM&A team manages a process that starts with
analysis of the draft RFP 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. At each step in proposal preparation, the
completed SM&A templates are reviewed in detail by internal team reviewers and
outside experts, as appropriate, to ensure that (i) the requirements of the RFP
are fully complied with; (ii) the team's win strategy is being enforced; (iii)
the flow of ideas is clear and consistent among all the proposal volumes; (iv)
each proposal graphic conveys a compelling idea; and (v) the text supports and
enlarges upon the ideas in the graphics.
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. Many proposals are won by maintaining the team's energy
level to deal with subsequent government requests, after the proposal is
submitted. The ability of SM&A to maintain the team's collective focus on
winning once the proposal is submitted, is vital. Many teams submit their
proposals and then disintegrate. The intellectual critical mass of the proposal
team is dispersed, key people go on vacation, or on
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to other jobs, and the facility is transitioned to other uses. 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. The
proposal team's interaction with the U.S. Government after the proposal is
submitted is a critical part of the SM&A winning process.
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. These deliverables, that often include detailed program plans,
component prototypes, and mission or system analyses, require intensive work
during the evaluation period, in order to meet the post-award deadlines. 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 (programs in excess of $100 million), 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 (programs in the $10 - $100
million range) 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 November 21,
1997, SM&A was managing six PDCs at clients' sites. The Company anticipates
operating up to 11 PDCs by the end of 1998. 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.
Contract Support Services
SM&A has negotiated and obtained support services contracts on programs won
by SM&A's clients. Contract support services engagements typically are larger
than proposal management efforts and often run for several years. This contract
support service role increases the continuity of personnel from the proposal
phase to the program execution phase, and provides the program execution team
with knowledge of exactly what was promised in the proposal. The Company is also
taking advantage of changing industry dynamics and the growth of the market for
such contract support services by expanding its services beyond projects that it
helped its client win. For example, the Company is moving rapidly into providing
such services in commercial projects for large high technology firms.
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 two areas: (i) systems engineering and (ii) 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 and flow them down to each engineering and management
department -- including mission requirements, annual and total budget, and the
schedule for each major program milestone. 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 constantly evaluate the work of
the program's design and test groups to be certain that these top level
requirements are being met.
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
modern 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
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(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.
CLIENTS AND REPRESENTATIVE ENGAGEMENTS
Clients
The Company provides its proposal management and contract support services
to numerous Fortune 100 clients including, among others, Bechtel Corporation,
The Boeing Company (including former McDonnell Douglas and Rockwell
International Corporation), Harris Corporation, Hughes Electronics Corporation,
ITT Corporation, Litton Industries, Inc., Lockheed Martin Corporation, Loral
Space & Communications, Ltd., Motorola, Inc. and Raytheon Company. The clients
who have utilized the Company's PDCs are fewer in number but are generally
derived from the same pool as its proposal management clients.
Lockheed Martin Corporation, Hughes Electronics Corporation and Motorola,
Inc. accounted for approximately 22.9%, 19.1% and 18.5%, respectively, of the
Company's revenue in 1996. These revenues are a result of various engagements by
several business units of Lockheed Martin Corporation, Hughes Electronics
Corporation and Motorola, Inc. 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.
Representative Engagements
Examples of the Company's recent engagements which are representative of
the nature of the Company's services and client relationships are set forth
below:
- AIM-9X Competition. SM&A was hired by Hughes Missiles Systems Company in
1993 to manage the proposal effort for the next generation of Sidewinder
short range air-to-air missiles to be supplied to U.S. and NATO fighter
aircraft. In the first phase of the competition Raytheon, Hughes and
Loral submitted bids to the government. Awards were made in December 1994
to Raytheon and Hughes for two years of intensive design, test and
program planning, prior to the ultimate selection of a single contractor.
In December 1996, the Naval Air Systems Command awarded a $169.2 million
contract to Hughes ($252.5 million with options) to complete the
engineering, development and test, and early manufacturing of the next
generation Sidewinder. Once the next phase is completed in January 2002,
Hughes is expected to sell over 10,000 AIM-9X missiles to supply the
needs of the U.S. forces (on today's F/A18C/D and the Air Force F-15C/D,
and follow-on aircraft including F/A-18E/F, F-15E, F-16 and F-22) and
international sales -- a program worth approximately $5 billion. SM&A
worked on the program for more than three years. Over the course of the
effort, SM&A's participation grew and shrank as the needs of the program
dictated -- but typically included a full time proposal manager, a
technical volume leader, a management volume leader, a life cycle
analyst, and part time support in strategy development, executive summary
preparation, and production support.
- SBIRS Competition. In February 1990, SM&A was hired by Lockheed Missiles
and Space Company (now Lockheed Martin Corporation) to provide systems
engineering and program integration support and to manage what became the
longest duration proposal effort in SM&A's history -- lasting over six
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years. The Air Force had decided to replace its aging space based
surveillance system (designed to quickly detect and report the launching
of ballistic missiles). In the first phase of the competition Hughes,
Lockheed and Northrop Grumman submitted bids to the Air Force. In August
1995, Northrop Grumman was eliminated and both Hughes and Lockheed were
awarded $23 million contracts for preliminary work before the selection
of a prime contractor. In November 1996, Lockheed was awarded the
contract as prime contractor for approximately $1.6 billion in funding
for the early satellites and ground stations (an award with the potential
to grow to over $10 billion over the life of the program). The program
continuity provided by SM&A's constant presence on the Lockheed team and
the high quality of all of the proposal products delivered to the
government during the six years leading to success was a significant
factor in Lockheed's victory. SM&A was awarded a support services
contract by Lockheed to be performed over the next few years.
- Contract Support Services. SM&A has been engaged by Motorola to perform
support services both in connection with programs it has helped Motorola
win and in connection with projects in which SM&A did not provide
proposal management services. The Company managed the proposal process
whereby Motorola secured a major government program for developing a
secure architecture and software to allow sensitive government data to be
securely transmitted on Government and external networks. The Company was
retained to provide contract support services. SM&A's contract support
services include providing program managers, logisticians, trainers,
systems engineers and software development managers to Motorola in
support of the completion of this project. SM&A is also supporting
Motorola in the creation of the multi-billion dollar Celestri(TM)
"bandwidth on demand" space-based telecommunications system. SM&A is
currently supporting the conceptual development, design, deployment and
operations of the Celestri(TM) system.
- PDC Operation. Over a three-year period, SM&A's operation of a PDC for a
major client (who wishes to remain unidentified for competitive reasons)
exemplifies the Company's success in applying the SM&A process to
programs under $100 million. In the year prior to utilizing the PDC, the
client had experienced a low win rate (25%) and low revenues
(approximately $13 million) from projects under $100 million. Following
SM&A's assessment of the situation, it presented the client with a
proposal consisting of a PDC design and operations plan and specific
metrics against which progress could be managed. After the PDC was
implemented, the client enjoyed rapid improvements in bidding results for
the subsequent years. The value of small programs won by the client
climbed to $32 million, $55 million, and $225 million in the three years
of SM&A's engagement, with win rates of 52%, 57% and 95%, respectively.
The increase in win rates was achieved along with an approximately 75%
decrease in the overall cost per dollar bid on small programs.
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 December 31, 1997 the Company's backlog was approximately $72.9 million,
of which $46.6 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 of articles and other
publications about the industry and the Company's methodologies and processes.
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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 it 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 Weekly and Defense Weekly.
COMPETITION
Proposal Management and Proposal Development Centers
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.
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.
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 -- 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
The Company employs approximately 160 persons: 150 persons are proposal and
engineering professionals at SM&A's headquarters or deployed at clients'
facilities across the nation and ten are administrative personnel at the
corporate headquarters. 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, tested in some of the largest and most complex
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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 Company's recruitment process brings new personnel
to the Company through three avenues: (i) by the personal recommendation of SM&A
employees, (ii) by recruiting persons with whom SM&A has done business in the
past and who are well acquainted with the Company's work ethic and employment
standards, and (iii) by considering persons who become acquainted with SM&A
through its advertising campaign which has, over the past year, encouraged
qualified persons to submit their resumes for consideration.
Successful candidates are then brought into the SM&A training class. The
SM&A training process is a three day, formal process, conducted by three SM&A
vice presidents for all SM&A employees upon hiring, with refresher courses as
needed to maintain proficiency and keep employees abreast of advances in the
SM&A process and applicable technologies. The course, conducted at SM&A
headquarters, is highly interactive, with class size limited to five to ten
persons. After two days of lectures and discussions on SM&A processes, and a
review of case studies of recent SM&A managed proposals, the students are
conducted through a fast-paced mock proposal exercise in which their ability to
implement the SM&A process with both diligence (to stick to the proven process)
and innovation (to use the process to create innovative solutions) is tested.
The successful students are sent into the field. Despite new employees'
extensive industry experience, they are introduced to the SM&A process at a
relatively junior level.
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 88.8% win
rate for SM&A-managed proposals is being accomplished by a professional staff
that is rapidly growing with only a 2.4% annual employee turnover rate from
January 1, 1995 through September 30, 1997.
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 offices adjacent to the Orange County (John Wayne)
International Airport in Newport Beach California. The Company has 19,487 square
feet of total office space, divided into 3,897 square feet for the Company's
executive management, 5,846 square feet for administration, 7,795 square feet
for the in-house PDC, and 1,949 square feet is available for growth. The Company
has a top secret facility clearance.
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 December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Steven S. Myers............... 51 President, Chief Executive Officer and Chairman of
the Board, Director
Kenneth W. Colbaugh........... 44 Executive Vice President, Chief Operating Officer
and Director
Ronald A. Hunn................ 49 Vice President, Chief Financial Officer and
Secretary
Thomas F. Heinsheimer......... 58 Senior Vice President, Chief Scientist
James F. Madewell............. 64 Vice President, Business Development
Ajaykumar K. Patel............ 37 Vice President, Operations
J. Christopher Lewis(1)(2).... 41 Director
James R. Mellor(1)(2)......... 67 Director
Malcolm R. Currie............. 70 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. degree 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. degree in business from San Jose State University.
Ronald A. Hunn has served as Vice President and Chief Financial Officer of
the Company since September 1995, and since August 1997 has served as Secretary
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 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
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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, Vice President -- Business Development, joined the
Company in August 1997. 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. degree in physics from The
Johns Hopkins University.
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.
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, Kerr Group Inc., Pinkerton Inc., Scripps Research
Institute, and U.S. Surgical Corporation. 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. degree in
electrical engineering and mathematics and a Masters of Science degree 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, U.S. Electricar and Moltech Corp., and as President 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
Berkley.
36
<PAGE> 38
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.
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 year ended December 31, 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 that period. 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 1997. Mr. Myers, Mr. Colbaugh and Mr. Lewis, a director of the
Company, participated in the deliberations regarding executive compensation for
1998.
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."
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, $550,000 and $150,000,
respectively, during the Company's fiscal years ended December 31, 1994, 1995
and 1996 and $90,000 during 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 $5,863,000.
In January 1997, the Company sold its Hawker 800 aircraft (the "Aircraft")
to Summit Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers,
for a sales price of $5,635,000. Concurrent with the sale, Summit assumed
$5,630,000 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 $5,788,000. 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 September 30, 1997,
the Company incurred $313,000 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
37
<PAGE> 39
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 provides for interest at the rate of 7.30% per
annum and all amounts thereunder are due and payable on February 1, 1998. As of
November 21, 1997, there was a total of $673,000 in principal and unpaid
interest due under the Myers Note.
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 bears interest at an annual rate of 10.74% and, as of October
31, 1997, had an outstanding principal balance of $519,000.
During 1994, the Company wrote off $1,716,000 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.
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 $316,260 (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.
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 $5,000,000, 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."
38
<PAGE> 40
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").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
---------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
Steven S. Myers........................................................ $559,000 $ --
President and Chief Executive Officer
Kenneth W. Colbaugh.................................................... 360,000 692,551
Executive Vice President and
Chief Operating Officer
Thomas F. Heinsheimer.................................................. 120,000 339,747
Senior Vice President
Ronald A. Hunn......................................................... 160,000 28,611
Vice President and Chief Financial Officer
</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.
STOCK OPTIONS
The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1997. The Company intends to grant to certain
employees and directors options to purchase 790,000 shares of Common Stock,
including options to purchase 32,000 shares to Mr. Heinsheimer and 12,000 shares
to Mr. Hunn upon the consummation of this Offering. All options will be granted
with an exercise price per share equal to the initial public offering price.
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
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 September 30, 1997, there were no
options to purchase shares of Common Stock outstanding under the 1997 Stock
Option Plan. It is currently intended that options to purchase 790,000 shares
will be granted to certain
39
<PAGE> 41
employees and directors of the Company upon the consummation of this Offering
with an exercise price per share equal to the initial public offering price.
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 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
40
<PAGE> 42
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 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."
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, $550,000 and $150,000, respectively, during the Company's
fiscal years ended December 31, 1994, 1995 and 1996 and $90,000 during 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 $5,863,000, 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 Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers,
for a sales price of $5,635,000. Concurrent with the sale, Summit assumed
$5,630,000 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 $5,788,000. 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 September 30, 1997, the Company incurred $313,000 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
41
<PAGE> 43
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
provides for interest at the rate of 7.30% per annum and all amounts thereunder
are due and payable on February 1, 1998. As of November 21, 1997, there was a
total of $673,000 in principal and unpaid interest due and owing under the Myers
Note.
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 $5,000,000, 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 bears interest at an annual rate of 10.74% and, as of October
31, 1997, had an outstanding principal balance of $519,000.
During 1994, the Company wrote off $1,716,000 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.
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 $316,260 (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.
42
<PAGE> 44
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 November 21, 1997 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)(2) NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Steven S. Myers and Paula K. Myers(3)....... 8,927,731 69.2% 877,418 8,050,313 53.7%
Kenneth W. Colbaugh and Robin E.
Colbaugh(3)............................... 1,115,095 8.6 109,590 1,005,486 6.7
Ronald A. Hunn and Linda E. Hunn(3)......... 131,806 1.0 12,954 118,852 *
J. Christopher Lewis(4)..................... 1,685,416 13.1 0 1,685,416 11.2
John W. Montgomery and Dian Y.
Montgomery(3)............................. 137,080 1.1 13,472 123,607 *
Thomas F. Heinsheimer and Julianne
Heinsheimer(3)............................ 234,981 1.8 23,094 211,887 1.4
Charles A. Cullian.......................... 137,080 1.1 13,472 123,607 *
All directors and executive officers as a
group (8 persons)......................... 12,095,009 93.8 1,023,056 11,071,953 73.8
</TABLE>
- -----------------------------
* less than one percent.
(1) The address of each person listed is c/o Steven Myers & Associates, Inc.,
4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660.
(2) 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; and Messrs. Montgomery, Heinsheimer and
Cullian are Vice Presidents of the Company.
(3) Includes shares over which shareholders have beneficial ownership as
trustees.
(4) Includes shares over which Mr. Lewis has sole voting and investment power as
trustee, which shares shall be transferred to RLH SM&A, L.P. in connection
with the Offering.
43
<PAGE> 45
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 has been filed as an exhibit
to the Registration Statement incorporating this Prospectus. As of November 21,
1997, there were 18 holders of the Company's Common Stock.
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.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 15,000,000 shares of
Common Stock outstanding. All 3,150,000 shares sold pursuant to this Offering
(assuming the overallotment option is not exercised) will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by an "affiliate" of the Company (as that term is defined below). Any such
affiliate would be subject to the resale limitations of Rule 144 adopted under
the Securities Act.
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).
It is currently intended that, upon consummation of this Offering, options
to purchase 790,000 shares of the Company's Common Stock will be granted to
certain employees and directors of the Company pursuant to the 1997 Stock Option
Plan. The Company intends to register on a registration statement on Form S-8,
shortly after the date of this Prospectus, all 790,000 shares of Common Stock
underlying the options that are then outstanding or issuable pursuant to the
1997 Stock Option Plan.
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."
45
<PAGE> 47
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below for whom
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Lehman Brothers
Inc. are serving as representatives (the "Representatives"), have severally
agreed to purchase from the Company and the Selling Shareholders the respective
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
---------------------------------------------------------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Lehman Brothers Inc. ...........................................
---------
Total...................................................... 3,150,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all of the shares of Common Stock (other than the shares
of Common Stock covered by the Underwriters' over-allotment option described
below) must be so purchased.
Prior to this Offering, there has been no established trading market for
the Common Stock. The initial price to the public for the Common Stock offered
hereby will be determined by negotiation between the Company and the
Representatives. The factors to be considered in determining the initial price
to the public include the history of and the prospects for the industry in which
the Company competes, the performance and ability of the Company's management,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of this Offering and the
recent market prices of securities of generally comparable companies. The
estimated initial public Offering price range set forth on the cover page of
this Prospectus is subject to change as a result of market conditions and other
factors.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain 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 has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the price
to the public set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price less a concession not
to exceed $ per share. The Underwriters may allow, and such dealers may
reallow, discounts not in excess of $ per share to any other
Underwriter and certain other dealers. After this Offering, the offering price
and other selling terms may be changed by the Underwriters.
The Selling Shareholders have granted to the Underwriters an option to
purchase up to an aggregate of 472,500 additional shares of Common Stock, at the
initial public offering price less underwriting discounts and commissions,
solely to cover over-allotments. Such option may be exercised in whole or in
part from time to time during the 30-day period after the date of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
from the Company and the Selling Shareholders on a pro rata basis a number of
option shares proportionate to such Underwriter's initial commitment as
indicated in the preceding table.
46
<PAGE> 48
The Company, and each of its directors, executive officers and the Selling
Shareholders have agreed not to offer, sell contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or in any manner transfer all or a
portion of the economic consequences associated with the ownership of such
Common Stock, or to cause a registration statement covering any shares of Common
Stock to be filed, for 180 days after the date of this Prospectus without the
prior written consent of DLJ, subject to certain limited exceptions, and
provided that the Company may grant options pursuant to, and issue shares of
Common Stock upon the exercise of options under the 1997 Stock Option Plan. See
"Shares Eligible for Future Sale."
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the 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. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
the Offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of 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 Representatives have informed the Company and the Selling Shareholders
that they do not expect to make sales to accounts over which they exercise
discretionary authority without prior specific written approval of the client.
Application has been made to have the Common Stock approved for listing on
the Nasdaq National Market ("Nasdaq") under the symbol "WINS," pending
notification of issuance.
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 at December 31, 1995 and 1996, and
for each of the years in the three-year period ended December 31, 1996, 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.
47
<PAGE> 49
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.
48
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets -- December 31, 1995 and 1996 and September 30, 1997 (unaudited)....... F-3
Statements of Operations -- Years ended December 31, 1994, 1995 and 1996 and nine
months ended September 30, 1996 and 1997 (unaudited)................................ F-4
Statements of Shareholders' Equity -- Years ended December 31, 1994, 1995 and 1996 and
nine months ended September 30, 1997 (unaudited).................................... F-5
Statements of Cash Flows -- Years ended December 31, 1994, 1995 and 1996 and nine
months ended September 30, 1996 and 1997 (unaudited)................................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 51
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, 1995 and 1996 and the related statements of
operations, shareholders' equity and cash flows for each of the three years
ended December 31, 1996. 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, 1995 and 1996 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
April 3, 1997 except for
Notes 12 and 13 as to which the
date is January 5, 1998.
F-2
<PAGE> 52
STEVEN MYERS & ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
ASSETS 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash............................................... $ 269,000 $ 1,927,000 $ 478,000
Accounts receivable, net of allowance of $0,
$27,000 and $105,000 (unaudited) at December 31,
1995 and 1996 and September 30, 1997,
respectively.................................... 2,287,000 3,637,000 6,501,000
Other accounts receivable.......................... 3,000 186,000 79,000
Prepaid expenses and other current assets.......... 25,000 45,000 317,000
---------- ----------- ------------
Total current assets....................... 2,584,000 5,795,000 7,375,000
Property and equipment, net (notes 3 and 4).......... 427,000 5,869,000 408,000
Other assets......................................... 23,000 156,000 140,000
---------- ----------- ------------
$3,034,000 $11,820,000 $ 7,923,000
========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 67,000 $ 367,000 $ 64,000
Dividend payable (note 9).......................... -- -- 2,500,000
Current portion of long-term debt (note 4)......... 29,000 1,259,000 765,000
Accrued salaries, wages and payroll taxes.......... 1,352,000 3,839,000 3,964,000
Accrued bonus...................................... 342,000 474,000 902,000
Other liabilities.................................. -- 135,000 300,000
---------- ----------- ------------
Total current liabilities.................. 1,790,000 6,074,000 8,495,000
Long-term debt, excluding current portion (note 4)... 576,000 4,991,000 4,301,000
---------- ----------- ------------
Total liabilities.......................... 2,366,000 11,065,000 12,796,000
Shareholders' equity (deficit) (note 5):
Common stock, no par value. Authorized 1,000,000
and 2,000,000 shares of Series A and Series B,
respectively; issued and outstanding 234,000 and
938,000 of Series A and Series B, respectively,
in 1996 and 1995 and 202,000 and 813,000 of
Series A and Series B, respectively, at
September 30, 1997 (unaudited).................. 5,000 5,000 5,000
Additional paid-in capital......................... 316,000 316,000 316,000
Stock subscription note receivable (note 2)........ (205,000) (51,000) --
Due from shareholder (note 2)...................... -- (632,000) (1,367,000)
Retained earnings (accumulated deficit)............ 552,000 1,117,000 (3,827,000)
---------- ----------- ------------
Total shareholders' equity (deficit)....... 668,000 755,000 (4,873,000)
Commitments and contingencies (notes 4 and 7)........
---------- ----------- ------------
$3,034,000 $11,820,000 $ 7,923,000
========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 53
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $15,220,000 $20,777,000 $25,699,000 $19,462,000 $26,639,000
Cost of revenues................ 9,449,000 12,313,000 14,512,000 11,399,000 14,838,000
----------- ----------- ----------- ----------- -----------
Gross profit.......... 5,771,000 8,464,000 11,187,000 8,063,000 11,801,000
Selling, general and
administrative expenses (note
9)............................ 4,893,000 7,793,000 10,749,000 7,407,000 4,958,000
----------- ----------- ----------- ----------- -----------
Operating income...... 878,000 671,000 438,000 656,000 6,843,000
Other expense (income):
Interest expense.............. 24,000 62,000 420,000 275,000 378,000
Other income, net............. (39,000) (69,000) (556,000) (360,000) (229,000)
Write-off of amounts due from
affiliated company (note
10)........................ 1,716,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes........ (823,000) 678,000 574,000 741,000 6,694,000
Income tax expense (benefit)
(note 6)...................... (12,000) 10,000 9,000 7,000 100,000
----------- ----------- ----------- ----------- -----------
Net earnings (loss)... $ (811,000) $ 668,000 $ 565,000 $ 734,000 $ 6,594,000
=========== =========== =========== =========== ===========
</TABLE>
PRO FORMA SUPPLEMENTAL DATA (NOTE 12):
<TABLE>
<S> <C> <C> <C> <C> <C>
Historical earnings before income taxes.................... $ 574,000 $ 6,694,000
Pro forma adjustment to selling, general and administrative
expenses................................................... 2,475,000 (843,000)
----------- -----------
Pro forma earnings before income taxes..................... 3,049,000 5,851,000
Pro forma income tax expense............................... 1,219,000 2,340,000
----------- -----------
Pro forma net earnings........................... $ 1,830,000 $ 3,511,000
========== ==========
Pro forma earnings per share..................... $ .12 $ .27
========== ==========
Weighted average common shares used in the
calculation of pro forma supplemental net
income per share............................... 14,893,000 12,993,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 54
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
SERIES A AND SERIES B
(NOTE 5) STOCK RETAINED TOTAL
--------------------- ADDITIONAL SUBSCRIPTION DUE EARNINGS SHAREHOLDERS'
SHARES PAID-IN NOTE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL RECEIVABLE SHAREHOLDER DEFICIT) (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993...................... 234,000 $5,000 $316,000 $ (316,000) -- $ 913,000 $ 918,000
Net loss.................... -- -- -- -- -- (811,000) (811,000)
Collection of stock
subscription receivable... -- -- -- 7,000 -- -- 7,000
Tax-free distribution....... -- -- -- 6,000 -- (6,000) --
Recapitalization of
Corporation............... 938,000 -- -- -- -- -- --
--------- ------ -------- ---------- ----------- ----------- ------------
Balance at December 31,
1994...................... 1,172,000 5,000 316,000 (303,000) -- 96,000 114,000
Net earnings................ -- -- -- -- -- 668,000 668,000
Collection of stock
subscription receivable... -- -- -- 89,000 -- -- 89,000
Tax-free distribution....... -- -- -- 9,000 -- (212,000) (203,000)
--------- ------ -------- ---------- ----------- ----------- ------------
Balance at December 31,
1995...................... 1,172,000 5,000 316,000 (205,000) -- 552,000 668,000
Net earnings................ -- -- -- -- -- 565,000 565,000
Note due from shareholder
(note 2).................. -- -- -- -- (632,000) -- (632,000)
Collection of stock
subscription receivable... -- -- -- 154,000 -- -- 154,000
--------- ------ -------- ---------- ----------- ----------- ------------
Balance at December 31,
1996...................... 1,172,000 5,000 316,000 (51,000) (632,000) 1,117,000 755,000
Net earnings (unaudited).... -- -- -- -- -- 6,594,000 6,594,000
Collection of stock
subscription receivable
(unaudited)............... -- -- -- 51,000 -- -- 51,000
Note due from shareholder
(note 2).................. -- -- -- -- (735,000) -- (735,000)
Dividends declared
(unaudited) (note 9)...... -- -- -- -- -- (5,675,000) (5,675,000)
Repurchase and retirement of
common stock
(unaudited)............... (157,000) -- -- -- -- (5,863,000) (5,863,000)
--------- ------ -------- ---------- ----------- ----------- ------------
Balance at September 30,
1997 (unaudited).......... 1,015,000 $5,000 $316,000 $ -- $(1,367,000) $(3,827,000) $ (4,873,000)
========= ====== ======== ========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 55
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ---------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $ (811,000) $ 668,000 $ 565,000 $ 734,000 $ 6,594,000
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Provision for doubtful accounts............. 1,716,000 -- 27,000 -- 78,000
Depreciation and amortization............... 115,000 175,000 448,000 117,000 98,000
(Gain) loss on sale of fixed asset.......... 25,000 -- -- -- (137,000)
Changes in assets and liabilities:
Accounts receivable....................... (627,000) (713,000) (1,377,000) (453,000) (2,942,000)
Other accounts receivables................ 29,000 (2,000) (183,000) (136,000) 107,000
Prepaid expenses and other current
assets................................. (6,000) (18,000) (20,000) 5,000 (272,000)
Other assets.............................. (12,000) (3,000) (133,000) 4,000 16,000
Accounts payable.......................... 70,000 (34,000) 300,000 323,000 (303,000)
Dividend payable.......................... -- -- -- -- 2,500,000
Accrued salaries, wages and payroll
taxes.................................. 257,000 408,000 2,487,000 1,253,000 125,000
Accrued bonus............................. -- 14,000 132,000 49,000 428,000
Other liabilities......................... 270,000 (292,000) 135,000 -- 165,000
----------- --------- ----------- ----------- -----------
Net cash provided by operating
activities........................... 1,026,000 203,000 2,381,000 1,896,000 6,457,000
----------- --------- ----------- ----------- -----------
Cash flows from investing activities:
Net purchases of property and equipment....... (163,000) (325,000) (5,890,000) (5,895,000) (136,000)
Advances to affiliated company (note 10)...... (675,000) -- -- -- --
Proceeds from sale of fixed assets............ -- -- -- -- 6,000
Due to (from) shareholder (note 2)............ (200,000) 200,000 (632,000) -- (735,000)
----------- --------- ----------- ----------- -----------
Net cash used in investing
activities........................... (1,038,000) (125,000) (6,522,000) (5,895,000) (865,000)
----------- --------- ----------- ----------- -----------
Cash flows from financing activities:
Increase in long-term debt.................... 58,000 63,000 5,645,000 5,118,000 4,446,000
Distribution to shareholders.................. (7,000) (212,000) -- -- (5,675,000)
Repurchase of common stock.................... -- -- -- -- (5,863,000)
Decrease in stock subscription note
receivable.................................. 14,000 98,000 154,000 154,000 51,000
----------- --------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................. 65,000 (51,000) 5,799,000 5,272,000 (7,041,000)
----------- --------- ----------- ----------- -----------
Net increase (decrease) in cash........ 53,000 27,000 1,658,000 1,273,000 (1,449,000)
Cash at beginning of period..................... 189,000 242,000 269,000 269,000 1,927,000
----------- --------- ----------- ----------- -----------
Cash at end of period........................... $ 242,000 $ 269,000 $ 1,927,000 $ 1,542,000 $ 478,000
=========== ========= =========== =========== ===========
Supplemental disclosures:
Cash paid during the year for:
Interest.................................... $ 21,000 $ 64,000 $ 421,000 $ 275,000 $ 378,000
Income taxes................................ $ 2,000 $ 1,000 $ -- $ 2,000 $ 58,000
=========== ========= =========== =========== ===========
</TABLE>
Supplemental schedule of noncash investing activity:
In 1994, the Company assumed a $200,000 note payable from an affiliated
company (note 10).
In 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 related
long-term note payable of $5,630,000 (unaudited) (note 4).
See accompanying notes to financial statements.
F-6
<PAGE> 56
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996 AND SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(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.
Interim Financial Data
The interim financial statements as of September 30, 1997 and for the nine
month periods ended September 30, 1996 and 1997 are unaudited. The information
reflects all adjustments, consisting only of normal recurring entities, that, in
the opinion of management, are necessary to present fairly the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for the full fiscal year.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the double declining method over the estimated useful lives of the assets,
except for the Hawker 800 jet which is depreciated using the straight-line
method. 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.
F-7
<PAGE> 57
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 OTHER ACCOUNTS RECEIVABLE
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 sheets are stock subscription receivable balances of
$205,000 and $51,000 at December 31, 1995 and 1996, respectively. The stock
subscription receivable balance was paid in full during the nine months ended
September 30, 1997.
Included in shareholders' equity at December 31, 1996 is an amount due from
an officer and principal shareholder of the Company totaling $632,000. This
balance is to be paid by February 1, 1998 by offsetting dividends to the
shareholder against the receivable.
In addition to the $632,000 receivable balance from the shareholder plus
accrued interest of $35,000, both which remained outstanding at September 30,
1997, was an advancement to the same officer and principal shareholder in the
amount of $700,000. The $700,000 advancement was paid in full on October 1, 1997
by offsetting dividends to the shareholder against the receivable.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Aircraft and automobile.............. $ 958,000 $ 6,746,000 $ 958,000
Furniture and equipment.............. 283,000 385,000 518,000
---------- ----------- ------------
1,241,000 7,131,000 1,476,000
Less accumulated depreciation........ (814,000) (1,262,000) (1,068,000)
---------- ----------- ------------
$ 427,000 $ 5,869,000 $ 408,000
========== =========== ============
</TABLE>
(4) DEBT
In 1995, the Company refinanced an aircraft loan for the corporate aircraft
(Turbo Commander). The new agreement provides for a long-term note in the
principal amount of $560,000, of which there was a remaining principal balance
of $536,000 at December 31, 1996. 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 with 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.
F-8
<PAGE> 58
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 September 30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997............................................ $ 8,000
1998............................................ 32,000
1999............................................ 31,000
2000............................................ 10,000
--------
81,000
Less amount representing interest................. (12,000)
--------
Present value of minimum lease payments...... 69,000
Less current portion.............................. (25,000)
--------
$ 44,000
========
</TABLE>
Bank debt at September 30, 1997 consists of $815,000 and $3,660,000
outstanding under the revolving line of credit and the term loan, respectively,
for the purchase of Company stock from various shareholders. The revolving line
of credit bears interest at the Bank's prime rate of 8.50% at September 30,
1997. The term loan 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 8.28% at September 30, 1997.
A summary of debt is provided as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Bank debt..................................... $ -- $ -- $ 4,475,000
Aircraft loans................................ 553,000 5,498,000 522,000
Shareholder note payable...................... -- 667,000 --
Capital leases................................ 52,000 85,000 69,000
-------- ----------- -----------
605,000 6,250,000 5,066,000
Less current portion of long-term debt........ (29,000) (1,259,000) (765,000)
-------- ----------- -----------
$576,000 $ 4,991,000 $ 4,301,000
======== =========== ===========
</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.
On January 2, 1997, the Company entered into a credit agreement with a
financial institution 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 is also available
to finance the repurchase of Company stock. The rates of interest applicable to
the revolving line of credit and the term loan are the Bank's prime rate and
2.50% in excess of the LIBOR rate (London Interbank Offered Rate), respectively.
The revolving line of credit expires in 1999 and the term loan expires in 2001.
As of March 31, 1997, $5,863,000 was used to finance the repurchase of the
Company's stock from various shareholders.
On January 9, 1997, the Company sold its Hawker jet to Summit Aviation
Inc., a company owned by one of the shareholders, for a purchase price of
approximately $5,635,000. Concurrent with the sale, the Company
F-9
<PAGE> 59
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transferred $5,630,000 of long-term notes payable to SAI bearing interest rate
of 7.30% and 10.07% per annum, 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, 250,000 shares of
Series A common stock were authorized. Additionally, the amendment authorized
the issuance of 2,000,000 shares of a new Series B common stock. The Series A
and Series B common stock are identical in all respects 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.
(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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
State.......................... $(12,000) $10,000 $9,000 $7,000 $100,000
======== ======= ====== ====== ========
</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 September 30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................... $ 135,000
1998........................................... 435,000
1999........................................... 451,000
2000........................................... 468,000
2001........................................... 487,000
Thereafter..................................... 2,963,000
----------
$4,939,000
==========
</TABLE>
F-10
<PAGE> 60
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense totaled $136,000, $177,000 and $184,000 for years ended
December 31, 1994, 1995 and 1996, respectively, and $154,000 and $278,000 for
the nine months ended September 30, 1996 and 1997, respectively (unaudited).
(8) CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER
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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer:
A 30% 23% 19% 16% 10%
B 25 27 23 28 23
C 13 -- 10 12 11
D 10 -- -- -- --
E -- 10 18 19 13
F -- 10 -- -- --
G -- -- -- -- 13
H -- -- -- -- 13
</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
$2,737,000, $4,642,000 and $5,175,000 for the years ended December 31, 1994,
1995 and 1996, respectively, and $4,009,000 and $1,182,000 for the nine months
ended September 30, 1996 and 1997, respectively.
In fiscal 1997, the Company changed the manner of distributions to
shareholders. For the nine months ended September 30, 1997, $5,675,000 in
dividends were declared and all but $2,500,000 were paid. Dividends will be paid
out of future earnings.
(10) WRITE-OFF OF AMOUNTS DUE FROM AFFILIATED COMPANY
During fiscal year 1994, the Company wrote off $1,716,000 of receivables
from California Kamchatka Company, Inc. ("CKC"), an affiliated entity that was
dissolved. This write-off represented the Company's advances to CKC. Included in
this amount was a $200,000 note payable assumed by the Company on behalf of CKC.
Additionally, $578,000 of the above amount was a proration of rent and labor
charges from the Company to CKC related to services provided to CKC during 1993
and 1994.
(11) EMPLOYEE BENEFIT 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.
F-11
<PAGE> 61
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) PRO FORMA ADJUSTMENTS TO STATEMENTS OF OPERATIONS
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.
(13) SUBSEQUENT EVENTS
Prior to the consummation of the initial public offering, the Company will
effect a conversion of all outstanding shares of Series A and B common stock of
the Company into an aggregate of 12.9 million shares of common stock.
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-12
<PAGE> 62
======================================================
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............................ 12
Recapitalization........................... 12
Prior S Corporation Status................. 12
S Corporation Dividend..................... 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 15
Selected Financial Data.................... 16
Recent Developments........................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 25
Management................................. 35
Certain Transactions....................... 41
Principal and Selling Shareholders......... 43
Description of Capital Stock............... 44
Shares Eligible For Future Sale............ 45
Underwriting............................... 46
Legal Matters.............................. 47
Experts.................................... 47
Additional Information..................... 48
Index to Financial Statements.............. F-1
</TABLE>
------------------
UNTIL , 1998, (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING) ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
3,150,000 SHARES
[SM&A LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
, 1998
======================================================
<PAGE> 63
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.................................................. $ 13,939
NASD filing fee................................................... 5,572
Printing and engraving expenses................................... 125,000
Nasdaq application fee............................................ *
Blue sky qualification fees and expenses.......................... *
Legal fees and expenses........................................... 225,000
Accountants' fees and expenses.................................... 200,000
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... 30,489
--------
Total................................................... $600,000
========
</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> 64
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has not sold any securities during the past three years.
II-2
<PAGE> 65
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.+
3.1 Articles of Incorporation, as amended and restated.**
3.2 Bylaws of the Registrant, as amended and restated.+
4.1 Specimen stock certificate.*
5.1 Opinion of Rutan & Tucker.*
10.1 1997 Stock Option Plan, and related form of Stock Option Agreement.+
10.2 Form of Indemnification Agreement.**
10.3 Office Facilities Lease.**
10.4 Hawker Aircraft Sale Agreement.**
10.5 Employment Agreement with Steven S. Myers.**
10.6 Employment Agreement with Kenneth W. Colbaugh.**
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.**
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.**
10.9 Steven S. Myers Promissory Note.**
10.10 Company Note.**
10.11 Executive Bonus Plan.+
10.12 Securities Purchase Agreement dated September 25, 1996.+
10.13 Investor Rights Agreement dated September 25, 1996.+
23.1 Consent of KPMG Peat Marwick LLP+.
23.2 Consent of Rutan & Tucker (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>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Filed herewith.
II-3
<PAGE> 66
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-4
<PAGE> 67
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.
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 January 5, 1998.
STEVEN MYERS & ASSOCIATES, INC.
By: /s/ STEVEN S. MYERS
------------------------------------
Steven S. Myers,
Chairman of the Board, President
and Chief Executive Officer
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
- ------------------------------------------ ----------------------------- -------------------
<S> <C> <C>
/s/ STEVEN S. MYERS Chairman of the Board, January 5, 1998
- ------------------------------------------ President and
Steven S. Myers Chief Executive Officer
(Principal Executive Officer)
/s/ KENNETH W. COLBAUGH Director, Executive Vice January 5, 1998
- ------------------------------------------ President and
Kenneth W. Colbaugh Chief Operating Officer
* Director January 5, 1998
- ------------------------------------------
J. Christopher Lewis
/s/ RONALD A. HUNN Vice President of Finance, January 5, 1998
- ------------------------------------------ Chief Financial Officer and
Ronald A. Hunn Secretary (Principal
Financial
Officer and Principal
Accounting Officer)
/s/ JAMES R. MELLOR Director January 5, 1998
- ------------------------------------------
James R. Mellor
/s/ MALCOLM R. CURRIE Director January 5, 1998
- ------------------------------------------
Malcolm R. Currie
*By: /s/ RONALD A. HUNN January 5, 1998
- ------------------------------------------
Ronald A. Hunn,
attorney-in-fact
</TABLE>
II-5
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ---------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement+.......................................
3.1 Articles of Incorporation, as amended and restated**..................
3.2 Bylaws of the Registrant, as amended and restated+....................
4.1 Specimen stock certificate*...........................................
5.1 Opinion of Rutan & Tucker*............................................
10.1 1997 Stock Option Plan, and related form of Stock Option Agreement+...
10.2 Form of Indemnification Agreement**...................................
10.3 Office Facilities Lease**.............................................
10.4 Hawker Aircraft Sale Agreement**......................................
10.5 Employment Agreement with Steven S. Myers**...........................
10.6 Employment Agreement with Kenneth W. Colbaugh**.......................
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**........
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**.............................................................
10.9 Steven S. Myers Promissory Note**.....................................
10.10 Company Note**........................................................
10.11 Executive Bonus Plan+.................................................
10.12 Securities Purchase Agreement dated September 25, 1996+...............
10.13 Investor Rights Agreement dated September 25, 1996+...................
23.1 Consent of KPMG Peat Marwick LLP+.....................................
23.2 Consent of Rutan & Tucker (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>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Filed herewith.
<PAGE> 1
EXHIBIT 1.1
3,150,000 Shares
STEVEN MYERS & ASSOCIATES, INC.
Common Stock
UNDERWRITING AGREEMENT
___________, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
STEVEN MYERS & ASSOCIATES, INC., a California corporation (the
"COMPANY"), proposes to issue and sell to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"), and certain shareholders of the Company
named in Schedule II hereto (the "SELLING SHAREHOLDERS") severally propose to
sell to the several Underwriters, an aggregate of 3,150,000 shares of the Common
Stock, no par value of the Company (the "FIRM SHARES"), of which 2,100,000
shares are to be issued and sold by the Company and 1,050,000 shares are to be
sold by the Selling Shareholders, each Selling Shareholder selling the amount
set forth opposite such Selling Shareholder's name in Schedule II hereto. The
Selling Shareholders also propose to sell to the several Underwriters not more
than an additional aggregate of 472,500 shares of its Common Stock, no par value
(the "ADDITIONAL SHARES"), if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as the "SHARES." The shares of common stock of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "COMMON STOCK." The Company and the Selling
Shareholders are hereinafter sometimes referred to collectively as the
"SELLERS".
<PAGE> 2
SECTION 1. Registration Statement and Prospectus. The
Company has prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION
STATEMENT;" and the prospectus in the form first used to confirm sales of
Shares is hereinafter referred to as the "PROSPECTUS." If the Company has
filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares
of Common Stock (a "RULE 462(B) REGISTRATION STATEMENT"), then, unless
otherwise specified, any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up
Agreements. On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, (i) the Company agrees
to issue and sell 2,100,000 Firm Shares, (ii) each Selling Shareholder agrees,
severally and not jointly, to sell the number of Firm Shares set forth opposite
such Selling Shareholder's name in Schedule II hereto and (iii) each
Underwriter agrees, severally and not jointly, to purchase from each Seller at
a price per Share of $_______ (the "PURCHASE PRICE") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Firm Shares to
be sold by such Seller as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Selling
Shareholders agree, severally and not jointly, to sell up to the number of
Additional Shares set forth opposite such Selling Shareholder's name in
Schedule II hereto and the Underwriters shall have the right to purchase,
severally and not jointly, up to an aggregate of 472,500 Additional Shares
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<PAGE> 3
from the Selling Shareholders at the Purchase Price. Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. The Underwriters may exercise their
right to purchase Additional Shares in whole or in part from time to time by
giving written notice thereof to the Company within 30 days after the date of
this Agreement. You shall give any such notice on behalf of the Underwriters
and such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business days
after such notice has been given. If any Additional Shares are to be
purchased, each Underwriter, severally and not jointly, agrees to purchase from
the Selling Shareholders the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears
the same proportion to the total number of Additional Shares to be purchased
from the Selling Shareholders as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I bears to the total number of Firm
Shares.
Each Seller hereby agrees 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 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), except to the Underwriters pursuant to
this Agreement, for a period of 180 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"). Notwithstanding the foregoing, during such period (i) the
Company may grant stock options pursuant to the Company's 1997 Stock Option
Plan and (ii) the Company may issue shares of Common Stock upon the exercise of
an option or warrant or the conversion of a security outstanding on the date
hereof. The Company also agrees
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<PAGE> 4
not to file any registration statement (other than a registration statement on
Form S-8 with respect to shares of Common Stock issuable pursuant to the
Company's 1997 Stock Option Plan) with respect to any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
for a period of 180 days after the date of the Prospectus without the prior
written consent of DLJ. In addition, each Selling Shareholder agrees that, for
a period of 180 days after the date of the Prospectus without the prior written
consent of DLJ, it will not 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. The Company
shall, prior to or concurrently with the execution of this Agreement, deliver
an agreement executed by (i) each Selling Shareholder, (ii) each of the
directors and officers of the Company who is not a Selling Shareholder and
(iii) each shareholder listed on Annex I hereto to the effect that such person
will not, during the period commencing on the date such person signs such
agreement and ending 180 days after the date of the person signs such
Prospectus, without the prior written consent of DLJ, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) 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.
SECTION 3. Terms of Public Offering. The Sellers are advised
by you that the Underwriters propose (i) to make a public offering of their
respective portions of the Shares as soon after the execution and delivery of
this Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at 9:00 A.M., New
York City time, on _________, 1998 (the "CLOSING DATE") at such place as you
shall designate. The Closing Date and the location of delivery of and payment
for the Firm Shares may be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at such place as you
shall designate at 9:00 A.M., New York City time, on the date specified in the
applicable exercise
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<PAGE> 5
notice given by you pursuant to Section 2 (an "OPTION CLOSING DATE"). Any such
Option Closing Date and the location of delivery of and payment for such
Additional Shares may be varied by agreement between you and the Company.
The Company authorizes DLJ to register the Shares in the name
of Cede & Co., a nominee of the Depositary Trust Company ("DTC") or such other
name as DLJ shall determine prior to the Closing Date or an Option Closing
Date, as the case may be. On the Closing Date or the applicable Option Closing
Date, as the case may be, with any transfer tax thereon duly paid by the
Sellers against payment to the Sellers by the several Underwriters of the
Purchase Price for the Shares in same day funds, the Company will cause DTC to
credit the Shares to the account of Donaldson, Lufkin & Jenrette Securities
Corporation at DTC for the benefit of the several Underwriters. The Shares
shall be made available to the Initial Purchaser for inspection not later than
9:30 a.m., New York City time, on the business day immediately preceding the
Closing Date.
SECTION 5. Agreements of the Company. The Company agrees with
you:
(a) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (ii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for offering or
sale in any jurisdiction, or the initiation of any proceeding for such
purposes, (iii) when any amendment to the Registration Statement becomes
effective, (iv) if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (v) of the happening of any
event during the period referred to in Section 5(d) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will use its
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<PAGE> 6
best efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish to you three (3) signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as you may
reasonably request.
(c) To prepare the Prospectus, the form and substance of
which shall be satisfactory to you, and to file the Prospectus in such form
with the Commission within the applicable period specified in Rule 424(b) under
the Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any amendment
or supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Shares by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first
business day after the date of this Agreement and from time to time thereafter
for such period as in the opinion of counsel for the Underwriters a prospectus
is required by law to be delivered in connection with sales by an Underwriter
or a dealer, to furnish in New York City to each Underwriter and any dealer as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any
event shall occur or condition shall exist as a result of which, in the opinion
of counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is
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<PAGE> 7
necessary to amend or supplement the Prospectus to comply with applicable law,
forthwith to prepare and file with the Commission an appropriate amendment or
supplement to the Prospectus so that the statements in the Prospectus, as so
amended or supplemented, will not in the light of the circumstances when it is
so delivered, be misleading, or so that the Prospectus will comply with
applicable law, and to furnish to each Underwriter and to any dealer as many
copies thereof as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to
cooperate with you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the several
Underwriters and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares and
to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification; provided,
however, that the Company shall not be required in connection therewith to
qualify as a foreign corporation in any jurisdiction in which it is not now so
qualified or to take any action that would subject it to general consent to
service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in which
it is not now so subject.
(g) To mail and make generally available to its
shareholders as soon as practicable an earnings statement covering the
twelve-month period ending _________, 1999 that shall satisfy the provisions of
Section 11(a) of the Act, and to advise you in writing when such statement has
been so made available.
(h) During the period of three years after the date of
this Agreement, to furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Common Stock or
furnished to or filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed and such other
publicly available information concerning the Company and its subsidiaries as
you may reasonably request.
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<PAGE> 8
(i) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause to
be paid all expenses incident to the performance of the Sellers' obligations
under this Agreement, including: (i) the fees, disbursements and expenses of
the Company's counsel, the Company's accountants and any Selling Shareholder's
counsel (in addition to the Company's counsel) in connection with the
registration and delivery of the Shares under the Act and all other fees and
expenses (other than the fees and expenses of counsel to the Underwriters) in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to
any of the foregoing, including the mailing and delivering of copies thereof to
the Underwriters and dealers in the quantities specified herein during the
period delivery of a prospectus is required by Rule 174 under the Act, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) all
costs of printing or producing this Agreement (other than the fees and expenses
of counsel to the Underwriters) and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv)
all expenses in connection with the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the several states
and all costs of printing or producing any Preliminary and Supplemental Blue
Sky Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to
the Common Stock and all costs and expenses incident to the listing of the
Shares on the Nasdaq National Market, (vii) the cost of printing certificates
representing the Shares, (viii) the costs and charges of any transfer agent,
registrar and/or depositary, and (ix) all other costs and expenses incident to
the performance of the obligations of the Company and the Selling Shareholders
hereunder for which provision is not otherwise made in this Section. The
provisions of this Section shall not supersede or
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<PAGE> 9
otherwise affect any agreement that the Company and the Selling Shareholders
may otherwise have for allocation of such expenses among themselves.
(j) To use its best efforts to (i) list for quotation the
Shares on the Nasdaq National Market and (ii) maintain the listing of the
Shares on the Nasdaq National Market for a period of three years after the date
of this Agreement.
(k) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to file a
Rule 462(b) Registration Statement with the Commission registering the Shares
not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City
time, on the date of this Agreement and to pay to the Commission the filing fee
for such Rule 462(b) Registration Statement at the time of the filing thereof
or to give irrevocable instructions for the payment of such fee pursuant to
Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company.
The Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective
(other than any Rule 462(b) Registration Statement to be filed by the Company
after the effectiveness of this Agreement); any Rule 462(b) Registration
Statement filed after the effectiveness of this Agreement will become effective
no later than 10:00 P.M., New York City time, on the date of this Agreement;
and no stop order suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for such purpose are pending before or threatened
by the Commission.
(b) (i) The Registration Statement (other than any Rule
462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement), when it became effective, did not contain
and, as amended, if applicable, will not contain any untrue statement of a
material fact or omit to
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<PAGE> 10
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any 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 and (B) will comply in all material respects with the Act and
(iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the Act, and did not contain 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, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of its jurisdiction
of incorporation and has the corporate power and authority to carry on its
business as described in the Prospectus and to own, lease and operate its
properties, and is duly
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<PAGE> 11
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company. The Company has no subsidiaries.
(e) There are no outstanding subscriptions, rights,
warrants, options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of its subsidiaries relating to or
entitling any person to purchase or otherwise to acquire any shares of the
capital stock of the Company or any of its subsidiaries, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Shareholders) have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares to be issued and
sold by the Company have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company conforms
to the description thereof contained in the Prospectus.
(h) The Company is not in violation of its articles of
incorporation or by-laws or in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company, to which the Company is a party or by which the Company or any of its
property is bound.
(i) The execution, delivery and performance of this
Agreement by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby and as
described in the Prospectus under the captions "Recapitalization," "Prior S
Corporation Status" and "S Corporation Dividend" will not (i) require any
consent, approval,
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<PAGE> 12
authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under applicable
federal, state or foreign securities laws), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the articles of
incorporation or by-laws of the Company or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company, to which the Company is a party or by which the Company or its property
is bound, (iii) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental body or
agency having jurisdiction over the Company, or any of its property or (iv)
result in the suspension, termination or revocation of any Authorization (as
defined below) of the Company or any other impairment of the rights of the
holder of any such Authorization.
(j) There are no legal or governmental proceedings
pending or, to the best of the Company's knowledge after due inquiry,
threatened to which the Company is or could be a party or to which any of its
property is or could be subject that are required to be described in the
Registration Statement or the Prospectus and are not so described; nor are
there any statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not so described or filed as
required.
(k) The Company has not violated any foreign, federal,
state or local law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the rules and
regulations promulgated thereunder, except for such violations which, singly or
in the aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company.
(l) The Company has such permits, licenses, consents,
exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and
all courts and other tribunals, including, without limitation, under any
applicable Environmental
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<PAGE> 13
Laws, as are necessary to own, lease, license and operate its properties and to
conduct its business, except where the failure to have any such Authorization
or to make any such filing or notice would not, singly or in the aggregate,
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company. Each such Authorization is valid and
in full force and effect and the Company is in compliance with all the terms
and conditions thereof and with the rules and regulations of the authorities
and governing bodies having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time or
both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or
the presence of any such restriction would not, singly or in the aggregate,
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company.
(m) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company.
(n) This Agreement has been duly authorized, executed and
delivered by the Company.
(o) KPMG Peat Marwick LLP are independent public
accountants with respect to the Company as required by the Act.
(p) The financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly the financial
position, results of operations and
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<PAGE> 14
changes in financial position of the Company on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein; the supporting schedules, if
any, included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(q) The pro forma financial statements of the Company and
the related notes thereto set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) have been prepared on a
basis consistent with the historical financial statements of the Company and
its subsidiaries, give effect to the assumptions used in the preparation
thereof on a reasonable basis and in good faith and present fairly the
historical and proposed transactions contemplated by the Registration Statement
and the Prospectus. Such pro forma financial statements have been prepared in
accordance with the applicable requirements of Rule 11-02 of Regulation S-X
promulgated by the Commission. The other pro forma financial and statistical
information and data set forth in the Registration Statement and Prospectus
(and any supplement or amendment thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with the pro forma
financial statements.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing
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<PAGE> 15
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
(s) All material tax returns required to be filed by the
Company in any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due pursuant to
such returns or pursuant to any assessment received by the Company have been
paid, other than those being contested in good faith and for which adequate
reserves have been provided.
(t) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended.
(u) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement.
(v) Since the respective dates as of which information is
given in the Prospectus other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or any
development involving a prospective material adverse change in the condition,
financial or otherwise, or the earnings, business, backlog, management or
operations of the Company, (ii) there has not been any material adverse change
or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company and (iii) the Company has
not incurred any material liability or obligation, direct or contingent.
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<PAGE> 16
(w) No relationship, direct or indirect, exists between
or among the Company on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company on the other hand, which is
required by the Act to be described in the Registration Statement or the
Prospectus which is not so described.
(x) The Company owns or possesses, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("intellectual property") currently employed by
it in connection with the business now operated by it except where the failure
to own or possess or otherwise be able to acquire such intellectual property
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operation of the
Company; and the Company has not received any notice of infringement of or
conflict with asserted rights of others with respect to any of such
intellectual property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect
on the business, prospects, financial condition or results of operations of the
Company.
(y) Effective as of January 1, 1991, the Company validly
elected S Corporation Status (as defined in Section 1361 of the Internal
Revenue Code of 1986, as amended) for federal and certain state income tax
purposes and has validly continued to qualify as an S corporation in each such
jurisdiction since such date and will continue to so qualify until date of
termination of the Company's S corporation status.
(z) The Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(aa) Each certificate signed by any officer of the Company
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
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<PAGE> 17
SECTION 7. Representations and Warranties of the Selling
Shareholders. Each Selling Shareholder represents and warrants to each
Underwriter that:
(a) Such Selling Shareholder is the lawful owner of the
Shares to be sold by such Selling Shareholder pursuant to this Agreement and
has, and on the Closing Date will have, good and clear title to such Shares,
free of all restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever.
(b) The Shares to be sold by such Selling Shareholder
have been duly authorized and are validly issued, fully paid and
non-assessable.
(c) Such Selling Shareholder has, and on the Closing Date
will have, full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement, the Custody Agreement
signed by such Selling Shareholder and U.S. Stock Transfer Corporation, as
Custodian, relating to the deposit of the Shares to be sold by such Selling
Shareholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such Selling
Shareholder appointing certain individuals as such Selling Shareholder's
attorneys-in-fact (the "ATTORNEYS") to the extent set forth therein, relating
to the transactions contemplated hereby and by the Registration Statement and
the Custody Agreement (the "POWER OF ATTORNEY") and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Shareholder in the manner
provided herein and therein.
(d) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder.
(e) The Custody Agreement of such Selling Shareholder has
been duly authorized, executed and delivered by such Selling Shareholder and is
a valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms.
(f) The Power of Attorney of such Selling Shareholder has
been duly authorized, executed and delivered by such Selling Shareholder and is
a valid and binding instrument of such Selling Shareholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Shareholder has, among other things, authorized the Attorneys, or any
one of them,
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<PAGE> 18
to execute and deliver on such Selling Shareholder's behalf this Agreement and
any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Shareholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be
sold by such Selling Shareholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever.
(h) The execution, delivery and performance of this
Agreement and the Custody Agreement and Power of Attorney of such Selling
Shareholder by or on behalf of such Selling Shareholder, the compliance by such
Selling Shareholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will not (i)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such as
may be required under applicable federal, state or foreign securities laws),
(ii) conflict with or constitute a breach of any of the terms or provisions of,
or a default under, the organizational documents of such Selling Shareholder,
if such Selling Shareholder is not an individual, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or any
property of such Selling Shareholder is bound or (iii) violate or conflict with
any applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over such Selling
Shareholder or any property of such Selling Shareholder.
(i) To the knowledge of such Selling Shareholder, the
representations and warranties of the Company contained in Section 6 hereof are
true and correct and (ii) such parts of the Registration Statement under the
caption "Principal and Selling Shareholders" which specifically relate to such
Selling Shareholder do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
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<PAGE> 19
(j) At any time during the period described in Section
5(d), if there is any change in the information referred to in Section 7(i),
such Selling Shareholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such
Selling Shareholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Shareholder to the Underwriters as to the matters covered thereby.
SECTION 8. Indemnification. (a) The Sellers, jointly and
severally, agree to indemnify and hold harmless each Underwriter, its
directors, its officers and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and
all losses, claims, damages, liabilities and judgments (including, without
limitation, any legal or other expenses incurred in connection with
investigating or defending any matter, including any action, that could give
rise to any such losses, claims, damages, liabilities or judgments) caused by
any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto), the Prospectus (or
any amendment or supplement thereto) or any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
judgments are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriter
furnished in writing to the Company by such Underwriter through you expressly
for use therein; provided however, that (i) the aggregate liability of any
Selling Shareholder pursuant to this Section 8(a) shall be limited to an amount
equal to the purchase price received by such Selling Shareholder from the sale
of such Selling Shareholder's Shares hereunder and (ii) the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter who failed to deliver a Prospectus (as then amended
or supplemented, provided by the Company to the several Underwriters in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the Closing Date) to the person asserting any losses, claims, damages and
liabilities and
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<PAGE> 20
judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and the delivery of such Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person.
(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
each Selling Shareholder and each person, if any, who controls such Selling
Shareholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Sellers to
such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(c) In case any action shall be commenced involving any
person in respect of which indemnity may be sought pursuant to Section 8(a) or
8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 8(a) and 8(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 8(c),
but may employ separate counsel and participate in the defense
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<PAGE> 21
thereof, but the fees and expenses of such counsel, except as provided below,
shall be at the expense of such Underwriter). Any indemnified party shall have
the right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel
shall have been specifically authorized in writing by the indemnifying party,
(ii) the indemnifying party shall have failed to assume the defense of such
action or employ counsel reasonably satisfactory to the indemnified party or
(iii) the named parties to any such action (including any impleaded parties)
include both the indemnified party and the indemnifying party, and the
indemnified party shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional
to those available to the indemnifying party (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf
of the indemnified party). In any such case, the indemnifying party shall not,
in connection with any one action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for (i) the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for all
Underwriters, their officers and directors and all persons, if any, who control
any Underwriter within the meaning of either Section 15 of the Act or Section
20 of the Exchange Act, (ii) the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and all persons, if
any, who control the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all Selling Shareholders and all persons, if
any, who control any Selling Shareholder within the meaning of either such
Section, and all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm
for the Selling Shareholders and such control persons of any Selling Sharehol-
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<PAGE> 22
ders, such firm shall be designated in writing by the Attorneys. The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) Notwithstanding the foregoing, no Selling Shareholder
shall be required to provide indemnification under this Section 8 until the
earlier to occur of (i) the Underwriters seeking indemnification shall have
first made a written demand for payment on the Company (a "Demand") and the
Company shall have failed to make such demanded payment within sixty (60) days
after receipt of such Demand or (ii) the Underwriters seeking indemnification
shall have made a Demand and the Company shall deny in writing its liability
for such demanded payment; provided, that this Section 8(d) shall be of no
force or effect (i) if a petition under the Bankruptcy Code shall have been
filed by or with respect to the Company or the Company shall have sought
protection from its creditors generally under any similar federal or state law
or (ii) with respect to any Selling Shareholder if a petition under the
Bankruptcy Code shall have been filed by or with respect to such Selling
Shareholder or such Selling Shareholder shall have sought protection from its
creditors generally under any similar federal or state law.
(e) To the extent the indemnification provided for in
this Section 8 is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages, liabilities or judgments referred to
therein, then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Sellers on the one hand and the Underwriters
on the other hand in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits
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<PAGE> 23
received by the Sellers on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (after deducting underwriting discounts and commissions, but before
deducting expenses) received by the Sellers, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Shares, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Sellers on the one
hand and the Underwriters on the other hand shall 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
relates to information supplied by the Company or the Selling Shareholders on
the one hand or the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. 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. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in pro-
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<PAGE> 24
portion to the respective number of Shares purchased by each of the
Underwriters hereunder and not joint.
(f) The remedies provided for in this Section 8 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) Each Selling Shareholder hereby designates Steven
Myers & Associates, Inc., 4695 MacArthur Court, Eighth Floor, Newport Beach,
California 92660, as its authorized agent, upon which process may be served in
any action which may be instituted in any state or federal court in the State
of New York by any Underwriter, any director or officer of any Underwriter or
any person controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Shareholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Shareholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The
several obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement shall have become effective by 10:00 P.M., New
York City time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a
certificate dated the Closing Date, signed by Steven S. Myers and
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<PAGE> 25
Kenneth W. Colbaugh, in their capacities as the President, Chairman of the
Board and Chief Executive Officer and Executive Vice President and Chief
Operating Officer, respectively, of the Company, confirming the matters set
forth in Sections 6(t), 9(a) and 9(b) and that the Company has complied with
all of the agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by the Company on or prior to the
Closing Date.
(d) Since the respective dates as of which information is
given in the Prospectus other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or otherwise, or the
earnings, business, backlog, management or operations of the Company, (ii)
there shall not have been any change or any development involving a prospective
change in the capital stock or in the long-term debt of the Company and (iii)
the Company shall not have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each
Selling Shareholder contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of the
Closing Date and you shall have received on the Closing Date a certificate
dated the Closing Date from each Selling Shareholder to such effect and to the
effect that such Selling Shareholder has complied with all of the agreements
and satisfied all of the conditions herein contained and required to be
complied with or satisfied by such Selling Shareholder on or prior to the
Closing Date.
(f) You shall have received on the Closing Date an
opinion (satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of Rutan & Tucker, counsel for the Company and the Selling
Shareholders, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing
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<PAGE> 26
under the laws of California and has the corporate power and
authority to carry on its business as described in the
Prospectus and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good
standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial
condition or results of operations of the Company;
(iii) all the outstanding shares of capital stock of
the Company (including the Shares to be sold by the Selling
Shareholders) have been duly authorized and validly issued and
are fully paid, non-assessable and not subject to any
preemptive or similar rights;
(iv) the Shares to be issued and sold by the
Company hereunder have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized,
executed and delivered by the Company and by or on behalf of
each Selling Shareholder;
(vi) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(vii) the Registration Statement has become
effective under the Act, no stop order suspending its
effectiveness has been issued and no proceedings for that
purpose are, to the best of such counsel's knowledge after due
inquiry, pending before or contemplated by the Commission;
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<PAGE> 27
(viii) the statements under the captions "Risk
Factors--Anti-Takeover Provisions", "--Shares Eligible for
Future Sale", "Management--1997 Stock Option Plan", "--Bonus
Plan", "--Employment Agreements", "--Indemnification of
Officers and Directors", "Description of Capital Stock",
"Shares Eligible for Future Sale" and "Underwriting" in the
Prospectus and Items 14 and 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(ix) the Company is not in violation of its
articles of incorporation or by-laws and, to the best of such
counsel's knowledge after due inquiry, the Company is not in
default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument
that is material to the Company, to which the Company is a
party or by which the Company or any of its property is bound;
(x) the execution, delivery and performance of
this Agreement by the Company, the compliance by the Company
with all the provisions hereof and the consummation of the
transactions contemplated hereby and as described in the
Prospectus under the caption "Recapitalization", "Prior S
Corporation Status" and "S Corporation Dividend" will not (A)
require any consent, approval, authorization or other order
of, or qualification with, any court or governmental body or
agency (except such as may be required under applicable
federal, state or foreign securities laws), (B) conflict with
or constitute a breach of any of the terms or provisions of, or
a default under, the articles of incorporation or by-laws of
the Company or any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the
Company, to which the Company is a party or by which the
Company or any of its property is bound, (C) violate or
conflict with any applicable law or any rule, regulation,
judgment, order or decree of any
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<PAGE> 28
court or any governmental body or agency having jurisdiction
over the Company or any of its property or (D) result in the
suspension, termination or revocation of any Authorization of
the Company or any other impairment of the rights of the
holder of any such Authorization;
(xi) after due inquiry, such counsel does not know
of any legal or governmental proceedings pending or threatened
to which the Company is or could be a party or to which any of
its property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and
are not so described, or of any statutes, regulations,
contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not so
described or filed as required;
(xii) the Company has not violated any Environmental
Law or any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations
promulgated thereunder, except for such violations which,
singly or in the aggregate, would not have a material adverse
effect on the business, prospects, financial condition or
results of operation of the Company;
(xiii) the Company has such Authorizations of, and
has made all filings with and notices to, all governmental or
regulatory authorities and self-regulatory organizations and
all courts and other tribunals, including, without limitation,
under any applicable Environmental Laws, as are necessary to
own, lease, license and operate its properties and to conduct
its business, except where the failure to have any such
Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on
the business, prospects, financial condition or results of
operations of the Company; each such Authorization is valid
and in full force and effect and the Company is in compliance
with all the terms and conditions thereof and with the rules
and regulations of the authorities and governing bodies
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<PAGE> 29
having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or
both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company;
except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction would not,
singly or in the aggregate, have a material adverse effect on
the business, prospects, financial condition or results of
operations of the Company;
(xiv) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be,
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xv) to the best of such counsel's knowledge after
due inquiry, (A) there are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Act with respect to any
securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the
Registration Statement and (B) no relationship, direct or
indirect, exists between the Company on the one hand, and the
directors, officers, shareholders, customers or suppliers of
the Company on the other hand, which is required by the Act to
be described in the Registration Statement or the Prospectus
which is not so described;
(xvi) (A) the Registration Statement and the
Prospectus and any supplement or amendment thereto (except for
the financial statements and other financial data included
therein as to which no opinion need be expressed) comply as to
form with the Act, (B)
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<PAGE> 30
such counsel has no reason to believe that at the time the
Registration Statement became effective or on the date of this
Agreement, the Registration Statement and the prospectus
included therein (except for the financial statements and
other financial data as to which such counsel need not express
any belief) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading and (C) such counsel has no reason to believe that
the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data,
as aforesaid) contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading;
(xvii) each Selling Shareholder is the lawful owner
of the Shares to be sold by such Selling Shareholder pursuant
to this Agreement and has good and clear title to such Shares,
free of all restrictions on transfer, liens, encumbrances,
security interests, equities and claims whatsoever;
(xviii) each Selling Shareholder has full legal
right, power and authority, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and the Power of Attorney of such Selling
Shareholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Shareholder in the manner
provided herein and therein;
(xix) the Custody Agreement of each Selling
Shareholder has been duly authorized, executed and delivered
by such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in
accordance with its terms;
(xx) the Power of Attorney of each Selling
Shareholder has been duly authorized, executed and delivered
by such Selling Shareholder and is a valid and binding
instrument of such Selling Shareholder,
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<PAGE> 31
enforceable in accordance with its terms, and, pursuant to
such Power of Attorney, such Selling Shareholder has, among
other things, authorized the Attorneys, or any one of them, to
execute and deliver on such Selling Shareholder's behalf this
Agreement and any other document they, or any one of them, may
deem necessary or desirable in connection with the
transactions contemplated hereby and thereby and to deliver
the Shares to be sold by such Selling Shareholder pursuant to
this Agreement;
(xxi) upon delivery of and payment for the Shares to
be sold by each Selling Shareholder pursuant to this
Agreement, good and clear title to such Shares will pass to
the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims
whatsoever; and
(xxii) the execution, delivery and performance of
this Agreement and the Custody Agreement and Power of Attorney
of each Selling Shareholder by such Selling Shareholder, the
compliance by such Selling Shareholder with all the provisions
hereof and thereof and the consummation of the transactions
contemplated hereby and thereby will not (A) require any
consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency
(except such as may be required under applicable federal,
state or foreign securities laws), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling
Shareholder, if such Selling Shareholder is not an individual,
or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Shareholder is a
party or by which any property of such Selling Shareholder is
bound or (C) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over
such Selling Shareholder or any property of such Selling
Shareholder.
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<PAGE> 32
The opinion of Rutan & Tucker described in Section 9(f) above shall be
rendered to you at the request of the Company and the Selling Shareholders and
shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated
the Closing Date, of Milbank, Tweed, Hadley & McCloy, counsel for the
Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(v) (but
only with respect to the Company), 9(f)(viii) (but only with respect to the
statements under the caption "Description of Capital Stock" and "Underwriting")
and 9(f)(xvi).
In giving such opinions with respect to the matters covered by Section
9(f)(xvi), counsel for the Company and the Selling Shareholders and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from KPMG Peat Marwick LLP,
independent public accountants, containing the information and statements of
the type ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements
specified in Section 2 hereof which agreements shall be in full force and
effect on the Closing Date.
(j) The Shares shall have been duly listed for quotation on the
Nasdaq National Market.
(k) The Company and the Selling Shareholders shall not have failed
on or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company
or the Selling Shareholders, as the case may be, on or prior to the Closing
Date.
- 32 -
<PAGE> 33
(l) You shall have received on the Closing Date, a certificate of
each Selling Shareholder who is not a U.S. Person (as defined under applicable
U.S. federal tax legislation) to the effect that such Selling Shareholder is
not a U.S. Person, which certificate may be in the form of a properly completed
and executed United States Treasury Department Form W-8 (or other applicable
form or statement specified by Treasury Department regulations in lieu
thereof).
(m) The Company shall have consummated the Recapitalization (as
defined in the Registration Statement).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This
Agreement shall become effective upon the execution and delivery of this
Agreement of the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) any outbreak or escalation of hostilities or other national
or international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus, (ii)
the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago
Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects,
- 33 -
<PAGE> 34
or will materially and adversely affect, the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken
as a whole, (v) the declaration of a banking moratorium by either federal or
New York State authorities or (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal
affairs which in your opinion has a material adverse effect on the financial
markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares, as
the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I bears
to the total number of Firm Shares which all the non-defaulting Underwriters
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the number of Firm Shares or
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter.
If on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased by all Underwriters and arrangements satisfactory
to you, the Company and the Selling Shareholders for purchase of such Firm
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders. In any such case which does not result in
termination of this Agreement, either you or the Sellers shall have the right
to postpone the Closing Date, but in no event for
- 34 -
<PAGE> 35
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. If, on an Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option
to (i) terminate their obligation hereunder to purchase such Additional Shares
or (ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such date
in the absence of such default. Any action taken under this paragraph shall
not relieve any defaulting Underwriter from liability in respect of any default
of any such Underwriter under this Agreement.
SECTION 11. Agreements of the Selling Shareholders. Each Selling
Shareholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Shareholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Shareholder under this Agreement prior to the Closing Date and any
Option Closing Date and to satisfy all conditions precedent to the delivery of
the Shares to be sold by such Selling Shareholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision
of this Agreement shall be addressed as follows: (i) if to the Company, to
Steven Myers & Associates, Inc., 4695 MacArthur Court, Eighth Floor, Newport
Beach, California 92626, (ii) if to the Selling Shareholders, to Kenneth W.
Colbaugh and Ronald A. Hunn c/o Steven Myers & Associates, Inc., 4695 MacArthur
Court, Eighth Floor, Newport Beach, California 92626 and (iii) if to any
Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
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<PAGE> 36
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and
the several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling such Selling
Shareholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including
the fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
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<PAGE> 37
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among the
Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
STEVEN MYERS & ASSOCIATES, INC.
By:_________________________________
Title:
THE SELLING SHAREHOLDERS
NAMED IN SCHEDULE II
HERETO, ACTING
SEVERALLY
By:_________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:_________________________________
Title:
- 37 -
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
Underwriters Number of Firm Shares
to be Purchased
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc.
Total 3,150,000
---------
</TABLE>
- 38 -
<PAGE> 39
SCHEDULE II
Selling Shareholders
<TABLE>
<CAPTION>
Name Number of Firm Number of Additional
Shares Being Sold Shares Being Sold
<S> <C> <C>
Total 1,050,000 472,500
--------- -------
</TABLE>
- 39 -
<PAGE> 40
Annex I
[Insert names of shareholders of the Company who will be required to sign
lockups]
- 40 -
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
STEVEN MYERS & ASSOCIATES, INC.,
a California corporation
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES................................................................. 1
Section 1. Principal Executive Office........................................ 1
Section 2. Other Offices..................................................... 1
ARTICLE II SHAREHOLDERS............................................................ 1
Section 1. Place of Meetings................................................. 1
Section 2. Annual Meetings................................................... 1
Section 3. Special Meetings.................................................. 1
Section 4. Notice of Annual or Special Meeting............................... 2
Section 5. Quorum............................................................ 2
Section 6. Adjourned Meeting and Notice Thereof.............................. 2
Section 7. Voting............................................................ 3
Section 8. Record Date....................................................... 5
Section 9. Consent of Absentees.............................................. 5
Section 10. Action Without Meeting............................................ 6
Section 11. Proxies........................................................... 6
Section 12. Inspectors of Election............................................ 6
ARTICLE III DIRECTORS............................................................... 7
Section 1. Powers............................................................ 7
Section 2. Number of Directors............................................... 8
Section 3. Election and Term of Office....................................... 8
Section 4. Vacancies......................................................... 8
Section 5. Place of Meeting.................................................. 9
Section 6. Regular Meetings.................................................. 9
Section 7. Special Meetings.................................................. 9
Section 8. Quorum............................................................ 9
Section 9. Participation in Meetings by Conference
Telephone......................................................... 10
Section 10. Waiver of Notice.................................................. 10
Section 11. Adjournment....................................................... 10
Section 12. Fees and Compensation............................................. 10
Section 13. Action Without Meeting............................................ 10
Section 14. Rights and Inspection............................................. 10
Section 15. Committees........................................................ 11
ARTICLE IV OFFICERS................................................................ 11
Section 1. Officers.......................................................... 11
Section 2. Election.......................................................... 12
Section 3. Subordinate Officers.............................................. 12
Section 4. Removal and Resignation........................................... 12
Section 5. Vacancies......................................................... 12
Section 6. Chairman of the Board............................................. 12
Section 7. President......................................................... 12
Section 8. Vice President.................................................... 13
Section 9. Secretary......................................................... 13
Section 10. Chief Financial Officer........................................... 13
ARTICLE V OTHER PROVISIONS........................................................ 14
Section 1. Inspection of Corporate Records................................... 14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 2. Inspection of Bylaws.............................................. 14
Section 3. Endorsement of Documents; Contracts............................... 15
Section 4. Certificates of Stock............................................. 15
Section 5. Representation of Shares of other Corpora-
tions............................................................. 16
Section 6. Stock Purchase Plans.............................................. 16
Section 7. Annual Report to Shareholders..................................... 16
Section 8. Construction and Definitions...................................... 16
ARTICLE VI INDEMNIFICATION......................................................... 17
Section 1. Definitions....................................................... 17
Section 2. Indemnification in Actions by Third
Parties........................................................... 17
Section 3. Indemnification in Actions by or in the
Right of the Corporation.......................................... 17
Section 4. Mandatory Indemnification Against Expenses........................ 18
Section 5. Required Determinations........................................... 18
Section 6. Advance of Expenses............................................... 18
Section 7. Other Indemnification............................................. 18
Section 8. Circumstances Where Indemnification Not
Permitted......................................................... 19
Section 9. Insurance......................................................... 19
Section 10. Nonapplicability to Fiduciaries of Employee
Benefit Plans..................................................... 19
ARTICLE VII AMENDMENTS.............................................................. 19
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED BYLAWS
Bylaws for the regulation, except as
otherwise provided by statute or its
Articles of Incorporation
of
STEVEN MYERS & ASSOCIATES, INC.,
a California corporation
ARTICLE I
OFFICES
Section 1. Principal Executive Office. The principal executive office of
the Corporation shall be located at 4695 MacArthur Court, 8th Floor, Newport
Beach, CA 92660. The Board of Directors (herein called the "Board") is granted
full power and authority to change said principal executive office from one
location to another.
Section 2. Other Offices. Branch or subordinate offices may be
established at any time by the Board at any place or places.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meetings. Meetings of shareholders shall be held
either at the principal executive office of the Corporation or at any other
place within or without the State of California which may be designated either
by the Board or by the written consent of all persons entitled to vote thereat,
given either before or after the meeting and filed with the Secretary.
Section 2. Annual Meetings. The annual meetings of the shareholders
shall be held on such date and at such time as may be fixed by the Board. At
such meetings, directors shall be elected and any other proper business may be
transacted.
Section 3. Special Meetings. Special meetings of the shareholders may be
called at any time by the Board, the Chairman of the Board, the President, or by
the holders of shares entitled to cast not less than ten percent (10%) of the
votes at such meeting. Upon request in writing to the Chairman of the Board, the
President, any Vice President or the Secretary by any person (other than the
Board) entitled to call a special meeting of shareholders, the officer forthwith
shall cause notice to be given to the shareholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than thirty-five nor more than sixty days after the receipt of
the request. If the notice is not given within twenty days after receipt of the
request, the persons entitled to call the meeting may give the notice.
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<PAGE> 5
Section 4. Notice of Annual or Special Meeting. Written notice of each
annual or special meeting of shareholders shall be given not less than ten nor
more than sixty days before the date of the meeting to each shareholder entitled
to vote thereat. Such notice shall state the place, date and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted, or (ii) in the case of
the annual meeting, those matters which the Board, at the time of the mailing of
the notice, intends to present for action by the shareholders, but, subject to
the provisions of applicable law, any proper matter may be presented at the
meeting for such action. The notice of any meeting at which directors are to be
elected shall include the names of nominees intended at the time of the notice
to be presented by management for election.
Notice of a shareholders' meeting shall be given either personally or by
mail or by other means of written communication, addressed to the shareholder at
the address of such shareholder appearing on the books of the Corporation or
given by the shareholder to the Corporation for the purpose of notice; or, if no
such address appears or is given, at the place where the principal executive
office of the Corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. Notice by mail shall be deemed to have been given at the time
a written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person given the notice by
electronic means, to the recipient.
Section 5. Quorum. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. The shareholders present at a duly called or held meeting at which
a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to have less than a
quorum, if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum.
Section 6. Adjourned Meeting and Notice Thereof. Any shareholders'
meeting, whether or not a quorum is present, may be adjourned from time to time
by the vote of a majority of the shares, the holders of which are either present
in person or represented by proxy thereat, but in the absence of a quorum
(except as provided in Section 5 of this Article) no other business may be
transacted at such meeting.
It shall not be necessary to give any notice of the time and place of
the adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken; provided,
however, when any shareholders' meeting is adjourned for more than 45 days or,
if after adjournment a new record date is fixed for the adjourned meeting,
notice of the
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<PAGE> 6
adjourned meeting shall be given as in the case of an original meeting.
Section 7. Voting. The shareholders entitled to notice of any meeting or
to vote at any such meeting shall be only persons in whose name shares stand on
the stock records of the Corporation on the record date determined in accordance
with Section 8 of this Article.
Voting shall in all cases be subject to the provisions of Chapter 7 of
the California General Corporation Law, and to the following provisions:
(a) Subject to clause (g), shares held by an administrator,
executor, guardian, conservator or custodian may be voted by such holder
either in person or by proxy, without a transfer of such shares into the
holder's name; and shares standing in the name of a trustee may be voted
by the trustee, either in person or by proxy, but no trustee shall be
entitled to vote shares held by such trustee without a transfer of such
shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by
such receiver; and shares held by or under the control of a receiver may
be voted by such receiver without the transfer thereof into the
receiver's name if authority to do so is contained in the order of the
court by which such receiver was appointed.
(c) Subject to the provisions of Section 705 of the California
General Corporation Law and except where otherwise agreed in writing
between the parties, a shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been transferred into
the name of the pledgee, and thereafter the pledgee shall be entitled to
vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and
the Corporation may treat all rights incident thereto as exercisable by
the minor, in person or by proxy, whether or not the Corporation has
notice, actual or constructive, of the nonage, unless a guardian of the
minor's property has been appointed and written notice of such
appointment given to the Corporation.
(e) Shares standing in the name of another corporation,
domestic or foreign, may be voted by such officer, agent or proxyholder
as the bylaws of such other corporation may prescribe or, in the absence
of such provision, as the Board of Directors of such other corporation
may determine or, in the absence of such determination, by the chairman
of the board, president or any vice president of such other corporation.
Shares which are purported to be voted or any proxy purported to be
executed in the name of a
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<PAGE> 7
corporation (whether or not any title of the person signing is
indicated) shall be presumed to be voted or the proxy executed in
accordance with the provisions of this subdivision, unless the contrary
is shown.
(f) Shares of the Corporation owned by any subsidiary shall
not be entitled to vote on any matter.
(g) Shares held by the Corporation in a fiduciary capacity,
and shares of the issuing corporation held in a fiduciary capacity by
any subsidiary, shall not be entitled to vote on any matter, except to
the extent that the settlor or beneficial owner possesses and exercises
a right to vote or to give the Corporation binding instructions as to
how to vote such shares.
(h) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, husband and wife as community property, tenants by
the entirety, voting trustees, persons entitled to vote under a
shareholder voting agreement or otherwise, or if two or more persons
(including proxyholders) have the same fiduciary relationship respecting
the same shares, unless the secretary of the Corporation is given
written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the
following effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so
voting binds all;
(iii) If more than one vote, but the vote is evenly
split on any particular matter, each faction may vote the
securities in question proportionately.
If the instrument so filed or the registration of the shares shows that
any such tenancy is held in unequal interests, a majority or even split
for the purpose of this section shall be a majority or even split in
interest.
Subject to the following sentence and to the provisions of Section 708
of the California General Corporation Law, every shareholder entitled to vote at
any election of directors may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are normally
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit. No shareholder shall be entitled
to cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' names have been placed in
nomination
-4-
<PAGE> 8
prior to the voting and the shareholder has given notice at a meeting prior to
the voting of the shareholder's intention to cumulate the shareholder's votes.
If any one shareholder has given such notice, all shareholders may cumulate
their votes for candidates in nomination. At the time the Corporation becomes a
listed corporation within the meaning of Section 301.5 of the California
General Corporation Law, the provisions of this paragraph shall be of no
further force and effect and no shareholder shall be entitled to cumulate such
shareholder's votes at any election of directors.
Elections need not be by ballot; provided, however, that all elections
for directors must be by ballot upon demand made by a shareholder at the meeting
and before the voting begins.
In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
Section 8. Record Date. The Board may fix, in advance, a record date for
the determination of the shareholders entitled to notice of any meeting to vote
or entitled to receive payment of any dividend or other distribution, or any
allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 days nor less than 10
days prior to the date of the meeting nor more than 60 days prior to any other
action. When a record date is so fixed, only shareholders of record on that date
are entitled to notice of and to vote at the meeting or to receive the dividend,
distribution, or allotment of rights, or to the exercise of the rights, as the
case may be, notwithstanding any transfer of shares on the books of the
Corporation after the record date. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for the
adjourned meeting. The Board shall fix a new record date if the meeting is
adjourned for more than 45 days.
If no record date is fixed by the Board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the next
business day next preceding the day on which the meeting is held. The record
date for determining shareholders for any purpose other than set forth in this
Section 8 or Section 10 of this Article shall be at the close of business on the
day on which the Board adopts the resolution relating thereto, or the sixtieth
day prior to the date of such other action, whichever is later.
Section 9. Consent of Absentees. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers,
-5-
<PAGE> 9
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting. Neither the business to be transacted at nor the
purpose of any regular or special meeting of shareholders need be specified in
any written waiver of notice, except as provided in Section 601(f) of the
California General Corporation Law.
Section 10. Action Without Meeting. Subject to Section 603 of the
California General Corporation Law, any action which, under any provision of the
California General Corporation Law, may be taken at any annual or special
meeting of shareholders, may be taken without a meeting and without prior notice
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Unless a
record date for voting purposes be fixed as provided in Section 8 of this
Article, the record date for determining shareholders entitled to give consent
shall be the day on which the first written consent is given.
Section 11. Proxies. Every person entitled to vote shares has the right
to do so either in person or by one or more persons authorized by a written
proxy executed by such shareholder and filed with the Secretary. Every proxy
duly executed shall continue in full force and effect until revoked by the
person executing it prior to the vote pursuant thereto effected by a writing
delivered to the Corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or by attendance at the meeting and voting in person by the
person executing the proxy; provided, however, that no proxy shall be valid
after the expiration of eleven months from the date of its execution unless
otherwise provided in the proxy.
Section 12. Inspectors of Election. In advance of any meeting of
shareholders, the Board may appoint any persons, other than nominees for office
inspectors of election to act at such meeting and any adjournment thereof. If
inspectors of election are not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any such meeting may, and on the
request of any shareholder or shareholder's proxy shall, make such appointment
at the meeting. The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares present shall determine whether one or three inspectors
are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b)
of the California General Corporation Law and shall include: determining the
number of shares outstanding and the voting power of each; the shares
represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and
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determining all challenges and questions in any way arising in connection with
the right to vote; counting and tabulating all votes or consents; determining
when the polls shall close; determining the result; and doing such acts as may
be proper to conduct the election or vote with fairness to all shareholders. If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all.
ARTICLE III
DIRECTORS
Section 1. Powers. Subject to limitations of the Articles of
Incorporation, of these Bylaws and of the California General Corporation Law
relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the Corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board. The Board may delegate the management of the day-to-day operation of the
business of the Corporation to a management company or other person provided
that the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the Board shall have the following powers
in addition to the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and
employees of the Corporation, prescribe the powers and duties for them
as may not be inconsistent with applicable law, with the Articles of the
Corporation or these Bylaws, fix their compensation and require from
them security for faithful service.
(b) To conduct, manage and control the affairs and business of
the Corporation and to make such rules and regulations therefor not
inconsistent with applicable law, or with the Articles of the
Corporation or these Bylaws, as they may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe
the forms of certificates of stock, and to alter the form of such seal
and of such certificates from time to time as in their judgment they may
deem best.
(d) To authorize the issuance of shares of stock of the
Corporation from time to time, upon such terms and for such
consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of
the Corporation, and to cause to be executed and delivered therefor, in
the corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges,
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hypothecation or other evidences of debt and securities thereof.
Section 2. Number of Directors. The authorized number of directors shall
be, until changed by amendment of the Articles or by a Bylaw duly adopted by the
shareholders, such number as may from time to time be authorized by resolution
of the Board of Directors or the shareholders, provided that such number shall
not be less than three (3) nor more than five (5).
Section 3. Election and Term of Office. The directors shall be elected
at each annual meeting of the shareholders, but if any such annual meeting is
not held or the directors are not elected thereat, the directors may be elected
at any special meeting of shareholders held for that purpose. Each director
shall hold office until the next annual meeting and until a successor has been
elected and qualified.
Section 4. Vacancies. Any director may resign effective upon giving
written notice to the Chairman of the Board, the President, Secretary or the
Board, unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a successor may
be elected to take office when the resignation becomes effective.
Vacancies in the Board, except those existing as a result of a removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in the case
of the death, resignation or removal of any director, or if the authorized
number of directors be increased, or if the shareholders fail, at any annual or
special meeting of shareholders at which any director or directors are elected,
to elect the full authorized number of directors to be voted for at that
meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a majority of the outstanding shares entitled to vote. If the Board
accepts the resignation of a director tendered to take effect at a future time,
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the Board or the shareholders shall have power to elect a successor to take
office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of the director's term of
office.
Section 5. Place of Meeting. Regular or special meetings of the Board
shall be held at any place within or without the State of California which has
been designated from time to time by the Board. In the absence of such
designation, regular meetings shall be held at the principal executive office of
the Corporation.
Section 6. Regular Meetings. Immediately following each annual meeting
of shareholders, the Board shall hold a regular meeting for the purpose of
organization, election of officers and the transaction of other business. Call
and notice of all such regular meetings of the Board of Directors is hereby
dispensed with. Other regular meetings of the Board shall be held without call
on such dates and at such times as may be fixed by the Board, and shall be
subject to the notice requirements set forth in Section 7 hereof.
Section 7. Special Meetings. Special meetings of the Board for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President or the Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written
notice or 48 hours' notice given personally or by telephone, telegraph,
telecopier, telex or other similar means of communication. Any such notice shall
be addressed or delivered to each director at such director's address as it is
shown upon the records of the Corporation or as may have been given to the
Corporation by the director for purposes of notice or, if such address is not
shown on such records or is not readily ascertainable, at the place in which the
meetings of the directors are regularly held.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mails, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated in person or by telephone or wireless, to the recipient or to a
person at the office or residence of the recipient who the person giving the
notice has reason to believe will promptly communicate it to the recipient.
Section 8. Quorum. One third of the authorized number of directors or
two directors, whichever is larger, constitutes a quorum of the Board for the
transaction of business, except to
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adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
Section 9. Participation in Meetings by Conference Telephone. Members of
the Board may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.
Section 10. Waiver of Notice. The transactions of any meeting of the
Board, however called and noticed or wherever held, are as valid as though had
at a meeting duly held after regular call and notice if a quorum be present and
if, either before or after the meeting, each of the directors not present signs
a written waiver of notice, a consent to holding such a meeting or an approval
of the minutes thereof. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Section 11. Adjournment. A majority of the directors present, whether or
not a quorum is present, may adjourn any directors' meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned. If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
Section 12. Fees and Compensation. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board.
Section 13. Action Without Meeting. Any action required or permitted to
be taken by the Board may be taken without a meeting if all members of the Board
shall individually or collectively consent in writing to such action. Such
consent or consents shall have the same effect as a unanimous vote of the Board
and shall be filed with minutes of the proceedings of the Board.
Section 14. Rights and Inspection. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of the
Corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.
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Section 15. Committees. The Board may appoint one or more committees,
each consisting of two or more directors, and delegate to such committees any of
the authority of the Board except with respect to:
(i) The approval of any action for which the
California General Corporation Law also requires shareholders'
approval of the outstanding shares.
(ii) The filling of vacancies on the Board or in any
committee;
(iii) The fixing of compensation of the directors for
serving on the Board or on any committee;
(iv) The amendment or repeal of Bylaws or the adoption
of new Bylaws;
(v) The amendment or repeal of any resolution of the
Board which by its express terms is not so amendable or
repealable;
(vi) A distribution to the shareholders of the
Corporation except at a rate or in a periodic amount or within
a price range determined by the Board; or
(vii) The appointment of other committees of the Board
or the members thereof.
Any such committee must be appointed by resolution adopted by a majority
of the authorized number of directors and may be designated an Executive
Committee or by such other name as the Board shall specify. The Board shall have
the power to prescribe the manner in which proceedings of any such committee
shall be conducted. In the absence of any such prescription, such committee
shall have the power to prescribe the manner in which its proceedings shall be
conducted. Unless the Board or such committee shall otherwise provide, the
regular and special meetings and other actions of any such committee shall be
governed by the provisions of this Article applicable to meetings and actions of
the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer. The Corporation may also
have, at the discretion of the Board, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Financial
Officers and such other officers as may be elected or appointed in accordance
with the provisions of Section 3 of this Article.
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Section 2. Election. The officers of the Corporation, except such
officers as may be elected or appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by, and shall
serve at the pleasure of the Board, and shall hold their respective offices
until their resignation, removal or other disqualification from service, or
until their respective successors shall be elected.
Section 3. Subordinate Officers. The Board may elect, and may empower
the President to appoint such other officers as the business of the Corporation
may require, each of whom shall hold office for such period, have such authority
and perform such duties as are provided in these Bylaws or as the Board may from
time to time determine.
Section 4. Removal and Resignation. Any officer may be removed, either
with or without cause, by the Board of Directors at any time or, except in the
case of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of
employment.
Any officer may resign at any time by giving written notice to the
Corporation, but without prejudice to the rights, if any, of the Corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular election or appointment to such
office.
Section 6. Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned by the Board.
Section 7. President. Subject to such powers, if any, as may be given by
the Board to the Chairman of the Board, if there be such an officer, the
President is the general manager and chief executive officer of the Corporation
and has, subject to the control of the Board, general supervision, direction and
control of the business and officers of the Corporation. The President shall
preside at all meetings of the shareholders and in the absence of the Chairman
of the Board, or if there be none, at all meetings of the Board. The President
has the general powers and duties of management usually vested in the office of
president and general manager of a corporation and such other powers and duties
as may be prescribed by the Board.
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Section 8. Vice President. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board or,
if not ranked, the Vice President designated by the Board, shall perform all the
duties of the President and, when so acting, shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board.
Section 9. Secretary. The Secretary shall keep or cause to be kept, at
the principal executive office and such other place as the Board may order, a
book of minutes of all meetings of shareholders, the Board and its committees,
with the time and place of holding, whether regular or special, and if special,
how authorized, the notice thereof given, the names of those present at Board
and committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof. The Secretary shall keep,
or cause to be kept, a copy of the Bylaws of the Corporation at the principal
executive offices or business office in accordance with Section 213 of the
California General Corporation Law.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, if one be appointed, a share register, or a duplicate share register,
showing the names of the shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders of the Board and of any committees thereof required by these
Bylaws or by law to be given, shall keep the seal of the Corporation in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
Section 10. Chief Financial Officer. The Chief Financial Officer is the
chief financial officer of the Corporation and shall keep and maintain, or cause
to be kept and maintained, adequate and correct accounts of the properties and
business transactions of the Corporation, and shall send or cause to be sent to
the shareholders of the Corporation such financial statements and reports as are
by law or these Bylaws required to be sent to them. The books of account shall
at all times be open to inspection by any director.
The Chief Financial Officer shall deposit all monies and other valuables
in the name and to the credit of the Corporation with such depositories as may
be designated by the Board. The Chief Financial Officer shall disburse the funds
of the Corporation as may be ordered by the Board, shall render to the President
and directors, whenever they request it, an account of all transactions entered
into as Chief Financial Officer and of the financial
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condition of the Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board.
ARTICLE V
OTHER PROVISIONS
Section 1. Inspection of Corporate Records.
(a) A shareholder or shareholders holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
Corporation shall have an absolute right to do either or both of the
following:
(i) Inspect and copy the record of shareholders'
names and addresses and shareholdings during usual business
hours upon five business days' prior written demand upon the
Corporation; or
(ii) Obtain from the transfer agent, if any, for the
Corporation, upon five business days' prior written demand and
upon the tender of its usual charges for such a list (the
amount of which charges shall be stated to the shareholder by
the transfer agent upon request), a list of the shareholders'
names and addresses who are entitled to vote for the election
of directors and their shareholdings as of the most recent
record date for which it has been compiled or as of a date
specified by the shareholder subsequent to the date of demand.
(b) The record of shareholders shall also be open to
inspection and copying by any shareholder or holder of a voting trust
certificate at any time during usual business hours upon written demand
on the Corporation, for a purpose reasonably related to such holder's
interest as a shareholder or holder of a voting trust certificate.
(c) The accounting books and records and minutes of
proceedings of the shareholders and the Board and committees of the
Board shall be open to inspection upon written demand on the Corporation
of any shareholder or holder of a voting trust certificate at any
reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as a holder of
such voting trust certificate.
(d) Any inspection and copying under this Article may be made
in person or by agent or attorney.
Section 2. Inspection of Bylaws. The Corporation shall keep in its
principal executive office the original or a copy of these Bylaws as amended to
date, which shall be open to inspection by shareholders at all reasonable times,
during office hours. If the
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principal executive office of the Corporation is located outside the State of
California and the Corporation has no principal business office in such state,
it shall upon the written notice of any shareholder furnish to such shareholder
a copy of these Bylaws as amended to date.
Section 3. Endorsement of Documents; Contracts. Subject to the
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance or other instrument in writing and any
assignment or endorsements thereof executed or entered into between the
Corporation and any other person, when signed by the Chairman of the Board, the
President or any Vice President and the Secretary, any Assistant Secretary, the
Chief Financial Officer or any Assistant Financial Officer of the Corporation
shall be valid and binding on the Corporation in the absence of actual knowledge
on the part of the other person that the signing officers had no authority to
execute the same. Any such instruments may be signed by another person or
persons and in such manner as from time to time shall be determined by the
Board, and, unless so authorized by the Board, no officer, agent or employee
shall have any power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
amount.
Section 4. Certificates of Stock. Every holder of shares of the
Corporation shall be entitled to have a certificate signed in the name of the
Corporation by the Chairman of the Board, the President or a Vice President and
by the Chief Financial Officer or an Assistant Financial Officer or the
Secretary or an Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificate may be facsimile. If any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this section, no new certificate for shares shall
be issued in lieu of an old one unless the latter is surrendered and cancelled
at the same time. The Board may, however, if any certificate for shares is
alleged to have been lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the Corporation may require that the
Corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made
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against it (including expense or liability) on account of the alleged loss,
theft or destruction of such certificate or the issuance of such new
certificate.
Section 5. Representation of Shares of other Corporations. The President
or any other officer or officers authorized by the Board or the President are
each authorized to vote, represent and exercise on behalf of the Corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of the Corporation. The authority herein granted may be
exercised either by any such officer in person or by any other person authorized
so to do by proxy or power of attorney duly executed by said officer.
Section 6. Stock Purchase Plans. The Corporation may adopt and carry out
a stock purchase plan or agreement or stock option plan or agreement providing
for the issue and sale for such consideration as may be fixed of its unissued
shares, or of issued shares acquired or to be acquired, to one or more of the
employees or directors of the Corporation or of a subsidiary or to a trustee on
their behalf and for the payment for such shares in installments or at one time,
and may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment and option or obligation
on the part of the Corporation to repurchase the shares upon termination of
employment, restrictions upon transfer of the shares, the time limits of and
termination of the plan, and any other matters, not in violation of applicable
law, as may be included in the plan as approved or authorized by the Board or
any committee of the Board.
Section 7. Annual Report to Shareholders. The annual report to
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly waived, but nothing herein shall be interpreted as prohibiting
the Board from issuing annual or other periodic reports to shareholders.
Section 8. Construction and Definitions. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the General Provisions of the California Corporations Code and in
the California General Corporation Law shall govern the construction of these
Bylaws.
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ARTICLE VI
INDEMNIFICATION
Section 1. Definitions. For the purposes of this Article, "agent" means
any person who is or was a director, officer, employee or other agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the Corporation or of another enterprise at the
request of such predecessor corporation. "Proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under Sections 4 or 5(d).
Section 2. Indemnification in Actions by Third Parties. The Corporation
shall have power to indemnify any person who was or is a party or is threatened
to be made a party to any proceeding (other than an action by or in the right of
the Corporation to procure a judgment in its favor) by reason of the fact that
such person is or was an agent of the Corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in the best interests of the
Corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of such person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the Corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 3. Indemnification in Actions by or in the Right of the
Corporation. The Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
Corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action, provided that no such
person shall be indemnified for acts, omissions or transactions for which
California Corporations Code Section 204(a)(10) disallows eliminating or
limiting the personal liability of a director. No indemnification shall be made
under this Section 3 for any of the following:
(a) In respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the Corporation in the
performance of such person's duty to the
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Corporation and its shareholders, unless and only to the extent that the
court in which such proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a
pending action without court approval; or
(c) Of expenses incurred in defending a pending action which
is settled or otherwise disposed of without court approval.
Section 4. Mandatory Indemnification Against Expenses. To the extent
that an agent of the Corporation has been successful on the merits in defense of
any proceeding referred to in Sections 2 or 3 or in defense of any claim, issue
or matter therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.
Section 5. Required Determinations. Except as provided in Section 4, any
indemnification under this Article shall be made by the Corporation only if
authorized in the specific case, upon a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3, by any of the
following:
(a) A majority vote of a quorum consisting of
directors who are not parties to such proceeding;
(b) If a quorum of directors is not obtainable, by independent
legal counsel in a written opinion;
(c) Approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon
application made by the Corporation or the agent or the attorney or
other person rendering services in connection with the defense, whether
or not such application by the agent, attorney or other person is
opposed by the Corporation.
Section 6. Advance of Expenses. Expenses incurred in defending any
proceeding may be advanced by the Corporation prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount if it shall be determined ultimately that the agent is not
entitled to be indemnified as authorized in this Article.
Section 7. Other Indemnification. The indemnification provided by this
section shall not be deemed exclusive of any other
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rights to which those seeking indemnification may be entitled under any
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office, to the extent such additional rights to indemnification are
authorized in the Articles of this corporation. The rights to indemnity
hereunder shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person. Nothing contained in this Article
shall affect any right to indemnification to which persons other than such
directors and officers may be entitled by contract or otherwise.
Section 8. Circumstances Where Indemnification Not Permitted. No
indemnification or advance shall be made under this Article, except as provided
in Sections 4 or 5(d), in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the
Articles, a resolution of the shareholders or an agreement in effect at
the time of the occurrence of the alleged cause of action asserted in
the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 9. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any agent of the Corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the Corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article.
Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans.
This Article does not apply to a proceeding against any trustee, investment
manager or other fiduciary of an employee benefit plan in such person's capacity
as such, even though such person may also be an agent as defined in Section 1 of
the employer Corporation. The Corporation shall have power to indemnify such a
trustee, investment manager or other fiduciary to the extent permitted by
subdivision (f) of Section 207 of the California General Corporation Law.
ARTICLE VII
AMENDMENTS
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however, that
after the issuance of shares, a Bylaw specifying or changing a fixed number of
directors or the maximum or minimum number or changing from a fixed to a
variable Board or vice versa may only be adopted by approval of the outstanding
shares.
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<PAGE> 1
EXHIBIT 10.1
STEVEN MYERS & ASSOCIATES, INC.
1997 STOCK OPTION PLAN
NOTICE: QUALIFIED OPTIONS UNDER THIS PLAN BEAR RESTRICTIONS
GOVERNED BY SECTION 422 OF THE INTERNAL REVENUE CODE. PLAN
PARTICIPANTS ARE URGED TO READ SECTION 422 AND TO UNDERSTAND THE
RESTRICTIONS CONTAINED THEREIN. NOT ALL SECTION 422 RESTRICTIONS
ARE REFERENCED IN THIS PLAN. OPTIONS GRANTED HEREUNDER MAY BEAR
RESTRICTIONS IMPOSED BY FEDERAL AND STATE SECURITIES LAWS. PLAN
PARTICIPANTS ARE URGED TO CONSULT WITH THEIR TAX AND LEGAL
ADVISORS CONCERNING THE NATURE AND RESTRICTIONS UPON THE OPTIONS
GOVERNED HEREBY.
1. Purposes.
(a) The purpose of the Plan is to provide a means by which selected
employees, Directors and Consultants of the Company and its Affiliates, may be
given an opportunity to benefit from increases in value of the stock of the
Company through the granting of Incentive Stock Options and Nonstatutory Stock
Options, as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants of the Company or its
Affiliates, to secure and retain the services of new Employees, Directors and
Consultants, and to provide incentives for such persons to exert maximum efforts
for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to Section 3(c), be
either Incentive Stock Options and Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
certificate or certificates will be issued for shares purchased on exercise of
such Options.
2. Definitions.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 2
(d) "Committee" means a Committee appointed by the Board in accordance
with Section 3(c) of the Plan.
(e) "Company" means Steven Myeres & Associates, Inc., a California
corporation.
(f) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(g) "Continuous Status as an Employee, Director or Consultant" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave or any other personal leave; provided, however, that for
purposes of Incentive Stock Options, any such leave may not exceed three (3)
months, unless reemployment upon the expiration of such leave is guaranteed by
contract, Company policies or statute; or (ii) transfers between locations of
the Company or between the Company, Affiliates or their successors.
(h) "Director" means a member of the Board.
(i) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market
Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on
such system or exchange on the last market trading day prior to the day
of determination, as reported in the Wall Street Journal or such other
source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the
Fair Market Value of a share of Common Stock shall be the mean between
the bid and asked prices for the Common Stock on the last market trading
day prior to the day of determination, as reported in the Wall Street
Journal or such other source as the Board deems reliable;
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<PAGE> 3
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Board.
(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(m) "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Rule 16a-1(f)
of the Exchange Act) of the Company or a parent or subsidiary of the
Company, or otherwise currently employed by the Company or a parent or
subsidiary of the Company;
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a parent or subsidiary of the Company,
for services rendered as a consultant or in any capacity other than as a
director, except for an amount that does not exceed the dollar amount
for which disclosure would be required pursuant to Rule 404(a) of the
Exchange Act;
(iii) Does not possess an interest in any other transaction
for which disclosure would be required pursuant to Rule 404(a) of the
Exchange Act; and
(iv) Is not engaged in a business relationship for which
disclosure would be required pursuant to Rule 404(b) of the Exchange
Act.
(n) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(r) "Optionee" means an Employee, Director or Consultant who holds an
outstanding Option.
(s) "Participant" means an Employee, Director or Consultant who is
granted Options.
(t) "Plan" means this 1997 Stock Option Plan.
(u) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
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<PAGE> 4
(v) "Securities Act" means the Securities Act of 1933, as amended.
3. Administration.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in Section 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Options; when and how Options
shall be granted; whether an Option will be an Incentive Stock Option or
a Nonstatutory Stock Option, the provisions of each Option granted
(which need not be identical), including the vesting schedule for the
Options, and the number of shares underlying such Options to be granted
to each such person;
(ii) To construe and interpret the Plan and Options granted
under it, and to establish amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may
correct any defect, omission or inconsistency in the Plan or in any
Option Agreement, in a manner and to the extent it shall deem necessary
or expedient to make the Plan fully effective;
(iii) To amend the Plan as provided in Section 12; and
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or advisable to promote the best
interests of the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"), all
of the members of which Committee shall be Non-Employee Directors. If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board (and references in this Plan to the Board shall thereafter be to
the Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4. Shares Subject to the Plan.
Subject to the provisions of Section 11 relating to adjustments upon
changes in stock (except the Company's conversion of its Series A and B shares
into Common Stock for which there shall be no adjustment), the stock that may be
issued pursuant to Options shall not exceed in the aggregate one million five
hundred thousand (1,500,000) shares of the Company's Common Stock. If any Option
shall for any reason expire or otherwise terminates, in whole or in part,
without having been exercised in full, the stock not acquired under such Option
shall revert to and again become available for issuance under the Plan.
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<PAGE> 5
5. Eligibility.
(a) INCENTIVE STOCK OPTIONS MAY BE GRANTED ONLY TO EMPLOYEES.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
(b) A Director shall be eligible for the benefits of the Plan provided
that such Director's participation conforms to the requirements of Rule 16b-3,
if applicable.
(c) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Incentive Stock Option is at
least one hundred ten percent (110%) of the Fair Market Value of such stock at
the date of grant.
6. Option Provisions.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) Price. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, the exercise price of any Incentive Stock Option granted hereunder to
any stockholder possessing at least 10% of the total combined voting power of
all classes of stock of the Company shall be not less than one hundred ten
percent (110%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, (ii) at the
discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, by delivering to the Company other shares of Common
Stock of the Company (provided that the shares have been held for the period
required to avoid a charge to the Company's reported earnings), (iii) at the
discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, by delivering to the Company all or any part of an
Option granted under this Plan for a cashless exercise (provided that such
cashless exchange will not result in a charge to the Company's reported
earnings), or (iv) by tendering any other form of legal consideration that may
be acceptable to the Board.
(d) Transferability. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory
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<PAGE> 6
Stock Option granted to an Optionee subject to Section 16 of the Exchange Act on
the date of grant shall not be transferable except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order
satisfying the requirements of Rule 16b-3 and the rules thereunder (a "QDRO"),
and shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person or any transferee pursuant to a QDRO. A Nonstatutory
Stock Option granted to an Optionee who is not subject to Section 16 of the
Exchange Act on the date of grant may not be transferable except by will or by
the laws of descent and distribution, unless otherwise permitted by the Board.
The person to whom the Option is granted may, by delivering written notice to
the Company, in a form satisfactory to the Company, designate a third party who,
in the event of the death of the Optionee, shall thereafter be entitled to
exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
Section 6(e) are subject to any Option provisions governing the minimum number
of shares as to which an Option may be exercised.
(f) Termination of Employment or Relationship as a Director or
Consultant. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date ninety (90) days after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer period specified in the Option Agreement), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement.
If, after termination, the Optionee does not exercise his or her Option within
the time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(g) Disability of Optionee. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date six (6) months
following such termination (or such longer period specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, at the date of termination, the Optionee is not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
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<PAGE> 7
(h) Death of Optionee. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to Section 6(d), but
only within the period ending on the earlier of (i) the date twelve (12) months
following the date of death (or such longer period specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
7. Cancellation and Regrant of Options.
The Board or the Committee shall have the authority to effect, at any
time and from time to time, (i) the repricing of any outstanding Options under
the Plan, and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than one hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as
described in Section 5(c)) not less than one hundred ten percent (110%) of the
Fair Market Value in the case of an Incentive Stock Option.
8. Covenants of the Company.
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock which would be issuable under such
outstanding Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Options or any stock issued or issuable
pursuant to any such Options. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
9. Use of Proceeds from Stock.
Proceeds from the sale of Common Stock upon exercise of the Options
shall constitute general funds of the Company.
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<PAGE> 8
10. Miscellaneous.
(a) Neither an Optionee nor any person to whom an Option is transferred
under Section 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Nothing in the Plan or any Option granted pursuant thereto shall
confer upon any Employee, Director, Consultant or other holder of Options any
right to continue in the employ of the Company or any Affiliate (or to continue
acting as a Director or Consultant) or shall affect the right of the Company or
any Affiliate to terminate the employment or relationship as a Director or
Consultant of any Employee, Director, Consultant or other holder of Options with
or without cause.
(c) TO THE EXTENT THAT THE AGGREGATE FAIR MARKET VALUE (DETERMINED AT
THE TIME OF GRANT) OF STOCK WITH RESPECT TO WHICH INCENTIVE STOCK OPTIONS ARE
GRANTED ARE EXERCISABLE FOR THE FIRST TIME BY AN OPTIONEE DURING ANY CALENDAR
YEAR UNDER ALL PLANS OF THE COMPANY AND ITS AFFILIATES EXCEEDS ONE HUNDRED
THOUSAND DOLLARS ($100,000), THE OPTIONS OR PORTIONS THEREOF WHICH EXCEED SUCH
LIMIT (ACCORDING TO THE ORDER IN WHICH THEY WERE GRANTED) SHALL BE TREATED AS
NONSTATUTORY STOCK OPTIONS.
(d) The Company may require any person to whom an Option is granted, or
any person to whom an Option is transferred under Section 6(d), as a condition
of exercising any Option, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Option; and (2)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the Option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Option has been registered under a
then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(e) To the extent provided by the terms of an Option Agreement, the
person to whom an Option is granted may, at the discretion of the Board, satisfy
any mandatory federal, state or local tax withholding obligation relating to the
exercise or acquisition of stock under an Option by any of the following means
or by a combination of such means: (1) tendering cash payment; (2) authorizing
the Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Participant as a result of the exercise or acquisition of stock
under the Option provided that such arrangement will not result in a charge to
the Company's reported
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<PAGE> 9
earnings; or (3) delivering to the Company owned and unencumbered shares of the
Common Stock of the Company that have been held for the period required to avoid
a charge to the Company's reported earnings. The exercise of the Option may be
conditioned upon the receipt by the Company of satisfactory evidence of the
Participant's satisfaction of any withholding obligations.
11. Adjustments Upon Changes in Stock.
(a) Subject to any required action by stockholders, the number of shares
which may be purchased upon the exercise of each outstanding Option shall be
proportionately increased or decreased upon the occurrence of any change,
increase or decrease in the number and type of issued shares of Common Stock of
the Company, without receipt of consideration by the Company, which change
results from a stock split, a stock dividend, a merger, consolidation,
reorganization, reincorporation, a recapitalization, a combination of shares,
change in corporate structure or other like capital adjustment, so that upon the
exercise of each Option the holders of such Options shall receive the number and
type of securities which the holders would have received had the Options been
exercised on the date preceding such change, increase or decrease. In the event
of any such adjustment, the exercise price for each share shall be likewise
adjusted in inverse proportion to the increase or decrease in the number of
shares purchasable.
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then to the extent permitted by applicable law: (i) any
surviving corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options for those outstanding under the Plan, or (ii)
such Options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such Options, or to substitute similar
options for those outstanding under the Plan, then, with respect to Options held
by persons then performing services as Employees, Directors or Consultants, the
time during which such Options shall be accelerated and the Options terminated
if not exercised prior to such event.
12. Amendment of the Plan.
(a) The Board at any time, and from time to time, may amend the Plan
provided that the implementation of such amendment by the Company complies with
all applicable law.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
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<PAGE> 10
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted, and (ii) such person consents in writing.
13. Termination or Suspension of the Plan.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on October 1, 2007, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent to the person to whom the Option was granted.
14. Effective Date of Plan.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
15. Financial Information.
The Company will provide to each Optionee financial statements of the
Company at least annually in accordance with Section 260.140.46 of Title 10 of
the California Code of Regulations.
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<PAGE> 11
OPTION TO PURCHASE COMMON STOCK
OF
STEVEN MYERS & ASSOCIATES, INC.
VOID AFTER [date]
This certifies that _________________ ("Holder") is entitled to
purchase from Steven Myers & Associates, Inc., a California corporation (the
"Corporation"), _______________ (______) shares of Common Stock, of the
Corporation (the "Shares"), subject to the terms and conditions of the
Corporation's 1997 Stock Option Plan (the "Plan") and such additional terms and
conditions contained herein. Any conflict between the terms and conditions of
the Plan and those contained herein shall be resolved in favor of the Plan. A
copy of the Plan is attached hereto as Exhibit A. Capitalized terms not
otherwise defined herein shall have such definition as is set forth in the Plan.
The number of shares of Common Stock purchasable hereunder may be adjusted upon
the occurrence of certain events, as specified in the Plan and as set forth
below.
The options granted hereby are (check one): ___ Qualified
___ Nonqualified; and are governed by the terms of the Plan concerning such
type of options thereunder.
IMPORTANT! IF THESE ARE QUALIFIED OPTIONS, YOU ARE URGED TO REVIEW CAREFULLY THE
REQUIREMENTS AND RESTRICTIONS OF QUALIFIED OPTIONS UNDER THE PLAN AND SECTION
422 OF THE INTERNAL REVENUE CODE. WHETHER THE OPTIONS ARE QUALIFIED OR
NONQUALIFIED, YOU ARE URGED TO SEEK INDEPENDENT ADVICE CONCERNING THE LEGAL AND
TAX EFFECTS OF THESE OPTIONS AND SHOULD NOT RELY ON ANY SUMMARY OF SUCH MATTERS
CONTAINED HEREIN.
The purchase price to be paid for the Shares upon the exercise of all
or any portion of this Option shall be __________ ($_____) per share of Common
Stock purchased (the "Purchase Price").
1. Exercise of Option; Vesting.
Holder may exercise this Option at any time until 5:00 P.M., California
time on __________, (the "Expiration Date"), in accordance with the Vesting
Schedule (the "Vesting Schedule") set forth below by delivery to the
Corporation, at its principal office, of:
(a) this Option,
(b) the Exercise Form attached to this Option, duly executed and
specifying the number of Shares of Common Stock to be purchased
hereunder, and
(c) cash or a certified or official bank check payable to the
order of the Corporation in the amount of the aggregate Purchase
Price for the number of Shares to be purchased.
<PAGE> 12
Upon receipt thereof, the Corporation shall, as promptly as
practicable, and in any event within 30 days thereafter, cause to be executed
and delivered to Holder a certificate or certificates for the aggregate number
of the Shares issuable upon such exercise. If this Option shall have been
exercised only in part of the total number of vested options, the Corporation
shall, at the time of delivery of such certificate or certificates, deliver to
Holder a new Option evidencing the rights of Holder to purchase the remaining
Shares of Common Stock called for by this Option, pursuant to the same terms and
conditions and with the same restrictions specified herein, and which new Option
shall be of like tenor to this Option. The Corporation shall pay all expenses,
taxes and other charges payable in connection with the preparation, issuance and
delivery of stock certificates.
All shares of Common Stock issuable upon the exercise of this Option
will be validly issued, fully paid and nonassessable.
The Options shall vest in accordance with the following Vesting
Schedule:
________________ ___%
________________ ___%
________________ ___%
2. Lost, Stolen, Mutilated or Destroyed Option.
If this Option is lost, stolen, mutilated or destroyed, the Corporation
may, on such terms as to indemnity or otherwise as the Corporation may in its
discretion impose (which shall, in the case of a mutilated Option, include the
surrender thereof), issue a new Option of like denomination, tenor and date as
this Option.
3. Restrictions on Transfer; Compliance with Securities Act; Legend
Condition.
Neither this Option nor the right to purchase shares of Common Stock
upon exercise of this Option may be transferred by Holder in whole or in part
except that this Option may be exercised by Holder's conservator, trustee or
estate subject to all the terms and conditions set forth herein. To the extent
not exercised by Holder on the Expiration Date, this Option and all rights
hereunder shall expire and the Option and such rights shall thereupon
automatically be cancelled and shall cease to exist. Common Stock issued upon
valid exercise of this Option in whole or in part shall not be transferable by
Holder other than in accordance with the Securities Act of 1933, as amended
("Securities Act"), and the rules and regulations promulgated thereunder,
together with applicable state securities laws. Unless a Registration Statement
concerning such shares is then in effect with the Securities and Exchange
Commission, certificates evidencing shares of the Common Stock issued upon
exercise of this Option shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED
FOR RESALE OR RESOLD UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF
THAT ACT, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
-2-
<PAGE> 13
4. Notices.
Any notice or other document required or permitted to be given or
delivered to Holder shall be deemed given to him if given to him at the
following address:
Holder: _________________
_________________
_________________
Any such notice or other document shall be mailed first-class, postage
prepaid, to such address or such other address as shall have been furnished to
the Corporation in writing by Holder. Any notice or other document required or
permitted to be given or delivered to the Corporation shall be mailed
first-class, postage prepaid to the Corporation at its principal executive
offices, 4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660,
Attention: Chief Financial Officer.
5. Applicable Law.
This Option shall be construed and enforced in accordance with and
governed by the laws of the State of California.
6. Headings.
The headings herein are for convenience only and are not part of this
Option and shall not affect the interpretation hereof.
IN WITNESS WHEREOF, the Corporation has caused this Option to be
executed in its name by its Chief Executive Officer and Secretary, thereunto
duly authorized.
Dated: _________________ STEVEN MYERS & ASSOCIATES, INC.,
a California corporation
By:
----------------------------------------
Steven S. Myers, Chief Executive Officer
By:
----------------------------------------
Ronald Hunn, Secretary
-3-
<PAGE> 14
EXERCISE FORM
(To be signed only upon exercise of Option)
To ______________________;
The undersigned, being the holder of the within Option, hereby
irrevocably elects to exercise the rights represented by such Option for, and to
purchase thereunder, *________________ shares of Common Stock of Steven Myers &
Associates, Inc. (subject to adjustment as provided in such Option) and herewith
makes payment of $__________ therefor, and requests that the certificates for
such shares be issued in the name of, and be delivered to _____________________
at the following address: ______________________________________________________
______________________________________________________
The undersigned hereby represents and warrants that he is acquiring
such shares of Common Stock for his own account, for investment and not with a
view to or for resale in connection with the distribution thereof.
Dated:________________ _______________________________________
(Signature must conform in all respects
to name of Holder as specified in the
within Option)
______________________
* Insert here all or such portion of the number of shares specified at the
beginning of the within Option with respect to which the Holder desires to
exercise his purchase right, without adjustment for any other or additional
stock or other securities, property or cash that may be delivered on such
exercise.
-4-
<PAGE> 15
INVESTOR'S CERTIFICATE
The undersigned, as a condition to purchase an Option for the purchase
of _______ shares of Common Stock (the Option and the Common Stock issuable upon
its conversion referred to collectively herein as the "Securities") of Steven
Myers & Associates, Inc. (the "Company"), certifies to the Company as follows:
1. My full name, residence address and business address are as follows:
<TABLE>
<CAPTION>
Name Residence Address Business Address
- ---------------- ----------------- ----------------
<S> <C> <C>
- ---------------- ---------------------- ------------------------------------
- ---------------- ---------------------- ------------------------------------
</TABLE>
2. I am purchasing the Securities in my own name and for my own account
(or for a trust account if I am a trustee), and no other person has any interest
in or right with respect to the Securities, nor have I agreed to give any person
any such interest or right in the future except as follows:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(If none so, state)
3. I am acquiring the Securities for investment and not with a view to
or for sale in connection with any distribution to the Securities. I recognize
that the Securities have not been registered under the Federal Securities Act of
1933 or qualified under the California Corporate Securities Law of 1968, that
any disposition of the Securities is subject to restrictions imposed by federal
and state law, and that the certificates representing the Securities will bear a
restrictive legend. I also recognize that I cannot dispose of the Securities
absent registration and qualification, or an available exemption from
registration and qualification, and that no undertaking has been made with
regard to registering or qualifying the Securities in the future. I understand
that the availability of an exemption in the future will depend in part on
circumstances outside my control and that I may be required to hold the
Securities for a substantial period. I recognize that no public market exists
with respect to the Securities and no representation has been made to me that
such a public market will exist at a future date. I understand that the
California Commissioner of Corporations has made no finding or determination
relating to the fairness for investment of the Securities offered by the Company
and that the Commissioner has not and will not recommend or endorse the
Securities.
4. I have not seen or received any advertisement or general
solicitation with respect to the sale of the Securities.
5. The total consideration to be paid by me for the Option shall be
$__________.
6. I have a preexisting personal or business relationship with the
Company or one or more of its officers, directors or controlling persons more
fully described as follows:
-5-
<PAGE> 16
(Describe relationship. If none, so state.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
7. I believe, by reason of my business or financial experience
described below, or by reason of the business or financial experience of my
professional advisor named below, who is unaffiliated with and who is not
compensated, directly or indirectly, by the Company or any affiliate or selling
agent of the Company, that I am capable of evaluating the merits and risks of
this investment and of protecting my own interests in connection with this
investment.
(Describe experience. If none, so state.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
If a professional advisor is used, please complete the following:
I designate ____________________(name) as my professional advisor with
regard to my investment in the Securities. I understand that this professional
advisor is unaffiliated with and will not be compensated by the Company or any
affiliate or selling agent of the Company.
Occupation and business address of professional advisor:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Describe business or financial experience of professional advisor:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
8. I acknowledge that during the course of this transaction and before
purchasing the Securities I have been provided with financial and other written
information about the Company and the terms and conditions of the offering. I
have been given the opportunity by the Company to obtain any information and ask
questions concerning the Company, the Securities, and my investment that I felt
necessary, and to the extent I availed myself of that opportunity, I have
received satisfactory information and answers. If I requested any additional
information that the Company possessed or could acquire without unreasonable
effort or expense and that was necessary to verify the accuracy of the financial
and other written information furnished to me by the Company, that additional
information was provided to me and was satisfactory. In reaching the decision to
invest in the Securities, I have carefully evaluated my financial resources and
investment position and the risks associated with this investment, and I
acknowledge that I am able to bear the economic risks of this investment. By
electing to participate in this investment I realize I may lose my entire
investment. I further acknowledge that my financial condition is such that I am
not under any present necessity or constraint to dispose of the Securities to
satisfy any existing or contemplated debt or undertaking.
-6-
<PAGE> 17
9. Before purchasing the Securities, I received a brief description in
writing of any written information concerning the offering that had been
provided by the Company to any other prospective purchaser of the Securities,
and that notice, if received by me, included information as to how I might
request that the written information also be provided to me. If I requested in
writing that the information be furnished me, it was furnished before my
purchase of the Securities.
Dated: __________________ ________________________________________
[Signature]
________________________________________
[Please Print Name]
-7-
<PAGE> 1
EXHIBIT 10.11
STEVEN MYERS & ASSOCIATES, INC.
EXECUTIVE BONUS PLAN
1. PURPOSE
The Executive Bonus Plan (the "Bonus Plan") is designed to promote the
interests of Steven Myers & Associates, Inc. (the "Company") and its
shareholders by providing incentives to participating officers of the Company
to make significant contributions to the performance of the Company and to
reward outstanding performance on the part of those individuals whose decisions
and actions most significantly affect the growth, profitability and efficient
operation of the Company. The Bonus Plan is intended to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code").
2. ADMINISTRATION
The Bonus Plan shall be administered by the Compensation Committee of the Board
of Directors (the "Compensation Committee"), which will at all times be
constituted to meet the "outside director" requirements of Section 162(m) of
the Code. The Compensation Committee shall have the power to make rules and
regulations for the administration of the Bonus Plan. In making any
determination under the Bonus Plan, the Compensation Committee shall be
entitled to rely on reports, opinions or statements of officers or employees of
the Company and its affiliates as well as those of counsel, public accountants
and other professional or expert persons. The interpretations and decisions of
the Compensation Committee with regard to the Bonus Plan shall be final and
conclusive. No member of the Compensation Committee shall be liable for any
action or determination made in good faith with respect to the Bonus Plan.
3. ELIGIBILITY
The Board of Directors of the Company initially had the discretion to designate
participants in the Bonus Plan and thereby designated the Chief Executive
Officer and Chief Operating Officer of the Company ("Participants") as eligible
to participate in the Bonus Plan. Additional officers of the Company may be
added as Participants in the discretion of the Compensation Committee.
4. DETERMINATION
The Compensation Committee will designate performance targets under the Bonus
Plan within the time period required by the Department of Treasury Regulations
adopted to implement Section 162(m) of the Code ("Regulations") for each year.
The performance targets will be based on achievement of specified levels of
gross profit margins and operating income. The performance targets will be set
by the Compensation Committee based on the prior year's performance and other
relevant factors. The performance targets designated by the Compensation
Committee may differ for each Participant in the Bonus Plan. The maximum bonus
amount payable for any year under the Bonus Plan to any Participant shall not
exceed 100% of such Participant's annual salary for that year. The Compensation
Committee may, in its sole discretion, establish maximum bonus amounts payable
to individual Participants under the Bonus Plan of less than 100% of a
Participant's annual salary for any year.
5. CERTIFICATION OF ACHIEVEMENT OF PERFORMANCE TARGETS
Provided that the Code and/or Regulations so require, the Compensation
Committee shall, prior to any payment under the Bonus Plan, certify in writing
the extent, if any, of achievement of performance targets for each Participant.
For purposes of this provision, and for so long as the Code and/or Regulations
permit, the approved minutes of the Compensation Committee meeting in which the
certification is made may be treated as a written certification.
<PAGE> 2
6. WITHHOLDING TAXES
The Company shall have the right to deduct from all awards granted under the
Bonus Plan any federal, state, local or foreign taxes required by law to be
withheld with respect to such awards.
7. OTHER BENEFITS
Awards granted to Participants under the Bonus Plan shall not be considered as
part of a Participant's salary or used for the calculation of any other pay,
allowance, pension or other benefit unless otherwise permitted by the other
benefit plans provided by the Company, or as required by law or by contractual
obligations of the Company.
8. AMENDMENT OR TERMINATION
The Compensation Committee may from time to time amend the Bonus Plan in any
respect or terminate or suspend the Bonus Plan at any time in whole or in part,
provided that, if shareholder approval of an amendment is required for
continued compliance with the requirements of Section 162(m) of the Code, such
amendment shall be subject to obtaining the required shareholder approval.
9. NO ASSIGNMENT
Except as expressly authorized by the Compensation Committee, the rights under
the Bonus Plan, including without limitation the rights to receive any payment,
shall not be sold, assigned, transferred, encumbered or hypothecated by a
Participant (except by testamentary disposition or intestate succession), and
during the lifetime of any Participant, any payment shall be payable only to
such Participant.
10. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Bonus Plan shall confer upon any Participant any right to
continue in the employ of the Company or shall interfere with or restrict in any
way the right of the Company to discharge a Participant at any time for any
reason whatsoever, with or without cause. If any Participant ceases to be
employed by the Company, any unpaid bonuses shall be paid in accordance with
the Participant's termination agreement, if any, and as otherwise determined by
the Compensation Committee.
11. COSTS AND EXPENSES
The costs and expenses of administering the Bonus Plan shall be borne by the
Company and not charged to any award nor to any Participant receiving an award
under the Bonus Plan.
12. FUNDING
The Bonus Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any award under the Bonus Plan.
<PAGE> 3
13. SEPARABILITY
If any of the terms or provisions of the Bonus Plan conflict with the
requirements of Section 162(m) of the Code, the Regulations or applicable law,
then such terms or provisions shall be deemed inoperative to the extent
necessary to avoid the conflict with the requirements of Section 162(m) of the
Code, the Regulations or applicable law without invalidating the remaining
provisions hereof. With respect to Section 162(m) of the Code, if the Bonus
Plan does not contain any provision required to be included herein under
Section 162(m) of the Code or the Regulations, such provisions shall be deemed
to be incorporated herein with the same force and effect as if such provision
had been set out at length herein.
14. TERM
The Bonus Plan shall be effective as of January 1, 1998, subject to shareholder
approval, and shall continue for a period until the first shareholder meeting
that occurs in the second year following the year in which the shareholders of
the Company previously approved this Bonus Plan, unless amended or terminated
by the Company (see Amendment or Termination above), subject to any future
shareholder re-approval requirements of the Code and the Regulations.
15. GOVERNING LAW
The validity, construction and effect of the Bonus Plan and any action taken or
relating to the Bonus Plan shall be determined in accordance with the laws of
the State of California and applicable federal law.
<PAGE> 1
EXHIBIT 10.12
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered
into this 25th day of September, 1996, by and among Steven Myers & Associates,
Inc. (the "Company"), the shareholders of the Company whose names appear on the
signature pages hereto (each, individually, a "Shareholder," and collectively,
the "Shareholders"), J. Christopher Lewis, Trustee of the RB Trust Dated June
28, 1993 (the "Trustee"), J. Christopher Lewis and Patrick C. Haden. Messrs.
Lewis, Haden and the Trustee are referred to individually herein as "Investor"
and collectively as "Investors."
BACKGROUND
A. Each of the Shareholders is the registered and beneficial holder of
shares of the Company's Series A Common Stock ("Series A Common Stock") and/or
the Company's Series B Common Stock ("Series B Common Stock").
B. The Shareholders desire to sell to Investors, and Investors desire
to purchase from the Shareholders, an aggregate of 26,793 shares of Series A
Common Stock and 107,175 shares of Series B Common Stock, which shares represent
approximately 11.43% of the outstanding shares of Series A Common Stock and
Series B Common Stock treated as a single class, with each Shareholder selling
to each Investor the number of shares shown on Schedule 1 attached hereto, on
the terms and conditions set forth herein.
AGREEMENT
In consideration of the foregoing and of the mutual covenants set forth
below, the parties hereby agree as follows:
1. PURCHASE OF THE SECURITIES.
1.1 Purchase of Common Stock. Subject to the terms and conditions of
this Agreement, Investors shall purchase from the Shareholders at the Closing
(as such term is defined below), and the Shareholders shall sell to Investors at
the Closing, an aggregate of 26,793 shares of Series A Common Stock and 107,175
shares of Series B Common Stock for an aggregate purchase price of $5,000,000
(the "Purchase Price"). The shares of Series A Common Stock and Series B Common
Stock to be sold pursuant hereto are sometimes referred to herein as the
"Shares." The number and type of Shares to be sold by each Shareholder and to
be purchased by each Investor, and the purchase price to be paid to each
Shareholder by each Investor therefor, are shown on Schedule 1 attached hereto.
1.2 Closing. The purchase and sale of the Shares (the "Closing") shall
take place at the offices of Riordan & McKinzie, 695 Town Center Drive, Suite
1500, Costa Mesa, California, as soon as practicable following the satisfaction
of the conditions set forth in Sections 5 and 6 hereof, or at such other time
and place as the Company, the Shareholders and Investors
<PAGE> 2
may mutually agree. Prior to the Closing, each Shareholder shall deliver to the
Company one or more certificates evidencing the Common Stock held by such
Shareholder with requisite stock powers attached permitting the transfer of the
shares by the Company in accordance with Schedule 1. Upon receipt thereof, the
Company shall cancel such certificates and reissue new certificates (i) to each
Investor, registered in such Investor's name evidencing the Shares purchased by
such Investor as shown on Schedule 1, and (ii) to each of the Shareholders,
evidencing the remaining shares of Common Stock to be held by such Shareholder
following the sale of the Shares to Investors. The Company shall hold all of the
certificates representing the Shares in trust until payment of the Purchase
Price by Investors. At the Closing, the Trustee (acting on behalf of Investors)
shall effect payment of the Purchase Price by wire transfer to an account
designated by the Company against delivery by the Company of the certificates
representing the Shares.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS. Except
as set forth herein or on the Disclosure Schedule attached hereto (the
"Disclosure Schedule"), the Company and the Shareholders hereby jointly and
severally represent and warrant to Investors as follows:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its business as now conducted and proposed to be conducted. The
Company is qualified to transact business in all other states where required by
reason of its current operations, except to the extent that the failure to so
qualify would not have a Material Adverse Effect (as defined below). The Company
has no subsidiaries or affiliated companies and does not otherwise own or
control, directly or indirectly, any equity interest in any corporation,
association or business entity.
2.2 Capitalization. The authorized capital of the Company consists of
10,000,000 shares of Common Stock, of which 1,000,000 shares are designated as
Series A Common Stock and 2,000,000 shares are designated as Series B Common
Stock. An aggregate of 234,444 shares of Series A Common Stock and 937,776
shares of Series B Common Stock are issued and outstanding, respectively, all of
which are owned of record and beneficially by the Shareholders. All of the
issued and outstanding shares of Common Stock are duly and validly issued,
fully-paid and nonassessable. The Disclosure Schedule sets forth a complete list
of all outstanding options, warrants, rights (including conversion or preemptive
rights), agreements for the voting or purchase or acquisition from the Company
of any shares of its capital stock, or restrictions on the sale of shares of
capital stock of the Company, including without limitation all buy/sell
agreements and shareholders agreements of any kind. True and complete copies of
all such options, warrants, rights and agreements have been delivered to
Investors.
2.3 Authorization. The Company has full power and authority to enter
into this Agreement and the Investors' Rights Agreement to be entered into as
provided in Section 5.8 hereof (the "Investors' Rights Agreement"). All action
on the part of the Company and its officers, directors and shareholders which is
necessary for the authorization, execution, delivery
2.
<PAGE> 3
and performance of this Agreement and the Investors' Rights Agreement has been
taken or will be taken prior to the Closing. This Agreement constitutes, and the
Investors' Rights Agreement will constitute when executed, valid and legally
binding obligations of the Company and the Shareholders, enforceable against
them in accordance with their respective terms.
2.4 Title to the Shares. Each of the Shareholders represents, as to such
Shareholder only, that such Shareholder has good and marketable title to the
Shares being sold by such Shareholder, free of any mortgage, pledge, lien,
encumbrance or charge. Upon the consummation of the transactions contemplated
hereby, Investors will acquire good and marketable title to the Shares, free of
any mortgage, pledge, lien encumbrance or charge.
2.5 Financial Statements. The Company has furnished to Investors copies
of the Company's (i) unaudited balance sheets as of December 31, 1994 and 1995
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1995, and (ii)
an unaudited balance sheet as of July 31, 1996 (the "Balance Sheet Date") and
the related statements of operations, stockholders' equity, and cash flows for
the seven months then ended (collectively, the "Financial Statements"). The
Financial Statements (a) were prepared in accordance with the Company's books
and records, (b) present fairly the Company's financial position as of the dates
indicated and its results of operations for the periods indicated, and (c) have
been prepared in conformity with generally accepted accounting principles
("GAAP") consistently applied throughout the periods indicated.
2.6 Projections. The Company has provided Investors with projected
statements of operations for fiscal year 1996 through fiscal year 2000. Such
projections have been prepared in good faith and the Company and the
Shareholders believe that the assumptions upon which such projections are based
are fair and reasonable, although no assurance can be or is being given that the
projected results of operations will be achieved as provided therein.
2.7 Material Liabilities. The Company has no liabilities or obligations,
absolute or contingent (individually or in the aggregate), except (a)
liabilities and obligations set forth in the Financial Statements and (b)
liabilities and obligations which have been incurred subsequent to the Balance
Sheet Date in the ordinary course of business which either individually or in
the aggregate, have not had, and would not have, a material adverse effect on
the Company's financial condition, assets, liabilities, earnings, business or
prospects of the Company (a "Material Adverse Effect").
2.8 Title to Properties and Assets. The Company has good and marketable
title to its properties and assets, and has good title to and enjoys peaceful
and undisturbed possession of all its leasehold interests, in each case not
subject to any mortgage, pledge, lien, encumbrance or charge, other than liens
and encumbrances arising in the ordinary course of business which would not have
a Material Adverse Effect.
2.9 Compliance with Other Instruments. The Company is not in violation
of any term of its Articles of Incorporation or Bylaws. The Company is not in
violation of any term or
3.
<PAGE> 4
provision of any mortgage, indebtedness, indenture, contract, agreement,
instrument, order, writ, injunction, judgment or decree to which the Company is
a party or by which it is bound, the result of which would have a Material
Adverse Effect. The Company is not in violation of any order, statute, rule or
regulation applicable to the Company, the result of which would have a Material
Adverse Effect. The execution, delivery and performance of and compliance with
the terms of this Agreement and the Investors' Rights Agreement will not result
in a violation of the Company's Articles of Incorporation or Bylaws. The
execution, delivery and performance of and compliance with the terms of this
Agreement and the Investors' Rights Agreement will not result in a violation of,
or conflict with, or constitute a default under any mortgage, indebtedness,
indenture, contract, agreement, instrument, order, writ, injunction, judgment or
decree to which the Company is a party or by which it is bound nor result in the
creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company, the result of which would have a Material
Adverse Effect.
2.10 Litigation. There are no actions, suits, proceedings or
investigations pending before any court or governmental agency against (i) the
Company or any of its properties or assets, (ii) any Shareholder relating to his
or her status as a shareholder of the Company, or (iii) any employee of the
Company relating to his or her status as an employee of the Company, nor have
any such actions, suits, or proceedings or investigations been threatened. The
foregoing includes, without limitation, actions pending or, to the Company's or
any Shareholder's knowledge, threatened, which involve the prior employment of
any of the Company's employees, their use in connection with the Company's
business of any information or techniques allegedly proprietary to any of their
former employers, or their obligations under any agreements with prior
employers. There is no action, suit, proceeding or investigation by the Company
against any third party currently pending or which the Company intends to
initiate.
2.11 Protection of Proprietary Information. The Company has provided
Investors with a copy of the form of agreement used by the Company to protect
its proprietary information and trade secrets and otherwise to protect the
Company, including without limitation, any nonsolicitation agreements. All
current and former employees of the Company have executed an agreement
substantially in the form provided to Investors.
2.12 Governmental Consents. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority is required
in connection with the execution, delivery and performance of this Agreement or
the Investors' Rights Agreement.
2.13 Patents and Trademarks. The Company has sufficient title and
ownership of all trademarks, service marks, trade names, copyrights, trade
secrets, proprietary information, proprietary rights and processes (collectively
"Proprietary Rights") necessary for its business as now conducted without any
conflict with or infringement of the Proprietary Rights of others. There are no
outstanding options, licenses, or agreements of any kind relating to the
Proprietary Rights of the Company, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the Proprietary
Rights of any other person or entity. The Company is not aware of any violation
or infringement on the Proprietary Rights of the
4.
<PAGE> 5
Company, and the Company has not received any communications alleging that the
Company has violated or, by conducting its business as now conducted or proposed
to be conducted, would violate any of the Proprietary Rights of any other person
or entity.
2.14 Material Agreements. The Disclosure Schedule contains a complete and
accurate list of all agreements, understandings, instruments, contracts, and
proposed transactions to which the Company is a party or by which it is bound
which may involve obligations (contingent or otherwise) of payments by the
Company in excess of $200,000, or in the case of payments to the Company, in
excess of $1,000,000, or which require performance for a period longer than one
year. Except for agreements explicitly contemplated hereby or referred to
herein, there are no agreements, understandings or proposed transactions between
the Company and any of its officers, directors, or affiliates, and none of such
individuals or entities has any interest in or is a party to any such agreement,
understanding, or proposed transaction. The Company is not a party to nor is it
bound by any contract, agreement, or instrument which could have a Material
Adverse Effect on its business as now conducted or as proposed to be conducted.
2.15 Changes. Except as otherwise contemplated hereby, since July 31,
1996 there has not been:
(a) any material adverse change in the financial condition,
assets, liabilities, earnings, business or prospects (including any decrease in
backlog) of the Company ("Material Adverse Change"), or any damage, destruction
or loss to any asset of the Company, whether or not covered by insurance, which
could have a Material Adverse Effect;
(b) any waiver by the Company of a valuable right or of a material
debt owed to it;
(c) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business;
(d) any change or amendment to a material contract or arrangement
by which the Company or any of its properties or assets is bound or subject;
(e) any change in any compensation arrangement or agreement with
any Key Employee (as defined below) of the Company;
(f) any change in the assets, liabilities, financial condition or
operations of the Company, except changes in the ordinary course of business
which could not have a Material Adverse Effect;
(g) any change, except in the ordinary course of business, in the
contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
5.
<PAGE> 6
(h) any declaration or payment of any dividend or other
distribution of earnings or assets of the Company or the adoption or
consideration of any plan or arrangement with respect thereto;
(i) any resignation or termination of employment of any Key
Employee of the Company or, to the best of the Company's knowledge, any plans
with respect thereto; or
(j) any other event or condition of any character which could have
a Material Adverse Effect.
2.16 Employee and Related Matters. The Disclosure Schedule contains a
complete list of all contracts, commitments and arrangements, whether written or
oral, express or implied, with any employee and a list of all of the Company's
Employee Benefit Plans, as such term is defined in the Employee Retirement
Income Security Act of 1974, as amended. The Company is not a party to any
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to the best of the Company's knowledge has sought, to represent
any of the employees, representatives or agents of the Company. There is no
strike or other labor dispute involving the Company pending, or to the best of
the Company's knowledge threatened, nor is the Company aware of any labor
organization activity involving the Company's employees. The Company is not
aware of any officer or key employee, or any group of officers or key employees,
that intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. Except as otherwise provided in any employment agreement listed in
the Disclosure Schedule, the employment of each employee by the Company is
terminable at the will of the Company. Any person who renders services for or to
the Company and is treated for tax purposes as independent contractor has been
properly classified as such for tax purposes. The Company has complied with all
applicable federal and state laws and regulations concerning payroll
withholding. No employee of the Company is in violation of any term of any
employment contract, confidentiality agreement or any other contract or
agreement relating to the relationship of such employee with the Company or, to
the best of the Company's knowledge, any other party, because of the nature of
the business now conducted or proposed to be conducted by the Company.
2.17 Taxes. The Company has validly elected to be treated as a subchapter
S corporation for federal and state tax purposes and has taken all action
necessary to ensure such treatment since January 1, 1991. Each Shareholder has
and continues to meet the definition of a permitted shareholder of a subchapter
S corporation as provided in Section 1361 of the Internal Revenue Code (the
"IRC"). The Company has timely filed all federal, state and other tax returns
required to have been filed and has paid all taxes which have become due and
payable. The Company has not been advised that any of its returns, federal,
state or other, have been or are being audited. There are no agreements, waivers
or other arrangements providing for an extension of time with respect to the
assessment of any tax or deficiency against the Company, nor are there any
actions, suits, proceedings or claims now pending against the Company in respect
of any tax or assessment. There is no pending or, to the best of the Company's
6.
<PAGE> 7
knowledge, threatened investigation of the Company by any federal, state,
foreign or local authority relating to any taxes or assessments, or any claims
for additional taxes or assessment's asserted by any such authority.
2.18 Insurance. The Disclosure Schedule includes a list of all insurance
policies held by the Company and in effect as of the date hereof.
2.19 Conflict of Interest. Neither the Company nor, to the best of the
Company's knowledge, its officers and directors, has an interest, either
directly or indirectly, in any entity, including, without limitation, any
corporation, partnership, joint venture, proprietorship, firm, licensee,
business or association (whether as an employee, officer, director, shareholder,
agent, independent contractor, security holder, creditor, consultant or
otherwise) that currently (i) provides any services or designs, produces and/or
sells any products or product lines, or engages in any activity which is the
same, similar to or competitive with any activity or business of the Company as
now conducted or as proposed to be conducted, (ii) is a supplier, customer or
creditor of the Company, or has an existing contractual relationship with any of
the Company's employees, or (iii) has any direct or indirect interest in any
property or asset, real or personal, tangible or intangible, of the Company.
2.20 Minutes. The copies of the minute books of the Company provided to
Investors contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
2.21 Disclosure. Neither this Agreement nor any of the Schedules and
Exhibits attached hereto nor any certificate furnished to Investors by or on
behalf of the Company or the Shareholders in connection herewith contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF INVESTORS. Investors hereby jointly and
severally represent and warrant to the Company and the Shareholders as follows:
3.1 Authorization. Each Investor has full power and authority to enter
into this Agreement and the Investors' Rights Agreement. All action on the part
of such Investor which is necessary for the authorization, execution, delivery
and performance of this Agreement and the Investors' Rights Agreement has been
taken or will be taken prior to the Closing. This Agreement constitutes, and the
Investors' Rights Agreement will constitute, when executed, the valid and
legally binding obligation of Investors, enforceable in accordance with its
terms.
3.2 Purchase for Investor's Own Account. Each Investor is acquiring the
Shares for investment and for such Investor's own account, and not with a view
to the resale or distribution of any part thereof.
7.
<PAGE> 8
3.3 Investment Experience. Each Investor is experienced in investing in
securities of companies such as the Company and can evaluate and bear the
economic risk of such Investor's investment.
3.4 Accredited Investor. Each Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission Rule 501 of Regulation
D, as presently in effect.
3.5 Restricted Securities. Each Investor understands that the Shares
will be characterized as "restricted securities" under the federal securities
laws. Such Investor acknowledges that the certificates and instruments
evidencing the Shares will bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE RESTRICTED SECURITIES AND
MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, AS AMENDED.
3.6 Qualified Subchapter S Corporation Shareholder. Each Investor meets
the definition of a permitted shareholder of a subchapter S corporation as
provided in Section 1361 of the IRC.
3.7 Disclosure of Information. Each Investor believes such Investor has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Common Stock. Each Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the purchase of the Common Stock
contemplated hereunder. The foregoing, however, does not limit or modify the
representations and warranties of the Company and the Shareholders in Section 2
of this Agreement or the right of Investors to rely thereon.
4. COVENANTS.
4.1 Conduct of the Company Prior to the Closing. From and after the date
of this Agreement until the Closing, except as contemplated by this Agreement,
the Company shall conduct its business in the ordinary course and shall not:
(a) waive any valuable right or any material debt owed to it;
(b) satisfy or discharge any lien, claim or encumbrance or pay any
obligation, except in the ordinary course of business;
(c) change or amend any material contract or arrangement by which
the Company or any of its properties or assets is bound or subject.
8.
<PAGE> 9
(d) change any compensation arrangement or agreement with any Key
Employee of the Company;
(e) effect any change in the assets, liabilities, financial
condition or operations of the Company, except changes in the ordinary course of
business which would not have a Material Adverse Effect.
(f) create any contingent obligation by way of guaranty,
endorsement, indemnity, warranty or otherwise, except in the ordinary course of
business;
(g) declare or pay any dividend or other distribution of assets or
earnings or adopt or consider any plan or arrangement with respect thereto; or
(h) issue any shares of capital stock or any options, warrants,
convertible securities or other rights to acquire capital stock without
Investors' consent.
4.2 Access to Information and Documents. From and after the date of this
Agreement, the Company shall give Investors and Investors' attorneys,
accountants and other representatives full access to its properties, documents,
books and records and shall furnish Investors with such information concerning
the Company as Investors may reasonably request. Investors hereby covenant and
agree to hold any and all such information obtained from the Company in strict
confidence and not to disclose such information to any third party without the
Company's consent, which consent shall not be unreasonably withheld; provided,
however, that Investors may disclose such information to its partners,
affiliates, attorneys and accountants.
4.3 Best Efforts to Satisfy Closing Conditions. The Company and the
Shareholders shall use their respective best efforts to cause the conditions set
forth in Section 5 hereof to be satisfied as soon as practicable following the
execution hereof.
4.4 Compensation for 1996. Subject to compliance with Section 4.5,
compensation for employees of the Company for 1996 shall be determined in a
manner consistent with the manner in which such compensation was determined in
1994 and 1995.
4.5 Distributions to Shareholders and Investors for 1996. On or prior to
December 31, 1996, the Company shall distribute to its shareholders, including
Investors, an aggregate amount equal to 26.5% of the amount computed by the
Company as the Net For Dividend amount for 1996, such computation to be made in
a manner consistent with the computation of such amount in 1994 and 1995.
4.6 Sale of Company Aircraft. Within 30 days after the Closing, the
Company shall sell its Hawker and Commander Aircraft (collectively, the "Company
Aircraft") to a company to be formed by Steven S. Myers and his wife for a
purchase price equal to the fair market value of the Company Aircraft. The
purchase price shall be paid by assuming all indebtedness related
9.
<PAGE> 10
to the Company Aircraft plus a two year promissory note in a principal amount
equal to the difference between such indebtedness and such fair market value
(the "Purchase Price").
4.7 Key Man Life Insurance. Within 30 days following the Closing, the
Company shall purchase guaranteed renewable, key man term life insurance
policies, each in a policy amount of $2,000,000, insuring the life of Steven
Myers and the life of Ken Colbaugh and naming the Company as the beneficiary.
5. CONDITIONS OF INVESTORS' OBLIGATIONS. The obligation of Investors to
purchase the Shares is subject to the fulfillment or waiver on or before the
Closing of each of the following conditions:
5.1 Representations and Warranties. The representations and warranties
of the Company and the Shareholders contained in Section 2 hereof shall be true
on and as of the Closing with the same effect as though such representations and
warranties had been made on and as of such date.
5.2 Performance. The Company and the Shareholders shall have performed
and complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with on or before the
Closing.
5.3 No Material Adverse Change. There shall have occurred no Material
Adverse Change.
5.4 No Indebtedness for Borrowed Money. The Company shall have no
indebtedness for borrowed money, except for indebtedness related to the Company
Aircraft and indebtedness in an amount not to exceed $100,000.
5.5 Closing Certificate. The Company and Steven S. Myers shall have
executed and delivered to Investors a certificate confirming the satisfaction of
the conditions set forth in Sections 5.1, 5.2, 5.3 and 5.4 hereof.
5.6 Completion of Due Diligence Investigation. Investors shall have
completed their due diligence investigation to their reasonable satisfaction.
5.7 Completion of Audit and Review by KPMG. The Company shall have
retained KPMG Peat Marwick LLP ("KPMG") to perform, and KPMG shall have
completed, (i) an audit of the Company's financial statements for the year ended
December 31, 1994 and for the year ended December 31, 1995 and (ii) a review of
the Company's financial statements for the seven-month period ended July 31,
1996, and such audit and review shall not differ materially from the Financial
Statements. In connection with its audit and review of the Company's financial
statements, KPMG shall have also delivered a separate detailed analysis of all
expenses related to the use or ownership of the Company Aircraft for all periods
covered by the financial statements described above. KPMG shall have also
delivered a separate letter rendering its
10.
<PAGE> 11
professional opinion that the Collart Family Living Trust, the Ronald and Linda
Hunn Trust dated February 26, 1990 and the Heinsheimer Living Trust dated July
17, 1968, each satisfy and have continually satisfied the requirements of a
permitted shareholder of a subchapter S corporation under Section 1361 of the
IRC during all times that such trusts have been shareholders of the Company.
5.8 The Investors' Rights Agreement. The Company and the Shareholders
shall have executed and delivered the Investors' Rights Agreement, a copy of
which is attached hereto as Exhibit A.
5.9 Bylaws. The Bylaws of the Company shall have been amended to be
consistent with the requirements of the Investors' Rights Agreement, including
such amendments as may be necessary to provide for a Board of Directors of the
Company consisting of five (5) persons.
5.10 Waiver of Rights Under Shareholder Buy-Out Agreements. The Company
and the Shareholders shall have waived in writing all of their respective rights
under the Shareholders' Buy-Out Agreements dated January 1, 1993 and January 1,
1995, as amended (the "Buy-Out Agreements"), with respect to the sale of the
Shares as provided herein.
5.11 Opinion of Company Counsel. Investors shall have received a legal
opinion from Rutan & Tucker, LLP in form and substance reasonably satisfactory
to Investors and its legal counsel, which specifically includes an opinion that
the Steven S. Myers Trust dated March 27, 1986, the Paula Kathryn Mathis Trust
dated August 28, 1986, the Steven S. Myers and Paula K. Mathis Revocable Trust,
dated June 24, 1992 and the K. and R. Colbaugh Revocable Trust dated September
1, 1994, each satisfy the requirements of a permitted shareholder of a
subchapter S corporation under Section 1361 of the IRC.
6. CONDITIONS OF THE COMPANY'S AND THE SHAREHOLDERS' OBLIGATIONS. The
obligation of the Shareholders to sell the Shares is subject to the fulfillment
on or before the Closing of each of the following conditions by Investors:
6.1 Representations and Warranties. The representations and warranties
of Investors contained in Section 3 hereof shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of such date.
6.2 Performance. Investors shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with on or before the Closing.
6.3 Closing Certificate. Investors shall have executed and delivered to
the Company and the Shareholders a certificate confirming the satisfaction of
the conditions set forth in Sections 6.1 and 6.2 hereof.
11.
<PAGE> 12
6.4 Waiver of Rights Under the Buy-Out Agreements. The Company and the
Shareholders shall have waived in writing all of their respective rights under
the Buy-Out Agreements with respect to the sale of the Shares as provided
herein.
6.5 Opinion of Investors' Counsel. The Company shall receive a legal
opinion from Riordan & McKinzie in the form and substance reasonably
satisfactory to the Company and its legal counsel, which is limited to an
opinion that the RB Trust dated June 28, 1993 satisfies the requirements of a
permitted shareholder of a subchapter S corporation under Section 1361 of the
IRC.
7. INDEMNIFICATION.
7.1 Indemnification of the Company and the Shareholders. Whether or not
the transactions contemplated by this Agreement are consummated, Investors
jointly and severally agree to indemnify and hold the Company and the
Shareholders harmless from any and all losses, claims, damages, liabilities,
costs, attorneys' fees and other expenses of every nature incurred or suffered
by them as a result of, arising out of, or related to any (i) breach by
Investors of any representation, warranty or covenant contained in this
Agreement, or (ii) claim by any person or entity for any commission or
compensation in the nature of a finders' fee for which Investors are
responsible.
7.2 Indemnification of Investors. Whether or not the transactions
contemplated by this Agreement are consummated, the Company and the Shareholders
jointly and severally agree to indemnify and hold Investors harmless from any
and all losses, claims, damages, liabilities, costs, attorneys' fees and other
expenses of every nature incurred or suffered by Investors as a result of,
arising out of, or related to (i) any breach by the Company or the Shareholders
of any representation, warranty or covenant contained in this Agreement,
provided, however, that Investors shall have no remedy for any breach by the
Company of Section 4.6, except as set forth in Section 8.3 below, (ii) the
operation of the Company prior to the Closing, (iii) a determination that the
Company is taxable under subchapter C of the Internal Revenue Code for any
period prior to the Closing, (iv) the distribution of any accumulated earnings
and profits or the recognition of any built-in gains or other tax liabilities
resulting from the Company's transition from a subchapter C corporation to a
subchapter S corporation in 1991, (v) any adjustments to the Company's liability
for taxes as set forth on the Company's tax returns as filed for periods prior
to the Closing and/or any adjustments to the Company's liability for taxes as
set forth on its books and records (based on past practices) for the current
period, including the day of the Closing, which adjustments result in additional
taxes, interest, penalties and/or any related costs or expenses or (vi) any
claim by any person or entity for any commission or compensation in the nature
of a finders' fee for which the Company or the Shareholders are responsible.
12.
<PAGE> 13
7.3 Amount Limitation. No party shall be entitled to compensation for
any claim against another party, whether by indemnification or otherwise, unless
the aggregate of such party's claims pursuant to this Agreement exceed $100,000,
and then only to the extent of such excess.
8. CERTAIN POST-CLOSING TRANSACTIONS.
8.1 Debt Financed Recapitalization. Within 120 days after the Closing,
the Company shall use its best efforts to enter into one or more credit
facilities (collectively, the "New Credit Facility"), on terms acceptable to
both the Company and Investors. Investors shall assist the Company in
identifying appropriate lenders and in negotiating the terms of the New Credit
Facility. The terms and conditions of the New Credit Facility shall permit the
Company to use up to $10.0 million in borrowings thereunder to purchase
outstanding shares of Common Stock pursuant to a purchase offer made in
accordance with this Section 8.1; provided, however, that in the event the
Company Aircraft have not been sold as contemplated by Section 4.6 prior to the
date on which the first such purchase offer is announced, the aggregate amount
of borrowings which may be used to purchase shares of Common Stock pursuant to
this Section 8.1 shall be limited to an amount equal to $10.0 million minus the
indebtedness related to the Company Aircraft outstanding on the Closing Date.
(The amount available to fund such purchase offer as provided in the preceding
sentence is referred to below as the "Maximum Purchase Consideration.") Promptly
after obtaining the New Credit Facility, the Company shall offer, in writing, to
purchase from its shareholders, including each Investor, for a purchase price
equal to Investors Effective Price (as such term is defined below), an aggregate
number of shares of Common Stock (the "Maximum Number of Purchased Shares") such
that, if all such shares were to be purchased at such price, the Maximum
Purchase Consideration would be required to fund such purchase. (For example, if
the Maximum Purchase Consideration is $10.0 million and Investors Effective
Price is $37.3223, then the Company shall offer to purchase up to 267,936 shares
of Common Stock.) To the extent more shares are tendered to the Company in
response to such purchase offer than the Maximum Number of Purchased Shares, the
Company shall purchase shares from each tendering shareholder in accordance with
such tendering shareholder's ownership of Common Stock as compared to the
ownership of Common Stock by all tendering shareholders. In the event the
Company is, for any reason, unable to make a purchase offer in an amount equal
to the Maximum Purchase Consideration, then the Company shall make successive
purchase offers as described above as and when it is able to do so until the
total consideration paid by the Company in connection with such purchase offers
equals the Maximum Purchase Consideration. As used in this Section 8, the term
Investors Effective Price shall initially mean $37.3223 per share, which amount
(i) shall be adjusted appropriately in the event of any stock split, stock
dividend or stock combination and (ii) shall be reduced in the event of the
transfer of any additional shares pursuant to Section 8.2 or Section 8.3 prior
to any purchase offer pursuant to this Section 8.1 to an amount computed by
dividing $5.0 million by the total number of shares held by Investors as a group
after such transfer or transfers.
8.2 Transfer of Additional Shares Upon Sale of Company Aircraft. Within
thirty (30) calendar days following the sale or transfer of the Company Aircraft
and termination of all
13.
<PAGE> 14
obligations with respect thereto, the Shareholders shall transfer additional
shares of Common Stock to Investors pro rated in accordance with the shares sold
pursuant hereto so as to achieve the result that all of the economic
consequences associated with the Company Aircraft, including, any taxation
imposed on such sale, will be economically borne by the Shareholders as if the
Company had not owned the Company Aircraft and had not been subject to the
obligations with respect thereto on and after the Closing.
8.3 Transfer of Additional Shares if Company Aircraft Not Sold. In the
event the indebtedness related to the Company Aircraft is not assumed by a
purchaser of the Company Aircraft, as contemplated by Section 4.6 above, prior
to December 31, 1996, then Investors shall be entitled to receive from the
Shareholders an additional number of shares of Common Stock such that, had such
transfer been effected as of the Closing Date, Investors' aggregate holdings of
Common Stock as of the Closing Date would have represented a percentage of the
outstanding shares of Common Stock equal to $5.0 million divided by ($43.75
million minus the amount of all indebtedness related to the Company Aircraft
outstanding as of the Closing Date). Such transfers shall be made by each
Shareholder pro rata in accordance with such Shareholder's ownership interest in
the Company and to each Investor pro rata in accordance with such Investor's
ownership interest in the Company and shall be effected no later than January
10, 1997.
9. MISCELLANEOUS.
9.1 Termination. This Agreement may be terminated by the Company (acting
on its own behalf and on behalf of the Shareholders) or by the Trustee (acting
on its own behalf and on behalf of the other Investors) on written notice to the
other party in the event the Closing hereunder has not occurred prior to
September 30, 1996; provided, however, that no party hereto shall have the right
to terminate this Agreement pursuant to this Section 9.1 if the Closing has not
occurred due to the failure of such party to satisfy a condition to any other
party's obligations hereunder.
9.2 Survival of Warranties. The representations, warranties and
covenants contained in or made pursuant to this Agreement shall survive beyond
the Closing and shall continue in effect until the expiration of two years
following the execution and delivery of this Agreement and shall in no way be
affected by any investigation made by or on behalf of any party, except that
claims based on the representations and warranties in Section 2.17 may be made
at any time before the expiration of the statute of limitations (including any
extension, waiver, or tolling thereof) applicable to the tax liabilities
referred to in Section 2.17.
9.3 Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties.
9.4 Governing Law. This Agreement shall be interpreted and enforced in
accordance with, and its validity and performance shall be governed by, the laws
of the State of California without regard to its principles of choice of law.
14.
<PAGE> 15
9.5 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.
9.6 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience of reference only and are not to be
considered in construing or interpreting this Agreement.
9.7 Notices. Unless otherwise expressly provided herein, any notice
required or permitted under this Agreement shall be given in writing and shall
be deemed effectively given (i) by telecopier at the number indicated for such
party on the signature page hereof upon receipt of confirmation thereof, (ii)
upon personal delivery to the party to be notified or (iii) four (4) days after
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. Any party may change such
party's notice address and telecopy number by written notice given to the other
parties in accordance with this Section 9.7.
9.8 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived only with the
written consent of the party against which such amendment or waiver is to be
enforced.
9.9 Expenses. In the event the transactions contemplated by this
Agreement are consummated, the Company will bear all of the costs and expenses
incurred by the Company, the Shareholders and Investors with respect to the
negotiation, execution, delivery and performance of this Agreement and the
documents contemplated hereby, except that the Company shall not bear costs and
expenses related to the fees of Riordan & McKinzie and Deloitte & Touche in
excess of $35,000. In the event the transactions contemplated by this Agreement
are not consummated for any reason, the parties shall bear their own costs and
expenses; provided, however, that Investors shall reimburse the Company for
amounts paid to KPMG for the work performed in the audit and review of the
Company's financial statements contemplated by Section 5.7 hereof, unless
Investors elect not to consummate the transactions contemplated hereby due to
material differences between the financial statements provided to Investors
under Section 5.7 and those provided under Section 2.5.
9.10 Attorneys' Fees. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
9.11 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties with regard to the
subject matter hereof and thereof.
15.
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"INVESTORS" THE "COMPANY"
STEVEN MYERS & ASSOCIATES, INC.
/s/ J. CHRISTOPHER LEWIS
- -------------------------------------
J. Christopher Lewis, Trustee of By:
the RB Trust Dated June 28, 1993 ---------------------------------
Steven S. Myers, President and
Chief Executive Officer
Address:
/s/ J. CHRISTOPHER LEWIS 1301 Dove Street, 7th Floor
- ------------------------------------- Newport Beach, CA 92660
J. CHRISTOPHER LEWIS Telecopier No.: (714) 975-1624
THE "SHAREHOLDERS"
/s/ PATRICK C. HADEN
- ------------------------------------
PATRICK C. HADEN
Address:
300 S. Grand Ave., 29th Floor -----------------------------------------
Los Angeles, California 90071 Steven S. Myers, Co-trustee of the Steven
Telecopier No.: (213) 229-8597 Myers and Paula Mathis Revocable Trust,
Dated June 24, 1992
-----------------------------------------
Paula K. Myers, Co-trustee of the Steven
Myers and Paula Mathis Revocable Trust,
Dated June 24, 1992
Address:
5 Summit
Irvine, CA 92612
Telecopier No.:
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
16.
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"INVEST0RS" THE "COMPANY"
STEVEN MYERS & ASSOCIATES, INC.
- -----------------------------------
J. Christopher Lewis, Trustee of By: /s/ STEVEN S. MYERS
the RB Trust Dated June 28, 1993 ---------------------------------------
Steven S. Myers, President
Chief Executive Officer
Address:
1301 Dove Street, 7th Floor
- --------------------------------- Newport Beach, CA 92660
J. CHRISTOPHER LEWIS Telecopier No.: (714) 975-1624
THE "SHAREHOLDERS"
- ---------------------------------
PATRICK C. HADEN
Address: /s/ STEVEN S. MYERS
300 S. Grand Ave., 29th Floor ---------------------------------------
Los Angeles, California 90071 Steven S. Myers, Co-trustee of the
Telecopier No.: (213) 229-8597 Steven Myers and Paula Mathis Revocable
Trust, Dated June 24, 1992
/s/ PAULA K. MYERS
----------------------------------------
Paula K. Myers, Co-trustee of the Steven
Myers and Paula Mathis Revocable Trust,
Dated June 24, 1992
Address:
5 Summit
Irvine, CA 92612
Telecopier No.: 854-4563
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
16.
<PAGE> 18
/s/ KENNETH W. COLBAUGH
----------------------------------------
Kenneth W. Colbaugh, Co-trustee of the
K. and R. Colbaugh Revocable Trust
Dated September 1, 1994
/s/ ROBIN E. COLBAUGH
----------------------------------------
Robin E. Colbaugh, Co-trustee of the
K. and R. Colbaugh Revocable Trust
Dated September 1, 1994
Address:
Telecopier No.:
----------------------------------------
Ronald Hunn, Co-trustee of the Ronald
and Linda Hunn Trust Dated February 26,
1990
----------------------------------------
Linda Hunn, CO-Trustee of the Ronald
and Linda Hunn Trust Dated February 26,
1990
Address:
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
17.
<PAGE> 19
----------------------------------------
Kenneth W. Colbaugh, Co-trustee of the
K. and R. Colbaugh Revocable Trust
Dated September 1, 1994
----------------------------------------
Robin E. Colbaugh, Co-trustee of the
K. and R. Colbaugh Revocable Trust
Dated September 1, 1994
Address:
Telecopier No.:
/s/ RONALD HUNN
----------------------------------------
Ronald Hunn, Co-trustee of the Ronald
and Linda Hunn Trust Dated February 26,
1990
/s/ LINDA HUNN
----------------------------------------
Linda Hunn, Co-trustee of the Ronald
and Linda Hunn Trust Dated February 26,
1990
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
17.
<PAGE> 20
/s/ THOMAS F. HEINSHEIMER
----------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17,
1968
Address:
Telecopier No.:
----------------------------------------
JOHN W. MONTGOMERY
----------------------------------------
DIAN Y. MONTGOMERY
Address:
Telecopier No.:
----------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
18.
<PAGE> 21
----------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17,
1968
Address:
Telecopier
/s/ JOHN W. MONTGOMERY
----------------------------------------
JOHN W. MONTGOMERY
/s/ DIAN Y. MONTGOMERY
----------------------------------------
DIAN Y. MONTGOMERY
Address
Telecopier No.:
----------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
18.
<PAGE> 22
----------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17,
1968
Address:
Telecopier No.:
----------------------------------------
JOHN W. MONTGOMERY
----------------------------------------
DIAN Y. MONTGOMERY
Address:
Telecopier No.:
/s/ CHARLES A. CULLIAN
----------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
18.
<PAGE> 23
/s/ RICHARD E. COLLART
---------------------------------------
Richard E. Collart, Co-trustee of the
Collart Family Living Trust
/s/ MARGARET S. COLLART
---------------------------------------
Margaret S. Collart, Co-trustee of the
Collart Family Living Trust
Address:
Telecopier No.:
---------------------------------------
KENNETH M. WISEHART
---------------------------------------
HOLLY ANN WISEHART
Address:
Telecopier No.:
---------------------------------------
AJAYKUMAR K. PATEL
---------------------------------------
ELIZABETH ANN STILLMAN
Address:
Telecopier No.:
19.
<PAGE> 24
---------------------------------------
Richard E. Collart, Co-trustee of the
Collart Family Living Trust
---------------------------------------
Margaret S. Collart, Co-trustee of the
Collart Family Living Trust
Address:
Telecopier No.:
/s/ KENNETH M. WISEHART
---------------------------------------
KENNETH M. WISEHART
/s/ HOLLY ANN WISEHART
---------------------------------------
HOLLY ANN WISEHART
Address:
Telecopier No.:
/s/ AJAYKUMAR K. PATEL
---------------------------------------
AJAYKUMAR K. PATEL
/S/ ELIZABETH ANN STILLMAN
---------------------------------------
ELIZABETH ANN STILLMAN
Address:
Telecopier No,.:
19.
<PAGE> 1
EXHIBIT 10.13
INVESTORS' RIGHTS AGREEMENT
This INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made and entered
into this 25th day of September, 1996, by and among Steven Myers & Associates,
Inc. (the "Company"), the shareholders of the Company whose names appear on the
signature pages hereto (each, individually, a "Shareholder," and collectively,
the "Shareholders"), J. Christopher Lewis, Trustee of the RB Trust Dated June
28, 1993 (the "Trustee"), J. Christopher Lewis and Patrick C. Haden. Messrs.
Lewis, Haden and the Trustee are referred to individually herein as "Investor"
and collectively as "Investors."
BACKGROUND
A. The execution of this Agreement is a condition to the consummation
of the transactions contemplated by that certain Securities Purchase Agreement
(the "Securities Purchase Agreement") dated as of September 25, 1996 by and
among the Company, the Shareholders and Investors pursuant to which Investors
have agreed to purchase certain shares of the Company's common stock ("Common
Stock") from the Shareholders.
B. Steven S. Myers ("Myers"), one of the Shareholders, is a founder of
the Company.
C. In consideration of the benefits to be derived from the consummation
of the transactions contemplated by the Securities Purchase Agreement, the
Company and the Shareholders (including Myers, who is entering into certain
agreements which the other Shareholders are not entering into) desire to enter
into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein, and for good and valuable consideration, the adequacy and
receipt of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Certain Covenants.
1.1 Inspection Rights. So long as Investors together own at
least 40% of the Common Stock initially purchased by Investors pursuant to the
Securities Purchase Agreement ("Investors' Initial Holdings"), the Company shall
permit each Investor, at such Investor's expense, to visit and inspect the
Company's properties, to examine its books of account and records and to discuss
the Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested.
1.2 Annual Audits. Promptly following the execution of this
Agreement, the Board of Directors of the Company shall select and retain one of
the six largest independent accounting firms in the United States to become the
Company's independent
<PAGE> 2
accountants. So long as Investors hold at least 40% of Investors' Initial
Holdings, the Company's financial statements for each fiscal year ending after
the date hereof shall be audited by such accounting firm or such other firm
meeting the criteria set forth above as may be selected by the Board of
Directors.
1.3 Information Rights. So long as Investors own at least 40%
of Investors' Initial Holdings, the Company shall deliver to each Investor the
following financial statements:
(a) As soon as practicable, but in any event within
120 days after the end of each fiscal year of the Company, an audited balance
sheet, income statement, and statement of cash flows for such fiscal year, each
in reasonable detail;
(b) As soon as practicable, but in any event within 30
days after the end of each month of each fiscal year of the Company, an
unaudited balance sheet, income statement and statement of cash flows as of the
end of such month, each in reasonable detail;
(c) Within 30 days prior to the beginning of each
fiscal year, the Company shall provide each Investor with a copy of the
Company's operating plan for such fiscal year, which shall (i) include the
Company's budget for each quarter of the upcoming fiscal year, (ii) forecast
operating profit, cash flow and capital expenditures and (iii) reflect all
material changes proposed for the Company's business; and
(d) Such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as such
Investor may from time to time request.
1.4 Key Man Life Insurance. Subject to the 30 day grace period
set forth in Section 4.9 of the Securities Purchase Agreement, so long as
Investors own at least 40% of Investors' Initial Holdings, the Company shall
maintain in effect guaranteed renewable, key man term life insurance policies,
each in a policy amount of $2,000,000, insuring the life of Steven S. Myers and
the life of Ken Colbaugh. Such policies shall name the Company as the
beneficiary. The Company shall not cancel either policy or change the
beneficiary of either policy without the express written consent of Investors.
2. Co-Sale Agreement with Myers.
2.1 Sales by Myers. In the event that Myers at any time
receives a bona fide offer (a "Purchase Offer") from any person to purchase no
less than 15% of the capital stock of the Company owned by him, his spouse, or
any trust or family partnership formed by him or his wife for the benefit of
themselves or any member or members of their family (collectively, the "Myers
Affiliates"), then Myers shall promptly notify each Investor who is a
shareholder of the Company of the terms and conditions of such Purchase Offer
(the "Offer Notice").
2
<PAGE> 3
2.2 Investors' Sale Rights. Each Investor shall have the right,
exercisable upon written notice to Myers within 30 days after receipt of the
Offer Notice to participate in the proposed sale of Common Stock pursuant to the
terms and conditions of such Purchase Offer. To the extent any Investor
exercises such right of participation in accordance with the terms and
conditions set forth below, the number of shares of Common Stock which the Myers
Affiliates may sell pursuant to such Purchase Offer shall be correspondingly
reduced. The right of participation of Investors shall be subject to the
following terms and conditions:
(a) Each Investor may sell all or any part of that
number of shares of Common Stock equal to the product obtained by multiplying
(i) the aggregate number of shares of Common Stock covered by the Purchase Offer
by (ii) a fraction the numerator of which is the number of shares of Common
Stock at the time owned by such Investor and the denominator of which is the sum
of the number of shares of Common Stock at the time owned by the Myers
Affiliates plus the number of shares of Common Stock owned by such Investor.
(b) Each Investor shall deliver to Myers for transfer
to the proposed purchaser one or more certificates, properly endorsed for
transfer, which represent the number of shares of Common Stock which such
Investor elects to sell pursuant to this Section 2.2. Myers shall promptly
thereafter remit to such Investor that portion of the sale proceeds to which
such Investor is entitled by reason of such Investor's participation in the
sale.
(c) This Section 2 shall not apply with respect to
sales of shares of Common Stock by any Myers Affiliates to any employee of the
Company.
3. Myers' Take Along Rights. In the event that Myers agrees to sell or
exchange (by merger or otherwise) all of the shares of Common Stock held by the
Myers Affiliates in a bona fide arm's-length transaction to a person or entity
not otherwise affiliated with any Shareholder ("Third Party"), then upon the
written demand of Myers (which demand shall contain all of the information
provided to be set forth in a notice pursuant to Section 2 above), Investors
shall sell to such Third Party all of the shares of Common Stock held by them at
the same price and on the same terms and conditions as those applicable to the
Myers Affiliates.
4. Rights Upon Issuance of Additional Securities.
4.1 Procedure. So long as any Investor is a shareholder of the
Company, if the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock (collectively, "New Shares"), the Company shall first make an offering of
such New Shares to such Investor(s) in accordance with the following provisions:
(a) The Company shall deliver a notice by certified
mail (the "Notice") to such Investor(s) stating (i) its bona fide intention to
offer such New Shares, (ii) the
3
<PAGE> 4
number of such New Shares to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such New Shares.
(b) Each such Investor, may, by written notice to the
Company delivered within 20 days of the receipt of the Notice, elect to
purchase, at the price and on the terms specified in the Notice, up to that
portion of such New Shares which equals the proportion that the number of shares
of Common Stock held by such Investor bears to the total number of shares of
Common Stock of the Company then outstanding.
(c) The Company may, during the 30-day period
following the expiration of the period provided in Section 3.1(b), offer such
New Shares not purchased by Investors to any person or persons at a price not
less than, and upon terms no more favorable to such person than those specified
in the Notice. If the Company does not enter into an agreement for the sale of
such New Shares within such period, or if such agreement is not consummated
within 45 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such New Shares shall not be offered unless first
reoffered to Investors in accordance herewith.
4.2 Permitted Issuances. The provisions of this Section 3 shall
not be applicable to the issuance of New Shares in connection with any merger,
consolidation, asset purchase, stock exchange or employee incentive plan.
5. Investors' Put Option. Shareholders hereby grant to each Investor a
put option (the "Put Option") with respect to all shares held now or hereafter
by such Investor, which becomes exercisable in the event either the Company or
the Shareholders enter into any transaction without the consent of such Investor
which involves the sale of the Company, whether pursuant to a merger,
consolidation, sale of assets, sale or exchange of stock or otherwise ("Sale
Transaction"), in which the per share price received by such Investor (or
effectively received in the case of a sale of assets) (the "Sale Price") is less
than the per share price paid by such Investor pursuant to the Securities
Purchase Agreement, adjusted for any subsequent stock splits, stock dividends or
stock combinations (the "Initial Purchase Price"). Upon notice of any Investor's
exercise of the Put Option, the Shareholders shall purchase a pro rata (in
accordance with such shareholder's stock ownership) portion of the shares of
Common Stock tendered by such Investor at a purchase price equal to the Initial
Purchase Price multiplied by the number of shares of Common Stock tendered. Such
purchase price may be paid contemporaneously with and from funds obtained by the
Shareholders in such Sale Transaction.
6. Voting Agreement.
6.1 Election of Directors. So long as each Investor is a
shareholder of the Company, (i) such Investor shall vote all of the shares of
Series A Common Stock held of record by such Investor to elect to the Company's
Board of Directors (A) three directors (the "Common Directors") nominated by the
holders of a majority of the outstanding shares of Series A Common Stock, other
than shares owned by Investors (a "Majority of the Voting
4
<PAGE> 5
Shareholders"), and (B) one director nominated with the mutual approval of the
Trustee and a Majority of the Voting Shareholders (a "Mutually Agreed Upon
Director"); and (ii) each Shareholder shall vote all of the shares of Series A
Common Stock held of record by such Shareholder to elect to the Company's Board
of Directors (A) one director nominated by the Trustee, in his sole discretion,
and (B) the Mutually Agreed Upon Director. The Company shall use its best
efforts to ensure that there are no more and no less than five authorized
directors at all times. In the event the Trustee and a Majority of the Voting
Shareholders are not able to agree upon a person to serve as the Mutually Agreed
Upon Director, only four directors shall be elected and there shall be a vacancy
on the Board of Directors.
6.2 Filling Vacancies on the Board of Directors. In the event
any vacancy is created on the Board of Directors, whether through the
resignation, death or removal of a Director, such vacancy shall be filled in the
same manner as such Director was originally elected.
6.3 Board Meetings and Committees. Investors and the
Shareholders shall cause the Board of Directors to meet at least once per
quarter. The Board of Directors shall at all times provide for a compensation
committee and an audit committee and the representative of the Board nominated
by the Trustee shall at all times serve on each such committee.
6.4 Best Efforts to Cause Articles of Incorporation and Bylaws
to be Consistent with this Section 5. The Company and the Shareholders shall at
all times ensure that the Company's Articles of Incorporation and Bylaws are not
inconsistent with the provisions of this Agreement.
7. Other Covenants
7.1 Distributions. From and after January 1, 1997, the Company
shall make cash distributions in the form of dividends to its shareholders,
including Investors, no less than annually in an amount at least equal to the
"Net For Dividend" amount for the applicable period, computed in a manner
consistent with the manner in which the "Net For Dividend" amount was computed
in calendar 1994 and 1995. In no event shall any such distribution be made which
would (i) leave the Company with inadequate working capital to conduct its
business immediately following such distribution, or (ii) violate any provision
of any credit agreement or other contract to which the Company is a party or by
which the Company is bound.
7.2 Compensation of Key Employees. From and after January 1,
1997, Steven S. Myers, Paula K. Myers and Ken Colbaugh shall receive a base
salary as set forth on Schedule 7.2 attached hereto and Mr. Colbaugh shall be
entitled to receive an incentive bonus as set forth on such Schedule 7.2. Such
compensation shall not be materially increased without the unanimous approval
of the Board of Directors.
5
<PAGE> 6
8. Miscellaneous.
8.1 Assignment of Rights. The rights of any Investor under this
Agreement may be assigned by such Investor, or any permitted assignee or
transferee of such Investor, to any assignee or transferee of shares of Common
Stock, provided that the Company is furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such rights are being assigned or transferred within a reasonable time
after such assignment or transfer. Notwithstanding the foregoing, an Investor or
permitted assignee or transferee shall not assign or transfer any shares of
Common Stock or any rights granted under this Agreement to (i) any person or
entity which does not meet the requirements of a permitted shareholder of a
subchapter S corporation, (ii) any competitor, former or current client of the
Company, or (iii) any other person or entity to which the Company has a
reasonable objection.
8.2 Termination of Rights. The rights of Investors and Myers
under this Agreement shall terminate upon the consummation of, and the
provisions of Sections 2, 3 and 4 shall not apply with respect to shares of
Common Stock sold in an underwritten public offering of the Company's Common
Stock.
8.3 Prohibited Transfers. Any transfer or purported transfer of
any Common Stock in contravention of any provision of this Agreement shall be
void and the Company shall take all actions necessary to prevent such transfer
from taking place, including imposing stop transfer instructions as to such
shares.
8.4 Legends. Each certificate representing shares of capital
stock of the Company now or hereafter owned by Investors or the Shareholders
shall be endorsed with the following legend:
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF AN INVESTORS' RIGHTS
AGREEMENT. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN
REQUEST TO THE SECRETARY OF STEVEN MYERS & ASSOCIATES, INC.
8.5 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties.
8.6 Governing Law. This Agreement shall be interpreted and
enforced in accordance with, and its validity and performance shall be governed
by, the laws of the State of California without regard to its principles of
choice of law.
6
<PAGE> 7
8.7 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.
8.8 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience of reference only and are not to be
considered in construing or interpreting this Agreement.
8.9 Notices. Unless otherwise expressly provided herein, any
notice required or permitted under this Agreement shall be given in writing and
shall be deemed effectively given (i) by telecopier at the number indicated for
such party on the signature page to the Stock Purchase Agreement upon receipt of
confirmation thereof, (ii) upon personal delivery to the party to be notified or
(iii) four (4) days after 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 or number indicated for such party on the signature page
to the Stock Purchase Agreement, or at such other telecopier number or address
as such party may designate by advance written notice to the other parties.
8.10 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived only with
the written consent of the party against which such amendment or waiver is to be
enforced.
8.11 Severability. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be judicially
declared to be invalid, unenforceable or void, such decision will not have the
effect of invalidating or voiding the remainder of this Agreement or affect the
application of such provision to other persons or circumstances, and the parties
hereto agree that the part or parts of this Agreement so held to be invalid,
unenforceable or void will be deemed to have been stricken from this Agreement
and the remainder of this Agreement will have the same force and effect as if
such part or parts had never been included herein. Any such finding or
invalidity or unenforceability shall not prevent the enforcement of such
provision in any other jurisdiction to the maximum extent permitted by
applicable law.
[REMAINDER OF THIS PAGE LEFT BLANK]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"INVESTORS" THE "COMPANY"
STEVEN MYERS & ASSOCIATES, INC.
/s/ J. CHRISTOPHER LEWIS
- ----------------------------------- By:
J. Christopher Lewis, Trustee of ---------------------------------
the RB Trust Dated June Steven S. Myers, President and
28, 1993. Chief Executive Officer
Address:
1301 Dove Street, 7th Floor
/s/ J. CHRISTOPHER LEWIS Newport Beach, CA 92660
- ----------------------------------- Telecopier No.: (714) 975-1624
J. CHRISTOPHER LEWIS
THE "SHAREHOLDERS"
/s/ PATRICK C. HADEN
- -----------------------------------
PATRICK C. HADEN
Address: ----------------------------------------
300 S. Grand Ave., 29th Floor Steven S. Myers, Co-trustee of the Steven
Los Angeles, California 90071 Myers and Paula Mathis Revocable Trust,
Telecopier No.: (213) 229-8597 Dated June 24, 1992
-----------------------------------------
Paula K. Myers, Co-trustee of the Steven
Myers and Paula Mathis Revocable Trust,
Dated June 24, 1992
Address:
5 Summit
Irvine, CA 92612
Telecopier No.: (714)_____________
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"INVESTORS" THE "COMPANY"
STEVEN MYERS & ASSOCIATES, INC.
- ----------------------------------- By: /s/ STEVEN S. MYERS
J. Christopher Lewis, Trustee of ---------------------------------
the RB Trust Dated June Steven S. Myers, President and
28, 1993. Chief Executive Officer
Address:
1301 Dove Street, 7th Floor
Newport Beach, CA 92660
- ----------------------------------- Telecopier No.: (714) 975-1624
J. CHRISTOPHER LEWIS
THE "SHAREHOLDERS"
- -----------------------------------
PATRICK C. HADEN
/s/ STEVEN S. MYERS
Address: ----------------------------------------
300 S. Grand Ave., 29th Floor Steven S. Myers, Co-trustee of the Steven
Los Angeles, California 90071 Myers and Paula Mathis Revocable Trust,
Telecopier No.: (213) 229-8597 Dated June 24, 1992
/s/ PAULA K. MYERS
-----------------------------------------
Paula K. Myers, Co-trustee of the Steven
Myers and Paula Mathis Revocable Trust,
Dated June 24, 1992
Address:
5 Summit
Irvine, CA 92612
Telecopier No.: (714) 854-4563
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
8
<PAGE> 10
/s/ KENNETH W. COLBAUGH
----------------------------------------------
Kenneth W. Colbaugh, Co-trustee of the K. and
R. Colbaugh Revocable Trust Dated September
1, 1994
/s/ ROBIN E. COLBAUGH
----------------------------------------------
Robin E. Colbaugh, Co-trustee of the K. and R.
Colbaugh Revocable Trust Dated September 1, 1994
Address:
Telecopier No.:
----------------------------------------------
Ronald Hunn, Co-trustee of the Ronald and
Linda Hunn Trust Dated February 26, 1990
----------------------------------------------
Linda Hunn, Co-trustee of the Ronald and Linda
Hunn Trust Dated February 26, 1990
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
9
<PAGE> 11
----------------------------------------------
Kenneth W. Colbaugh, Co-trustee of the K. and
R. Colbaugh Revocable Trust Dated September
1, 1994
----------------------------------------------
Robin E. Colbaugh, Co-trustee of the K. and R.
Colbaugh Revocable Trust Dated September 1, 1994
Address:
Telecopier No.:
/s/ RONALD HUNN
----------------------------------------------
Ronald Hunn, Co-trustee of the Ronald and
Linda Hunn Trust Dated February 26, 1990
/s/ LINDA HUNN
----------------------------------------------
Linda Hunn, Co-trustee of the Ronald and Linda
Hunn Trust Dated February 26, 1990
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
9
<PAGE> 12
/s/ THOMAS F. HEINSHEIMER
----------------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17, 1968
Address:
Telecopier No.:
----------------------------------------------
JOHN W. MONTGOMERY
----------------------------------------------
DIAN Y. MONTGOMERY
Address:
Telecopier No.:
----------------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
10
<PAGE> 13
----------------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17, 1968
Address:
Telecopier No.:
/s/ JOHN W. MONTGOMERY
----------------------------------------------
JOHN W. MONTGOMERY
/s/ DIAN Y. MONTGOMERY
----------------------------------------------
DIAN Y. MONTGOMERY
Address:
Telecopier No.:
----------------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
(SIGNATURES CONTINUE ON FOLLOWING PAGE]
10
<PAGE> 14
----------------------------------------------
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust Dated July 17, 1968
Address:
Telecopier No.:
----------------------------------------------
JOHN W. MONTGOMERY
----------------------------------------------
DIAN Y. MONTGOMERY
Address:
Telecopier No.:
/s/ CHARLES A. CULLIAN
----------------------------------------------
CHARLES A. CULLIAN
Address:
Telecopier No.:
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
10
<PAGE> 15
/s/ MARGARET S. COLLART /s/ RICHARD E. COLLART
- ---------------------------------- ---------------------------------
Margaret S. Collart Richard E. Collart, Trustee of
the Collart Family Trust
Address:
Telecopier No.:
---------------------------------
KENNETH M. WISEHART
---------------------------------
HOLLY ANN WISEHART
Address:
Telecopier No.:
---------------------------------
AJAYKUMAR K. PATEL
---------------------------------
ELIZABETH ANN STILLMAN
Address:
Telecopier No.:
11
<PAGE> 16
/s/ RICHARD E. COLLART
--------------------------------------
Richard E. Collart, Co-trustee of the
Collart Family Living Trust
/s/ MARGARET S. COLLART
--------------------------------------
Margaret S. Collart, Co-trustee of the
Collart Family Living Trust
Address:
Telecopier No.:
--------------------------------------
KENNETH M. WISEHART
--------------------------------------
HOLLY ANN WISEHART
Address:
Telecopier No.:
--------------------------------------
AJAYKUMAR K. PATEL
--------------------------------------
ELIZABETH ANN STILLMAN
Address:
Telecopier No.:
11
<PAGE> 17
--------------------------------------
Richard E. Collart, Co-trustee of the
Collart Family Living Trust
--------------------------------------
Margaret S. Collart, Co-trustee of the
Collart Family Living Trust
Address:
Telecopier No.:
/s/ KENNETH M. WISEHART
--------------------------------------
KENNETH M. WISEHART
/s/ HOLLY ANN WISEHART
--------------------------------------
HOLLY ANN WISEHART
Address:
Telecopier No.:
/s/ AJAYKUMAR K. PATEL
--------------------------------------
AJAYKUMAR K. PATEL
/s/ ELIZABETH ANN STILLMAN
--------------------------------------
ELIZABETH ANN STILLMAN
Address:
Telecopier No.:
11
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Steven Myers & Associates, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Orange County, California
January 5, 1998
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<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<EXCHANGE-RATE> 1,000 1,000
<CASH> 1,927 478
<SECURITIES> 0 0
<RECEIVABLES> 3,664 6,606
<ALLOWANCES> 27 105
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,795 7,375
<PP&E> 7,131 1,476
<DEPRECIATION> 1,262 1,068
<TOTAL-ASSETS> 11,820 7,923
<CURRENT-LIABILITIES> 6,074 8,495
<BONDS> 0 0
0 0
0 0
<COMMON> 5 5
<OTHER-SE> 750 (4,878)
<TOTAL-LIABILITY-AND-EQUITY> 11,820 7,923
<SALES> 0 0
<TOTAL-REVENUES> 25,699 26,639
<CGS> 0 0
<TOTAL-COSTS> 14,512 14,838
<OTHER-EXPENSES> 10,749 4,958
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (136) 149
<INCOME-PRETAX> 574 6,694
<INCOME-TAX> 9 100
<INCOME-CONTINUING> 565 6,594
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 565 6,594
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</TABLE>
