<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1998
REGISTRATION NO. 333-40725
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
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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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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==========================================================================================================
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) 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 27, 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.
The Common Stock has been 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 36%, from $10.7 million for 1993 to $37.0 million for 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, as cited in Aviation Week &
Space Technology (May 29, 1995, p. 39). 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 21.1% for 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 26 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
Repayment of existing indebtedness and general
Use of Proceeds................................ 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994(1) 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net revenues................................... $10,738 $15,220 $20,777 $25,699 $ 36,962
Gross profit................................... 3,622 5,771 8,464 11,187 16,433
Operating income............................... 830 878 671 438 9,506
Earnings (loss) before income taxes............ 817 (823) 678 574 8,964
Net earnings (loss)............................ $ 801 $ (811) $ 668 $ 565 $ 8,817
======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Earnings before income taxes................................................... $ 3,049 $ 7,957
Provision for income taxes..................................................... 1,219 3,183
------- -------
Net earnings................................................................... $ 1,830 $ 4,774
======= =======
Net earnings per share......................................................... $ .12 $ .37
======= =======
Weighted average common shares(4).............................................. 14,893 12,948
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(5)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 150 $ 17,210
Working capital................................................................ 101 17,947
Total assets................................................................... 5,331 22,391
Total debt..................................................................... 7,729 --
Total shareholders' equity (deficit)........................................... (6,328) 18,461
</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
1995, 1996 and 1997, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) In January 1997, the Company repurchased 1,995,125 shares of Common Stock
from certain of its existing shareholders for approximately $5.9 million
using borrowings under the Bank Facility. See "Certain Transactions."
(5) 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, 1997, approximately 78.9% 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 90.3%, 98.0%, 92.9% and 91.2% of
its total revenues for the years ended December 31, 1997, 1996, 1995 and 1994,
respectively. Six clients, Lockheed Martin Corporation, Litton Industries, Inc.,
Motorola, Inc., Raytheon Company, The Boeing Company, and Hughes Electronics
Corporation accounted for approximately 81.5% of total revenues for the year
ended December 31, 1997. Lockheed Martin Corporation is the Company's single
largest client, accounting for approximately 22.5% and 22.9% of the Company's
total revenues for the years ended December 31, 1997 and 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 $7.7 million of existing
indebtedness as of December 31, 1997 and for general corporate purposes, which
may include strategic acquisitions. Approximately $17.1 million, or 69% 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 53.6% 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, on or 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 $7.7 million of
existing indebtedness and for general corporate purposes, which may include
future acquisitions of complementary businesses. Approximately $17.1 million, or
69% 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 also used the revolving line of credit for cash flow
requirements and general corporate purposes, including the payment of dividends
to shareholders. See "Dividend Policy." As of December 31, 1997, the revolving
line of credit had an outstanding principal balance of $3.7 million and the term
loan 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 December 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
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 $1.2 million, $1.9 million, $2.5
million and $4.4 million 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
December 31, 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 DECEMBER 31, 1997
---------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Cash and equivalents............................................... $ 150 $ 17,210
======== ========
Long term obligations, including current portion................... 7,729 --
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(2)...... 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 25,105
Due from shareholder............................................. (679) (679)
Retained earnings (deficit)...................................... (5,970) (5,970)
-------- --------
Total shareholders' equity (deficit)........................ (6,328) 18,461
-------- --------
Total capitalization..................................... $ 1,401 $ 18,461
======== ========
</TABLE>
- ---------------
(1) 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."
(2) 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 the consummation of this Offering. The Company will elect to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recorded. The Company will
adopt the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). If
the Company determined compensation expense based on the fair value at the
date of grant for its stock options under SFAS No. 123, the Company's net
income would have been reduced by $980,000.
14
<PAGE> 16
DILUTION
As of December 31, 1997, the Company had a deficit net tangible book value
of $(6,328,000) or $(.49) per share of Common Stock. Deficit 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. After
giving 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), the Company's pro forma net tangible book value at December 31, 1997
would have been $18,461,000 or $1.23 per share. This represents an immediate
increase in the pro forma net tangible book value of $1.72 per share to existing
shareholders and an immediate dilution of $11.77 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
-------
Deficit net tangible book value per share before the
Offering.................................................... $ (.49)
-------
Pro forma increase in net tangible book value per share
attributable to New Investors............................... 1.72
-------
Pro forma net tangible book value per share after the Offering... 1.23
-------
Pro forma dilution per share to New Investors.................... $ 11.77
=======
</TABLE>
15
<PAGE> 17
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1995,
1996 and 1997, and the balance sheet data as of December 31, 1996 and 1997, have
been derived from the 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 balance sheet data as of December
31, 1994 and 1995 and the statement of operations data for the fiscal year ended
December 31, 1994 has been derived from the Company's audited financial
statements, which statements are not included herein. The balance sheet data as
of December 31, 1993 and the statement of operations data for the fiscal year
ended December 31, 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 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>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994(1) 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net revenues........................................ $10,738 $15,220 $20,777 $25,699 $36,962
Cost of revenues.................................... 7,116 9,449 12,313 14,512 20,529
------- ------- ------- ------- -------
Gross profit........................................ 3,622 5,771 8,464 11,187 16,433
Selling, general and administrative expenses........ 2,792 4,893 7,793 10,749 6,927
------- ------- ------- ------- -------
Operating income.................................... 830 878 671 438 9,506
Other income (expense).............................. (13) (1,701) 7 136 (542)
------- ------- ------- ------- -------
Earnings (loss) before income taxes................. 817 (823) 678 574 8,964
Income tax expense (benefit)(3)..................... 16 (12) 10 9 147
------- ------- ------- ------- -------
Net earnings (loss)................................. $ 801 $ (811) $ 668 $ 565 $ 8,817
======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA(4):
Net revenues........................................................................ $25,699 $36,962
Cost of revenues.................................................................... 14,512 20,529
------- -------
Gross profit........................................................................ 11,187 16,433
Selling, general and administrative expenses........................................ 8,274 7,934
Operating income.................................................................... 2,913 8,499
Other income (expense).............................................................. 136 (542)
------- -------
Earnings before income taxes........................................................ 3,049 7,957
Income tax expense.................................................................. 1,219 3,183
Net earnings........................................................................ $ 1,830 $ 4,774
======= =======
Net earnings per share.............................................................. $ .12 $ .37
======= =======
Weighted average common shares(5)................................................... 14,893 12,948
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 189 $ 242 $ 269 $ 1,927 $ 150
Working capital..................................... 868 95 794 (279) 101
Total assets........................................ 2,269 2,320 3,034 11,820 5,331
Total debt(5)(6).................................... 283 541 605 6,250 7,729
Total shareholders' equity (deficit)(5)............. 918 114 668 755 (6,328)
</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 1995, 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) 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
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 $4.6 million, $5.2 million and $1.7 million in
1995, 1996 and 1997, respectively. In November 1997, the Company adopted an
Executive Compensation Program, which provides maximum annual compensation in an
aggregate amount of approximately $2.7 million for the two remaining senior
executive shareholders, comprised of base salary and bonus amounts to be awarded
based on the attainment of certain financial performance criteria.
As the Company elected to be taxed as an S corporation, substantially all
taxes and benefits from income, losses and tax credits have flowed through the
Company to its shareholders for federal income and state
18
<PAGE> 20
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>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $20,777 $25,699 $36,962
Cost of revenues............................................ 12,313 14,512 20,529
------- ------- -------
Gross profit................................................ 8,464 11,187 16,433
SG&A expenses............................................... 5,851 8,274 7,934
------- ------- -------
Operating income............................................ 2,613 2,913 8,499
Other income (expense)...................................... 7 136 (542)
------- ------- -------
Earnings before income taxes................................ 2,620 3,049 7,957
Income tax expense.......................................... 1,048 1,219 3,183
------- ------- -------
Net earnings................................................ $ 1,572 $ 1,830 $ 4,774
======= ======= =======
</TABLE>
The following table sets forth certain pro forma operating data as a
percentage of net revenues for 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 59.3 56.5 55.5
----- ----- -----
Gross profit................................................ 40.7 43.5 44.5
SG&A expenses............................................... 28.1 32.2 21.5
----- ----- -----
Operating income............................................ 12.6 11.3 23.0
Other income (expense)...................................... 0.0 0.5 (1.5)
----- ----- -----
Earnings before income taxes................................ 12.6 11.8 21.5
Income tax expense.......................................... 5.0 4.7 8.6
----- ----- -----
Net earnings................................................ 7.6% 7.1% 12.9%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. Net revenues were $37.0 million for 1997 compared to $25.7
million for 1996, an increase of $11.3 million or 44.0%. Net revenues from
proposal management services were $22.1 million for 1997 compared to $14.7
million for the prior year, an increase of $7.4 million or 50.3%. This increase
was attributable to an increase in the Company's customer base and the number of
proposals managed as a result of increased marketing efforts by the Company. Net
revenues from 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
19
<PAGE> 21
revenues from contract support services were $7.8 million for 1997 compared to
$3.5 million for the prior year, an increase of $4.3 million or 122.9%. This
increase was due primarily to the expanding number of clients utilizing the
Company's contract support services in 1997.
Gross profit. Gross profit was $16.4 million for 1997 compared to $11.2
million for 1996, an increase of $5.2 million or 46.4%. As a percentage of net
revenues, gross profit increased to 44.5% for 1997 from 43.5% for the prior
year. The increase in gross profit as a percentage of net revenues was primarily
attributable to more favorable labor margins realized on average from the new
employees hired by the Company throughout 1997, and reduced travel costs as a
percentage of net revenues.
SG&A expenses. SG&A expenses were $7.9 million for 1997 compared to $8.3
million for 1996, a decrease of $0.4 million, or 4.8%. This decrease was
primarily attributable to reduced aircraft expenses in 1997 compared to 1996.
The Company purchased a Hawker aircraft in 1996 for use by the Company and to be
chartered to non-affiliated entities. Due to the investment by non-employee
shareholders in 1996 and the limited use by the Company, the aircraft was sold
to an affiliate of the Company's principal shareholder at market value. This
sale resulted in a gain of $137,000. As a percentage of net revenues, SG&A
expenses decreased to 21.5% for 1997, from 32.2% for the prior year.
Operating income. Operating income was $8.5 million for 1997 compared to
$2.9 million for 1996, an increase of $5.6 million or 193.1%. As a percentage of
net revenues, operating income increased to 23.0% for 1997 from 11.3% the prior
year. The increase in operating income as a percentage of net revenues was due
primarily to increased revenues and the stabilization of fixed operating costs
in 1997.
Other income (expense). Other expense was $542,000 for 1997 compared to
income of $136,000 for 1996. This difference was primarily due to revenues
recognized in 1996 from aircraft charter services from the Company's Hawker
aircraft. As the Hawker aircraft was sold in January 1997, there were no such
revenues recognized in 1997.
Net earnings. Net earnings were $4.8 million for 1997 compared to $1.8
million for 1996, an increase of $3.0 million or 166.7%.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. Net revenues were $25.7 million for 1996 compared to $20.8
million for 1995, an increase of $4.9 million or 23.6%. Net revenues from
proposal management services for 1996 were $14.7 million compared to $13.6
million for the prior year, an increase of $1.1 million or 8.1%. This increase
was attributable to the addition of several major proposals in 1996. Net
revenues from 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.
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<PAGE> 22
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%.
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
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA:
Net revenues.......................... $ 7,546 $ 7,824 $ 4,092 $ 6,237 $ 7,229 $ 8,544 $10,866 $10,323
Cost of revenues...................... 4,422 4,544 2,433 3,113 3,865 4,792 6,181 5,691
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 3,124 3,280 1,659 3,124 3,364 3,752 4,685 4,632
SG&A expenses......................... 1,497 2,207 1,720 2,850 1,507 1,818 2,476 2,133
------- ------- ------- ------- ------- ------- ------- -------
Operating income...................... 1,627 1,073 (61) 274 1,857 1,934 2,209 2,499
Other income (expense):
Interest expense.................... 17 109 149 145 124 124 130 127
Miscellaneous income (expense)...... 24 149 188 195 174 24 31 (266)
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes... 1,634 1,113 (22) 324 1,907 1,834 2,110 2,106
Income tax expense (benefit).......... 654 445 (9) 129 762 734 844 843
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)................... $ 980 $ 668 $ (13) $ 195 $ 1,145 $ 1,100 $ 1,266 $ 1,263
======= ======= ======= ======= ======= ======= ======= =======
</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
December 31, 1997 balance of $4.2 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 years ended
December 31, 1996 and 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.
Borrowing activities provided funds of $7.1 million for the year ended
December 31, 1997. Net cash used by financing activities totaled approximately
$8.7 million for the year ended December 31, 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
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<PAGE> 23
InterBank Offered Rate. Amounts outstanding under the Bank Credit Facility are
secured by the Company's assets. As of December 31, 1997, the revolving line of
credit had an outstanding principal balance of $3.7 million and the term loan
had 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.
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 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 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.
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<PAGE> 24
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 36%, from $10.7 million for 1993 to $37.0
million for 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, as cited in Aviation
Week & Space Technology (May 29, 1995, p. 39). 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 21.1% for 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
23
<PAGE> 25
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
24
<PAGE> 26
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 16 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.
25
<PAGE> 27
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 26 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.
There can be no assurance that the Company will successfully achieve any
elements of its growth strategy.
- ---------------
Celestri(TM) is a trademark of Motorola, Inc.
26
<PAGE> 28
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 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
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<PAGE> 29
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 December 31,
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 (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
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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, Litton Industries, Inc., Motorola, Inc.,
Raytheon Company, The Boeing Company and Hughes Electronics Corporation
accounted for approximately 22.5%, 14.6%, 12.9%, 10.9%, 10.3%, and 10.3%,
respectively, of the Company's revenue in 1997. These revenues are a result of
various engagements by several business units of these companies. Although such
business units are affiliated with the parent entities, the Company's experience
has indicated that the particular engagements are subject to the discretion of
each individual business unit.
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
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 Martin and Northrop Grumman submitted bids to the Air Force. In
August 1995,
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Northrop Grumman was eliminated and both Hughes and Lockheed Martin were
awarded $80 million contracts for preliminary work before the selection
of a prime contractor. In November 1996, Lockheed Martin 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 Martin
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 Martin to be performed during 1997.
- 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 significant additional funding on 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 has also supported Motorola in the creation of the
multi-billion dollar Celestri(TM) "bandwidth on demand" space-based
telecommunications 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.
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
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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 News and Defense News.
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
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
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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 2.7% annual employee turnover rate from
January 1, 1995 through December 31, 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.
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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 years ended December 31, 1996 and 1997, the Company's Board of Directors
established levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, as the
Compensation Committee had not yet been formed during those periods. Mr. Myers,
the Company's President, Chief Executive Officer, and Chairman of the Board,
Kenneth W. Colbaugh, the Company's Executive Vice President, Chief Operating
Officer and a director of the Company and Paula K. Myers, then serving as a Vice
President, Secretary and a director of the Company, participated in the
deliberations regarding executive compensation for 1996 and 1997. Mr. Myers, Mr.
Colbaugh and Mr. Lewis, a director of the Company, participated in the
deliberations regarding executive compensation for 1998.
In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers, including Mr. Myers and Mr.
Colbaugh, providing for indemnification rights in certain circumstances. See
"Management -- Indemnification of Officers and Directors." In November 1997, the
Company entered into Executive Employment Agreements with Mr. Myers and Mr.
Colbaugh. See "Management -- Employment Agreements."
The terms of the Bank Facility provide for the maintenance of certain
financial covenants. The Company has obtained a waiver from the bank from
compliance with certain of the covenants, the principal covenant being the
Company's tangible net worth requirement of $(4,450,000) at December 31, 1997.
The waiver is conditioned upon the Company completing an Initial Public
Offering. If the Company does not complete an Initial Public Offering, the
Company's principal shareholder has agreed to provide an amount to the Company,
in the form of subordinated debt, to enable the Company to comply with the
covenants.
In October 1997, Paula K. Myers resigned from all her positions with the
Company, including those as a director and Secretary. Mrs. Myers was paid
compensation from the Company totalling $550,000, $150,000 and $81,000,
respectively, during the Company's fiscal years ended December 31, 1995, 1996
and 1997.
In January 1997, the Company repurchased 1,995,125 shares of its Common
Stock representing 13.4% of its then outstanding Common Stock from the following
officers of the Company: Steven S. Myers, Kenneth W. Colbaugh, Thomas F.
Heinsheimer, Charles A. Cullian, and John W. Montgomery, for an aggregate
purchase price of $5,863,000.
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 rates of
7.30% and 10.07% per annum, and Summit paid the Company $5,000 in cash. The
Aircraft was purchased by the Company in April 1996 for $5,788,000. 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
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through December 31, 1997, the Company incurred $444,000 in charter fees for the
Aircraft. The terms of use and charter rates paid by the Company concerning the
Aircraft are established by the air service chartering company and are
considered by the Company to be competitive with charter rates and on terms as
favorable as those from unaffiliated third parties for similar aircraft.
In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.30% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
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 December 31, 1997, there was a
total of $679,000 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
December 31, 1997, had an outstanding principal balance of $517,000. The note is
payable in monthly installments, expires in 2010 and is secured by the aircraft.
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 $316,000 (the "Colbaugh Note"). The Colbaugh Note
provided for interest at a rate of 7.30% per annum, periodic payments out of
Company income distributions to Mr. Colbaugh, and that all amounts due
thereunder were due and payable in January 2003. In January 1997, Mr. Colbaugh
paid in full all amounts owing under the Colbaugh Note.
In September 1996, J. Christopher Lewis, a director of the Company and a
member of the Compensation Committee, and certain affiliates, purchased an
aggregate of 1,702,444 shares of the Company's Common Stock from other
shareholders of the Company for an aggregate purchase price of $5,000,000, 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."
The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the Offering, other than Underwriting Discounts and Commissions.
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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 years ended December 31, 1996 and 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 1996 and 1997, respectively
exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
FISCAL -----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
<S> <C> <C> <C>
Steven S. Myers 1997 $559,000 $ --
President and Chief Executive Officer 1996 490,000 3,487,325
Kenneth W. Colbaugh 1997 360,000 692,551
Executive Vice President and 1996 360,000 689,364
Chief Operating Officer
Thomas F. Heinsheimer 1997 120,000 339,747
Senior Vice President 1996 75,000 390,246
Ronald A. Hunn 1997 160,000 53,861
Vice President, Chief Financial Officer and Secretary 1996 171,000 60,494
Paula K. Myers(2) 1997 81,000 --
1996 150,000 --
</TABLE>
- -----------------------------
(1) Excludes perquisites and other personal benefits that, in the aggregate, do
not exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for the Named Executive Officer.
(2) Paula K. Myers resigned from her positions as Senior Vice President and
Secretary of the Company in October 1997. Ronald A. Hunn was appointed
Secretary of the Company upon the resignation of Paula K. Myers.
STOCK OPTIONS
The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1997. 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
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<PAGE> 39
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
December 31, 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 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.
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<PAGE> 40
The Bylaws of the Company provide for indemnification of the Company's
officers, directors, employees, and other agents to the extent and under the
circumstances permitted by California law. The Bylaws further provide that no
indemnification shall be made in the case of a derivative suit in respect to any
claim as to which such person has been adjudged to be liable to the corporation,
except with court approval, nor shall indemnification be made for amounts paid
in settling or otherwise disposing of a threatened or pending action, with or
without court approval, or for expenses incurred in defending a threatened or
pending action which is settled or otherwise disposed of without court approval.
Indemnification under the Bylaws is mandatory in the case of an agent of the
Company (present or past) who is successful on the merits in defense of a suit
against him or her in such capacity. In all other cases where indemnification is
permitted by the Bylaws, a determination to indemnify such person must be made
by a majority of a quorum of disinterested directors, a majority of
disinterested shareholders, or the court in which the suit is pending.
The Company has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in the
Articles of Incorporation and Bylaws. Among other things, these agreements
provide that the Company will indemnify, subject to certain requirements, each
of the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Company, on account of services by such person as a director or officer
of the Company, or as a director or officer of any other company or enterprise
to which the person provides services at the request of the Company.
CERTAIN TRANSACTIONS
In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers providing for indemnification rights
in certain circumstances. See "Management -- Indemnification of Officers and
Directors."
In November 1997, the Company entered into Executive Employment Agreements
with (i) Mr. Steven S. Myers, the President, Chief Executive Officer and
Chairman of the Board of the Company, and (ii) Mr. Kenneth W. Colbaugh, the
Executive Vice President, Chief Operating Officer and a director of the Company.
The Executive Employment Agreements were approved by the Company's Board of
Directors. See "Management -- Employment Agreements."
The terms of the Bank Financing provide for the maintenance of certain
financial covenants. The Company has obtained a waiver from the bank from
compliance with certain of the covenants, the principal covenant being the
Company's tangible net worth requirement of $(4,450,000) at December 31, 1997.
The waiver is conditioned upon the Company completing an Initial Public
Offering. If the Company does not complete an Initial Public Offering, the
Company's principal shareholder has agreed to provide an amount to the Company,
in the form of subordinated debt, to enable the Company to comply with the
covenants.
Paula K. Myers, the wife of Steven S. Myers, has served in various
executive capacities to the Company since its founding, recently serving as a
director, Vice President and Secretary of the Company. In October 1997, Mrs.
Myers resigned from all her positions with the Company, including those as a
director and Secretary. Mrs. Myers was paid compensation from the Company
totalling $550,000, $150,000 and $81,000, respectively, during the Company's
fiscal years ended December 31, 1995, 1996 and 1997.
In January 1997, the Company repurchased 1,995,125 shares of its Common
Stock representing 13.4% of its then outstanding Common Stock from the following
officers of the Company: Steven S. Myers, Kenneth W. Colbaugh, Thomas F.
Heinsheimer, Charles A. Cullian, and John W. Montgomery, for an aggregate
purchase price of $5,863,000, 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
39
<PAGE> 41
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 December 31, 1997, the Company incurred $444,000 in charter fees
for the Aircraft. The terms of use and charter rates paid by the Company
concerning the Aircraft are established by the air service chartering company
and are considered by the Company to be competitive with charter rates and on
terms as favorable as those from unaffiliated third parties for similar
aircraft.
In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.3% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
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 December 31, 1997, there was a
total of $679,000 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
December 31, 1997, had an outstanding principal balance of $517,000. The note is
payable in monthly installments, expires in 2010 and is secured by the aircraft.
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 $316,000 (the "Colbaugh Note"). The Colbaugh Note
provided for interest at a rate of 7.30% per annum, periodic payments out of
Company income distributions to Mr. Colbaugh, and that all amounts due
thereunder were due and payable in January 2003. In January 1997, Mr. Colbaugh
paid in full all amounts owing under the Colbaugh Note.
The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the Offering, other than Underwriting Discounts and Commissions.
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<PAGE> 42
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 December 31, 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)....... 8,921,580 69.2% 877,418 8,044,162 53.6%
Kenneth W. Colbaugh and Robin E.
Colbaugh(3)............................... 1,115,076 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)..................... 1,685,415 13.1 0 1,685,415 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 *
James R. Mellor............................. -- * -- -- *
Malcolm R. Currie........................... -- * -- -- *
All directors and executive officers as a
group (8 persons)......................... 12,088,848 93.7 1,023,056 11,065,802 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 in connection with
the Offering.
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<PAGE> 43
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 December 31,
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.
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<PAGE> 44
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,
on or 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."
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<PAGE> 45
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.
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<PAGE> 46
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.
The Common Stock has been 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, LLP, 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, 1996 and 1997, and
for each of the years in the three-year period ended December 31, 1997, have
been included herein and in the Registration Statement, in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
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<PAGE> 47
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.
46
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets -- December 31, 1996 and 1997.......................................... F-3
Statements of Earnings -- Years ended December 31, 1995, 1996 and 1997................ F-4
Statements of Shareholders' Equity -- Years ended December 31, 1995, 1996 and 1997.... F-5
Statements of Cash Flows -- Years ended December 31, 1995, 1996 and 1997.............. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Steven Myers & Associates, Inc.:
We have audited the accompanying balance sheets of Steven Myers &
Associates, Inc. as of December 31, 1996 and 1997 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Steven Myers & Associates,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
January 9, 1998, except for the
common stock conversion
discussed in Note 5
as to which the date is
January 21, 1998
F-2
<PAGE> 50
STEVEN MYERS & ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS (NOTE 4) 1996 1997
<S> <C> <C>
Current assets:
Cash............................................................ $ 1,927,000 $ 150,000
Accounts receivable, net of allowance of $27,000 and $0 at
December 31, 1996 and 1997, respectively..................... 3,637,000 4,245,000
Other accounts receivable....................................... 186,000 8,000
Prepaid expenses and other current assets....................... 45,000 414,000
----------- -----------
Total current assets.................................... 5,795,000 4,817,000
Property and equipment, net (notes 3 and 4)....................... 5,869,000 378,000
Other assets...................................................... 156,000 136,000
----------- -----------
$11,820,000 $ 5,331,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 367,000 $ 333,000
Current portion of long-term debt (note 4)...................... 1,259,000 786,000
Accrued salaries, wages and payroll taxes....................... 3,839,000 2,574,000
Accrued bonus................................................... 474,000 736,000
Other liabilities............................................... 135,000 287,000
----------- -----------
Total current liabilities............................... 6,074,000 4,716,000
Long-term debt, excluding current portion (note 4)................ 4,991,000 6,943,000
----------- -----------
Total liabilities....................................... 11,065,000 11,659,000
Shareholders' equity (deficit) (note 5):
Common stock, no par value. Authorized 50,000,000 shares of
common stock; issued and outstanding 14,895,000 and
12,900,000, at December 31, 1996 and 1997, respectively...... 5,000 5,000
Additional paid-in capital...................................... 316,000 316,000
Stock subscription note receivable (note 2)..................... (51,000) --
Due from shareholder (note 2)................................... (632,000) (679,000)
Retained earnings (accumulated deficit)......................... 1,117,000 (5,970,000)
----------- -----------
Total shareholders' equity (deficit).................... 755,000 (6,328,000)
Commitments (notes 4 and 7).......................................
----------- -----------
$11,820,000 $ 5,331,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 51
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Net revenues............................................ $20,777,000 $25,699,000 $36,962,000
Cost of revenues........................................ 12,313,000 14,512,000 20,529,000
----------- ----------- -----------
Gross profit.................................. 8,464,000 11,187,000 16,433,000
Selling, general and administrative expenses (note 9)... 7,793,000 10,749,000 6,927,000
----------- ----------- -----------
Operating income.............................. 671,000 438,000 9,506,000
Other expense (income):
Interest expense...................................... 62,000 420,000 505,000
Other (income) expense, net........................... (69,000) (556,000) 37,000
----------- ----------- -----------
Earnings before income taxes.................. 678,000 574,000 8,964,000
Income tax expense (note 6)............................. 10,000 9,000 147,000
----------- ----------- -----------
Net earnings.................................. $ 668,000 $ 565,000 $ 8,817,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
================================================================================
PRO FORMA SUPPLEMENTAL DATA (UNAUDITED):
<TABLE>
<S> <C> <C> <C>
Historical earnings before income taxes.............................. $ 574,000 $ 8,964,000
Pro forma adjustment to selling, general and administrative
expenses............................................................. 2,475,000 (1,007,000)
----------- -----------
Pro forma earnings before income taxes............................... 3,049,000 7,957,000
Pro forma income tax expense......................................... 1,219,000 3,183,000
----------- -----------
Pro forma net earnings..................................... $ 1,830,000 $ 4,774,000
========== ==========
Pro forma earnings per share............................... $ .12 $ .37
========== ==========
Weighted average common shares used in the calculation of
pro forma supplemental net income per share.............. 14,893,000 12,948,000
========== ==========
</TABLE>
The pro forma adjustments include the elimination of salaries and bonuses
paid to three principal executive officers (which have historically been
included in selling, general, and administrative expenses) in excess of $2.7
million in the aggregate (the maximum salaries and bonuses payable for 1998
under the Executive Compensation Program) and adjustments for Federal and state
income taxes as if the Company had been taxed as a C corporation rather than an
S corporation.
Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and Series B common stock of the Company into an
aggregate of 12.9 million shares of common stock to be effected upon the
consummation of the initial public offering.
Supplemental net income per share has been computed by dividing
supplemental net income by the weighted average number of shares of common stock
outstanding during the period. Supplemental net income per share information is
calculated under Statement of Financial Accounting Standard No. 128, "Earnings
per Share."
F-4
<PAGE> 52
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
(NOTE 5) STOCK RETAINED TOTAL
--------------------- ADDITIONAL SUBSCRIPTION DUE EARNINGS SHAREHOLDERS'
SHARES PAID-IN NOTE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL RECEIVABLE SHAREHOLDER DEFICIT) (DEFICIT)
----------- ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994, as previously
reported.................. 1,172,000 5,000 316,000 (303,000) -- 96,000 114,000
Exchange of shares.......... 14,895,000 -- -- -- -- -- --
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...................... 14,895,000 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...................... 14,895,000 5,000 316,000 (51,000) (632,000) 1,117,000 755,000
Net earnings................ -- -- -- -- -- 8,817,000 8,817,000
Collection of stock
subscription receivable... -- -- -- 51,000 -- -- 51,000
Note due from shareholder
(note 2).................. -- -- -- -- (47,000) -- (47,000)
Dividends declared (note
9)........................ -- -- -- -- -- (10,041,000) (10,041,000)
Repurchase and retirement of
common stock.............. (1,995,000) -- -- -- -- (5,863,000) (5,863,000)
---------- ------ -------- ---------- ----------- ----------- ------------
Balance at December 31,
1997...................... 12,900,000 $5,000 $316,000 $ -- $ (679,000) $(5,970,000) $ (6,328,000)
========== ====== ======== ========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 53
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................... $ 668,000 $ 565,000 $ 8,817,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for doubtful accounts................ -- 27,000 (27,000)
Depreciation and amortization.................. 175,000 448,000 139,000
Gain on sale of fixed asset.................... -- -- (137,000)
Changes in assets and liabilities:
Accounts receivable.......................... (713,000) (1,377,000) (581,000)
Other accounts receivables................... (2,000) (183,000) 178,000
Prepaid expenses and other current assets.... (18,000) (20,000) (369,000)
Other assets................................. (3,000) (133,000) 20,000
Accounts payable............................. (34,000) 300,000 (34,000)
Accrued salaries, wages and payroll taxes.... 408,000 2,487,000 (1,265,000)
Accrued bonus................................ 14,000 132,000 262,000
Other liabilities............................ (292,000) 135,000 152,000
--------- ----------- ------------
Net cash provided by operating
activities.............................. 203,000 2,381,000 7,155,000
--------- ----------- ------------
Cash flows from investing activities:
Net purchases of property and equipment........... (325,000) (5,890,000) (146,000)
Proceeds from sale of fixed assets................ -- -- 6,000
Due to (from) shareholder......................... 200,000 (632,000) (47,000)
--------- ----------- ------------
Net cash used in investing activities..... (125,000) (6,522,000) (187,000)
--------- ----------- ------------
Cash flows from financing activities:
Increase in long-term debt........................ 63,000 5,645,000 7,108,000
Distribution to shareholders...................... (212,000) -- (10,041,000)
Repurchase of common stock........................ -- -- (5,863,000)
Decrease in stock subscription note receivable.... 98,000 154,000 51,000
--------- ----------- ------------
Net cash provided by (used in) financing
activities.............................. (51,000) 5,799,000 (8,745,000)
--------- ----------- ------------
Net increase (decrease) in cash........... 27,000 1,658,000 (1,777,000)
Cash at beginning of period......................... 242,000 269,000 1,927,000
--------- ----------- ------------
Cash at end of period............................... $ 269,000 $ 1,927,000 $ 150,000
========= =========== ============
Supplemental disclosures:
Cash paid during the year for:
Interest....................................... $ 64,000 $ 421,000 $ 505,000
Income taxes................................... $ 1,000 $ -- $ 100,000
========= =========== ============
</TABLE>
Supplemental schedule of noncash investing activity:
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 notes payable of $5,630,000 (note 4).
See accompanying notes to financial statements.
F-6
<PAGE> 54
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Steven Myers & Associates, Inc. (the Company) was incorporated in
California on January 25, 1985. The Company's primary business is providing
proposal management and contract support services.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the double declining and straight-line method over the estimated useful lives of
the assets. Estimated useful lives range from five to ten years.
Revenue Recognition
The Company derives most of its revenue from professional service
activities. The majority of these activities are provided under "time and
expenses" billing arrangements, and revenues are recorded as work is performed.
Revenues are directly related to the total number of hours billed to clients and
the associated hourly billing rates. Revenues are also derived from success fees
offered to clients as a pricing option, and recorded as revenue only upon the
attainment of the specified incentive criteria. This success fee is billable by
the Company when a contract is won by the client.
Income Taxes
The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code and similar statutes in the state of
California. Accordingly, the Company's taxable income is treated as if it were
distributed to the shareholders, who are responsible for payment of taxes
thereon. Additionally, in accordance with state laws regarding S corporations,
the Company is subject to a 1.5% California franchise tax. Deferred taxes are
provided on items for which there are temporary differences in recording such
items for financial and income tax reporting purposes.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, other accounts
receivables, accounts payable and other accrued liabilities are measured at cost
which approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Supplemental Net Income per Share
Historical net income per common share is not presented because it is not
meaningful.
(2) STOCK SUBSCRIPTION NOTE RECEIVABLE AND DUE FROM SHAREHOLDER
In 1993, the Company entered into a stock subscription agreement with an
officer of the Company for common stock valued at $316,000. Included in the
accompanying balance sheet is a stock subscription
F-7
<PAGE> 55
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
receivable balance of $51,000 at December 31, 1996. The stock subscription
receivable balance was paid in full during 1997.
Included in shareholders' equity at December 31, 1996 and 1997 are amounts
due from an officer and principal shareholder of the Company totaling $632,000
and $679,000, respectively. The incremental increase of $47,000 represents
interest accrued at a rate of 7.3%. This balance is to be paid by February 1,
1998 by offsetting dividends to the shareholder against the receivable.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
<S> <C> <C>
Aircraft and automobile........................... $ 6,746,000 $ 958,000
Furniture and equipment........................... 385,000 511,000
Leasehold improvements............................ -- 19,000
----------- -----------
7,131,000 1,488,000
Less accumulated depreciation..................... (1,262,000) (1,110,000)
----------- -----------
$ 5,869,000 $ 378,000
=========== ===========
</TABLE>
(4) DEBT
In 1995, the Company refinanced an aircraft loan for the corporate aircraft
(Turbo Commander). The new agreement provided for a long-term note in the
principal amount of $560,000, of which there was a remaining principal balance
of $536,000 and $517,000 at December 31, 1996 and 1997, respectively. The note
bears annual interest at a fixed rate of 10.74% and is payable monthly, expiring
in June 2010. The note is secured by the aircraft.
In April 1996, the Company purchased a Hawker 800 jet for $5,788,000 and
financed the purchase through a bank. The financing arrangement consisted of a
note in the amount of $4,962,000 bearing interest at 10.07%, payable annually,
with the full principle balance due and payable in April 2001. The note is
secured by the Hawker jet. In January 1997, the Company sold the Hawker jet to a
company which is owned by an officer and principal shareholder.
The Company also financed the acquisition of an automobile and certain
office equipment through capital leases. These leases bear interest at 7.25% and
15.71%, respectively, and are payable monthly. Future minimum lease payments
under these capital lease agreements as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................ $ 32,000
1999............................................................ 31,000
2000............................................................ 10,000
--------
73,000
Less amount representing interest................................. (10,000)
--------
Present value of minimum lease payments...................... 63,000
Less current portion.............................................. (26,000)
--------
$ 37,000
========
</TABLE>
F-8
<PAGE> 56
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On January 2, 1997, the Company entered into a credit agreement with a bank
under which it may borrow up to $8,000,000. The agreement, as amended on July
21, 1997, has two parts: a $4,000,000 revolving line of credit is available with
a sub-limit of $2,000,000 to finance a portion of the repurchase of the
Company's stock and a $4,000,000 term loan which is also available to finance
the repurchase of Company stock. Bank debt at December 31, 1997 consisted of
$3,659,000 and $3,490,000 outstanding under the revolving line of credit and the
term loan, respectively, which amounts were used by the Company for general
corporate purposes and to fund the purchase of Company stock from various
shareholders. The revolving line of credit bears interest at the Bank's prime
rate of 8.5% at December 31, 1997 and is due January 2, 1999. The term loan
expires in 2001, is payable in graduated quarterly installments ranging from
$170,000 to $230,000, and bears interest at LIBOR plus 2.50%. The term loan
interest rate was 8.66% at December 31, 1997. The loans are secured by
substantially all of the Company's assets.
A summary of debt is provided as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
<S> <C> <C>
Bank debt.................................................. $ -- $7,149,000
Aircraft loans............................................. 5,498,000 517,000
Shareholder note payable................................... 667,000 --
Capital leases............................................. 85,000 63,000
----------- ----------
6,250,000 7,729,000
Less current portion of long-term debt..................... (1,259,000) (786,000)
----------- ----------
$ 4,991,000 $6,943,000
=========== ==========
</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.
The terms of the bank agreement provide for the maintenance of financial
covenants. The Company has obtained a waiver from the bank from compliance with
certain of the covenants, the principal covenant being the Company's tangible
net worth requirement of $(4,450,000) at December 31, 1997. The waiver is
conditioned upon the Company completing an Initial Public Offering. If the
Company does not complete an Initial Public Offering, the Company's principal
shareholder has agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.
On January 9, 1997, the Company sold its Hawker jet to SAI, a company owned
by one of the shareholders, for a purchase price of approximately $5,635,000.
Concurrent with the sale, the Company transferred $5,630,000 of long-term notes
payable to SAI bearing interest at rates of 7.30% and 10.07% per annum,
respectively, and SAI paid the Company $5,000 in cash. The sale was finalized
and recorded in the second quarter of 1997 and resulted in a gain of $137,000.
(5) COMMON STOCK
In November 1994, the Board of Directors approved the recapitalization of
the Company through the amendment of the Articles of Incorporation. The
amendment authorized all outstanding common shares to be exchanged for a new
series of common stock designated as Series A. In total, up to 1,000,000 shares
of Series A common stock were authorized. Additionally, the issuance of up to
2,000,000 shares of a new Series B common stock were authorized. The Series A
and Series B common stock are identical in all respects
F-9
<PAGE> 57
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and have equal rights and privileges, except that Series B common stock has no
voting rights. The amendment had no effect on the ownership structure of the
Company.
On January 21, 1998, the Company amended its articles of incorporation to
authorize the issuance of up to 50,000,000 shares of common stock and up to
10,000,000 shares of preferred stock. On that same date, the Company converted
each issued and outstanding share of Series A and B common stock into 12.7078
shares of common stock, or an aggregate of 12,900,000 Shares outstanding as of
December 31, 1997. The Statements of Shareholders' Equity has been revised to
reflect this conversion.
(6) INCOME TAXES
For all periods presented, the Company has provided for income taxes at the
appropriate California statutory state income tax rate imposed on S
Corporations.
The provision for income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
State...................................... $ 10,000 $9,000 $147,000
======= ====== ========
</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 December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................... $ 435,000
1999........................................... 451,000
2000........................................... 468,000
2001........................................... 487,000
2002........................................... 492,000
Thereafter..................................... 2,478,000
----------
$4,811,000
==========
</TABLE>
Rent expense totaled $177,000, $184,000 and $392,000 for years ended
December 31, 1995, 1996 and 1997, respectively.
(8) CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
majority of the Company's receivables are from large companies in the
F-10
<PAGE> 58
STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
aerospace and defense industries. The Company controls credit risk through
credit approvals and monitoring procedures. Credit losses have historically been
minimal.
Revenue from major customers is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
<S> <C> <C> <C>
Customer:
A 23% 19% 10%
B 27 23 22
C -- 10 10
D -- -- --
E 10 18 13
F 10 -- --
G -- -- 11
H -- -- 15
</TABLE>
(9) COMPENSATION TO THREE SENIOR EXECUTIVE SHAREHOLDERS
Included in selling, general and administrative expense is total
compensation paid to three senior executive shareholders in the amount of
$4,642,000, $5,175,000 and $1,693,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
In fiscal 1997, the Company changed the manner of distributions to
shareholders. Dividends in the amount of $10,041,000 were declared and paid
during fiscal 1997.
(10) EMPLOYEE BENEFIT PLAN AND STOCK OPTION PLAN
The Steven Myers & Associates 401(k) Plan and Trust is a defined
contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan
covers all employees of the Company. Contributions are made to the Plan by
participants only.
The Company adopted the 1997 Stock Option Plan in December 1997. The 1997
Stock Option Plan, which is administered by the Compensation Committee of the
Board of Directors, provides for the granting of options to purchase an
aggregate of 1,500,000 shares of the Company's common stock to directors,
employees, and consultants of the Company. Upon consummation of the Offering,
the Company intends to grant to certain employees and directors of the Company
options to purchase of 790,000 shares of common stock. The exercise price per
share will be equal to the initial public offering price.
F-11
<PAGE> 59
======================================================
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
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 23
Management................................. 33
Certain Transactions....................... 39
Principal and Selling Shareholders......... 41
Description of Capital Stock............... 42
Shares Eligible For Future Sale............ 43
Underwriting............................... 44
Legal Matters.............................. 45
Experts.................................... 45
Additional Information..................... 46
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> 60
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............................................ 50,000
Blue sky qualification fees and expenses.......................... 7,000*
Legal fees and expenses........................................... 225,000*
Accountants' fees and expenses.................................... 200,000*
Transfer agent and registrar fees................................. 2,000*
Miscellaneous..................................................... 5,000*
--------
Total................................................... $633,511*
========
</TABLE>
- -----------------------------
* Estimated
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> 61
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> 62
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, LLP.+
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.**
10.14 Security and Loan Agreement and Addendum, Exhibit "A" -- Waiver to Certain
Provisions between Imperial Bank and the Registrant.**
23.1 Consent of KPMG Peat Marwick LLP.+
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith as
Exhibit 5.1).+
24 Power of Attorney.**
27 Financial Data Schedule.**
</TABLE>
- ---------------
** Previously filed.
+ Filed herewith.
II-3
<PAGE> 63
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> 64
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 26, 1998.
STEVEN MYERS & ASSOCIATES, INC.
By: /s/ RONALD A. HUNN
------------------------------------
Ronald A. Hunn,
Vice President of Finance,
Chief Financial Officer
and Secretary
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>
* Chairman of the Board, January 26, 1998
- ------------------------------------------ President and
Steven S. Myers Chief Executive Officer
(Principal Executive Officer)
* Director, Executive Vice January 26, 1998
- ------------------------------------------ President and
Kenneth W. Colbaugh Chief Operating Officer
* Director January 26, 1998
- ------------------------------------------
J. Christopher Lewis
/s/ RONALD A. HUNN Vice President of Finance, January 26, 1998
- ------------------------------------------ Chief Financial Officer and
Ronald A. Hunn Secretary (Principal
Financial
Officer and Principal
Accounting Officer)
* Director January 26, 1998
- ------------------------------------------
James R. Mellor
* Director January 26, 1998
- ------------------------------------------
Malcolm R. Currie
*By: /s/ RONALD A. HUNN January 26, 1998
- ------------------------------------------
Ronald A. Hunn,
attorney-in-fact
</TABLE>
II-5
<PAGE> 65
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, LLP+.......................................
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**..................
10.14 Security and Loan Agreement and Addendum, Exhibit "A" -- Waiver to
Certain Provisions between Imperial Bank and the Registrant**.........
23.1 Consent of KPMG Peat Marwick LLP+.....................................
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith
as Exhibit 5.1)+......................................................
24 Power of Attorney**...................................................
27 Financial Data Schedule**.............................................
</TABLE>
- ---------------
** Previously filed.
+ Filed herewith.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
Steven S. Myers and Ronald A. Hunn hereby certify that:
1. They are the President and Secretary, respectively, of Steven Myers
& Associates, Inc., a California corporation (the "Corporation").
2. The Articles of Incorporation of this Corporation are amended and
restated in full to read as follows:
I.
The name of this corporation is "STEVEN MYERS & ASSOCIATES,
INC."
II.
The purpose of this Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the
trust company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
III.
A. Classes of Stock. This Corporation is authorized to issue
two classes of stock to be designated, respectively, as "Common Stock"
and "Preferred Stock." The total number of shares which the Corporation
is authorized to issue is sixty million (60,000,000) shares. Fifty
million (50,000,000) shares shall be Common Stock and ten million
(10,000,000) shares shall be Preferred Stock. Upon the amendment and
restatement of this Article III to read as hereinabove set forth, each
share of issued and outstanding Series A Common Stock shall be
converted into 12.707844 shares of Common Stock, and each share of
issued and outstanding Series B Common Stock shall be converted into
12.707844 shares of Common Stock.
B. Rights, Preferences and Restrictions of Preferred Stock.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions),
redemption price or prices, and the liquidation preferences of any
wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series
subsequent to the issuance of that series, but not below the number of
shares of
<PAGE> 2
such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease
shall resume the status they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
IV.
The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
V.
The Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code)
through bylaw provisions, agreements with agents, approval of
shareholders or disinterested directors or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in
Section 204 of the California Corporations Code with respect to actions
for breach of duty to the Corporation and its shareholders.
Any repeal or modification of this Article shall be
prospective and shall not affect the rights under this Article in
effect at the time of the alleged occurrence of any act or omission to
act giving rise to liability or indemnification.
3. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of the shareholders of the Corporation in
accordance with Section 902 of the Corporations Code. The total number of
outstanding Series A shares of this Corporation is 202,292 shares. The total
number of outstanding Series B shares of this Corporation is 812,819 shares. The
number of shares voting in favor of the amendment and restatement equaled or
exceed the vote required. The percentage vote required was more than 50% of the
outstanding shares of Series A Common Stock voting as a separate class and more
than 50% of the outstanding shares of Series A Common Stock and Series B Common
Stock voting together as a class.
-2-
<PAGE> 3
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
DATED: January 19, 1998 /s/ Steven S. Myers
--------------------------------------
Steven S. Myers, President
/s/ Ronald A. Hunn
--------------------------------------
Ronald A. Hunn, Secretary
-3-
<PAGE> 1
EXHIBIT 5.1
January 22, 1998
Steven Myers & Associates, Inc.
4695 MacArthur Court, Eighth Floor
Newport Beach, CA 92660
Gentlemen:
At your request, we have examined the form of Registration Statement on
Form S-1 (the "Registration Statement") which has been filed by Steven Myers &
Associates, Inc. (the "Company") with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"), for the purpose
of registering 3,622,500 shares of Common Stock of the Company (including
1,050,000 shares registered on behalf of selling shareholders and 472,500 shares
which may be sold by selling shareholders pursuant to the exercise of the
underwriters' over-allotment option).
We have examined the proceedings relating to the issuance of your
presently outstanding shares of Common Stock and are also familiar with
proceedings taken and proposed to be taken in connection with the issuance and
sale of securities in the manner set forth in the Registration Statement, as
amended.
Subject to the completion of the proceedings contemplated in connection
with the foregoing matters, we are of the opinion that:
(i) all of the issued and outstanding securities of the Company have
been duly and validly authorized and issued, and are fully paid and
nonassessable; and
(ii) all of the securities included in the Registration Statement for
sale by the Company have been duly authorized and, when issued and sold in the
manner set forth in the Registration Statement will, upon such issuance and
sale, be validly and legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Respectfully submitted,
RUTAN & TUCKER, LLP
<PAGE> 1
EXHIBIT 10.4
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") dated as of
January 9, 1997, among STEVEN MYERS & ASSOCIATES, INC., a California
corporation (the "Assignor"), SUMMIT AVIATION, INC., a California corporation
(the "Assignee"), and NATIONSBANC LEASING CORPORATION OF NORTH CAROLINA, a
North Carolina corporation ("Secured Party").
Reference is made to (a) the Aircraft Security Agreement (the "Security
Agreement") dated as of April 25, 1996, among the Assignor, as Debtor, and
Secured Party, as Secured Party as more particularly described on Annex I
attached hereto, (b) the Secured Promissory Note (the "Note") dated April 25,
1996, from the Assignor to the Secured Party, (c) the Guarantees (the
"Guarantees") dated April 25, 1996, from Mr. Steven Myers and Mrs. Paula Myers
(each a "Guarantor" collectively, the "Guarantors") to the Secured Party and
(d) the Aircraft (the "Aircraft") described in the Security Agreement. Loans
made to the Assignor by the Secured Party under the Security Agreement in the
aggregate principal amount of $4,962,248.28 are outstanding as of the date
hereof.
The Assignor and the Assignee are proposing that Assignor sell the
Aircraft to Assignee (the "Transaction"), and in connection therewith, the
Assignee will assume the due and punctual payment of all amounts payable by the
Assignor under, and the due and punctual performance and observance of all the
terms, covenants, agreements and conditions of, the Security Agreement and the
Note to the same extent as if the Assignee had been the original party to the
Security Agreement and the Note. As a condition to the Transaction, the Secured
Party has required that such assumption be separately evidenced by this
Agreement and that the Guarantors each enter into a new guarantee (a "New
Guarantee") in substantially the form of the Guarantees.
Accordingly, the Assignor and the Assignee, intending to be legally bound,
hereby agree with the Secured Party as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Security Agreement.
SECTION 2. Assignment and Assumption. The Assignor hereby assigns,
transfers and conveys to the Assignee, as the new owner of the Aircraft, all of
the Assignor's rights, interests, duties, obligations and liabilities in, to
and arising under the Security Agreement and the Note. The Assignee hereby
accepts and acknowledges its assumption of the Security Agreement and the Note
and assumes all of the obligations of the Assignor under the Security Agreement
and the Note, including the due and punctual payment of the principal of and
interest on the Loan, when and as due, and the due and punctual performance and
observance of all the terms, covenants, agreements and conditions of the
Security Agreement and the Note to be performed or observed by the Assignor, to
the same extent as if the Assignee had been the original party the Security
Agreement and the Note (collectively, the "Assigned Obligations"). Upon the
execution and delivery hereof by the Assignor, the Assignee and the Secured
Party and upon the
<PAGE> 2
satisfaction of all the conditions set forth in Exhibit "A" hereto, the
Assignee shall, as of the date hereof, succeed to the rights and be obligated
to perform the Assigned Obligations. The filing of this Agreement with the FAA
shall be deemed evidence of the satisfaction of the conditions set forth in
Exhibit "A" hereto.
SECTION 3. Release. Upon the assignment to, and assumption by, Assignee
of all of the rights and Assigned Obligations, Assignor shall be released of
its duties, obligations and liabilities under the Security Agreement and the
Note.
SECTION 4. Representations and Warranties. Each of the Assignor and the
Assignee represents and warrants with respect to itself to the Secured Party
that (a) all representations and warranties made by it in the Security
Agreement, before the Transaction with respect to Assignor, and after the
Transaction with respect to Assignee, are and will be true and correct in all
material respects, except to the extent such representations and warranties
expressly relate to an earlier date, in which case they will be true and
correct as of such specific date, and (b) all conditions set forth in Exhibit
"A" hereto have been satisfied.
SECTION 5. Indemnification. Each of the Assignor and the Assignee agrees
to indemnify the Secured Party, its affiliates and its directors, officers,
agents and employees (each an "Indemnitee") and hold each Indemnitee harmless
from and against any and all liabilities, losses, damages, costs and expenses
of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee by reason of
any breach of or inaccuracy in the representations, warranties and covenants
made by the Assignor or Assignee in this Agreement on and as of the date hereof.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
SECTION 7. Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
SECTION 8. Consent of the Secured Party. Secured Party hereby consents
to the transfer of the Aircraft to the Assignee, the charter of the Aircraft by
the Assignee to the Assignor and the assignment and assumption of the Security
Agreement and the Note pursuant to the terms hereof. Secured Party hereby
waives the requirements of Section 4.3(a) of the Security Agreement solely for
this transfer but not for any other transfers.
SECTION 9. Amendment of Security Agreement. Section 4.3(a) of the
Security Agreement is hereby amended in its entirety to read as follows:
"(a) Conveyance of Interest in Collateral. Sell, lease, assign,
transfer, convey, Grant an interest in, exchange or otherwise dispose of
any of the Collateral, any part thereof or any interest therein or
otherwise cause or permit any of the foregoing to occur; provided, that
Debtor may enter into an aircraft charter agreement with a carrier
appropriately certified under Part 135 of FAR so long as such charter
agreement is subject and subordinate to the Security
-2-
<PAGE> 3
Agreement; provided further, that the Aircraft and Debtor are at all
times in compliance with all statutes, laws, ordinances, regulations
and standards or directives relating to the Aircraft and the use or
operation thereof issued by any governmental agency with jurisdiction
over Debtor or the Aircraft, the non-compliance with which would have
a material adverse effect on the Aircraft, the Secured Party or the
Secured Party's security interest in the Aircraft."
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
STEVEN MYERS & ASSOCIATES, INC.,
as Assignor
By /s/ STEVEN S. MYERS
-----------------------------------
Name: Steven S. Myers
Title: President
SUMMIT AVIATION, INC.,
as Assignee
By /s/ STEVEN S. MYERS
-----------------------------------
Name: Steven S. Myers
Title: President
NATIONSBANC LEASING CORPORATION OF
NORTH CAROLINA,
as Secured Party
By /s/ HERBERT T. THURAU
-----------------------------------
Name: Herbert T. Thurau
Title: Senior Vice President
-4-
<PAGE> 5
EXHIBIT "A"
CONDITIONS TO ASSIGNMENT AND ASSUMPTION
In order to be entitled to the rights and be obligated to perform the
Assumed Obligations, Assignee must provide, at Assignee's sole cost and
expense, to the Secured Party, the following documentation:
1. Assignment and Assumption Agreement executed by the parties thereto;
2. Federal Aviation Administration ("FAA") Bill of Sale from Assignor to
Assignee;
3. the New Guarantees;
4. Uniform Commercial Code filings as deemed appropriate by the Secured
Party's counsel duly executed by Assignee;
5. the FAA Aircraft Registration Application in the name of the Assignee
regarding the Aircraft;
6. evidence of payment of any and all sales, transfer, use, documentation
or similar taxes due in connection with the acquisition of the
Aircraft by Assignee;
7. certificates of insurance required under Section 5.1 of the Security
Agreement amended to reflect the change in ownership of the Aircraft;
8. Opinion of FAA counsel;
9. Opinion of counsel to Assignee;
10. good standing certificates from the Secretary of State of Assignee's
state of incorporation and for the state where the home airport for
the Aircraft is located; and
11. an officer's certificate from Assignee (A) certifying as to
Assignee's articles of incorporation, by-laws and resolutions (B)
containing an incumbency certificate of Assignee including the
name(s), title(s) and specimen signature(s) of the person(s)
authorized on behalf of Assignee to execute the Assignment and
Assumption Agreement, (C) stating that no material adverse change has
occurred in the condition of the Assignee (financial or otherwise)
since the most recent financial statements of Assignee were delivered
to Secured Party that would impair the ability of Assignee to pay or
perform its obligations hereunder and (D) stating that no Default or
Event of Default shall have occurred and be continuing as of the date
hereof.
<PAGE> 6
ANNEX I
DESCRIPTION OF SECURITY AGREEMENT
Aircraft Loan and Security Agreement dated as of April 25, 1996 between
Steven Myers & Associates, Inc., as debtor, and NationsBanc Leasing Corporation
of North Carolina, as secured party, which was recorded by the Federal
Aviation Administration on May 1, 1996 and assigned Conveyance No. P06580.
<PAGE> 7
GUARANTEE
FOR VALUE RECEIVED and in consideration of any financial accommodations now or
hereafter made to Summit Aviation, Inc. (together with its successors and
assigns, "Obligor"), which accommodations will be to the direct interest and
advantage of the undersigned, by NationsBanc Leasing Corporation of North
Carolina ("NationsBanc"), and to induce NationsBanc from time to time to make
any such accommodations to Obligor and/or enter into any loan or lease
agreement with Obligor with regard to any such accommodations, the undersigned
and NationsBanc agree as follows:
I. CHARACTER OF OBLIGATION.
The undersigned hereby unconditionally guarantees the full payment and
performance by Obligor of all such financial accommodations, including all
interest and other charges with respect thereto, and including all obligations
of Obligor under any promissory note, loan agreement, lease, conditional sales
contract, security agreement, instrument of lien, security deed or other
security device in favor of NationsBanc, and all other obligations of Obligor
to NationsBanc, however and whenever incurred or evidenced, whether direct or
indirect, absolute or contingent, or due or to become due (hereafter the
"Obligations"). The obligation of the undersigned hereunder is primary and
unconditional and shall be enforceable before, concurrently or after any claim
or demand made or suit filed against Obligor or any other guarantor or surety,
and before, concurrently or after any proceeding by NationsBanc against any
security. The obligation of the undersigned shall be effective regardless of
(i) the solvency or insolvency of Obligor at any time, (ii) the extension or
modification of the Obligations by operation of law or (iii) any other change
in Obligor's composition, nature, personnel or location. The obligation
hereunder may be considered by NationsBanc either as a guaranty or an agreement
of surety. All sums owing hereunder shall be deemed to become immediately due
and payable if (a) Obligor defaults in any of the Obligations or under any
material agreement with NationsBanc; (b) Obligor or the undersigned becomes
insolvent or unable to pay debts as they mature or admits in writing to such
effect, makes a conveyance fraudulent as to creditors under any state or federal
law, makes an assignment for the benefit of creditors, or any proceeding is
instituted by or against Obligor or the undersigned alleging that Obligor or
the undersigned is insolvent or unable to pay debts as they mature, or a
petition under any provision of Title 11 of the United States Code as amended,
is brought by or against Obligor or the undersigned and, in the case of a
petition or proceeding which is brought by a third party, such petition or
proceeding is not removed within thirty (30) days; (c) a receiver is appointed
for any part of the property or assets of Obligor or the undersigned; (d) there
occurs the sale, transfer or exchange, either directly or indirectly, of a
controlling interest of the Obligor other than as permitted under the Guarantee
dated December __, 1996 by Steven Myers to NationsBanc for the benefit of
Obligor; or (e) any statement, representation or warranty at any time furnished
or made by Obligor or the undersigned to NationsBanc is untrue in any material
respect as of the date made or furnished. Payment of any sum or sums due to
NationsBanc hereunder will then be made by the undersigned immediately upon
demand by NationsBanc. To the extent that NationsBanc receives payment of the
Obligations, which payment is thereafter set aside or required to be repaid in
whole or in part, then, to the extent of any sum not finally retained by
NationsBanc, the obligation of the undersigned hereunder shall remain in full
force and effect (or be reinstated).
<PAGE> 8
The undersigned agrees to pay all costs of NationsBanc of collection of any sum
or sums due hereunder, and, if collected by or through an attorney, all
attorneys' fees together with all other legal and court expenses. The
undersigned hereby transfers and conveys to NationsBanc any and all of its
balances, credits, deposits, accounts, items and monies now or hereafter in
possession or control of, or otherwise with NationsBanc, and NationsBanc is
hereby given a security interest upon and in all property of the undersigned of
every kind and description now or hereafter in the possession or control of
NationsBanc for any reason, including all dividends and distributions or other
rights in connection therewith.
II. CONSENT AND WAIVER.
The undersigned waives notice of acceptance hereof, creation of any of the
Obligations, or nonpayment or default by Obligor under any of the Obligations or
any agreement now or hereafter existing between Obligor and NationsBanc,
presentment, demand, notice of dishonor, protest and any other notices whatever.
The undersigned, without affecting its liability hereunder, consents to and
waives notice of all changes of terms of the Obligations, the withdrawal or
extension of credit or time to pay, the release of the whole or any part of the
Obligations, renewal, indulgence, settlement, compromise or failure to exercise
due diligence in collection, the acceptance or release of security, extension of
the time to pay for any period or periods whether or not longer than the
original period, or any surrender, substitution or release of any other person
directly or indirectly liable for any of the Obligations or any collateral
security given by Obligor. The undersigned waives any provisions of North
Carolina law, including any and all rights under Section 26-7 through Section
26-9 of the North Carolina General Statutes (or any similar provisions of other
jurisdictions), relating to the undersigned's rights to discharge upon the
undersigned's giving notice to NationsBanc to proceed against Obligor for
collection after the Obligations are due and payable and the failure or refusal
of NationsBanc thereupon to commence an action or foreclose any collateral
within any specified time period or at any time. The undersigned also consents
to and waives notice of any arrangements of settlements made in or out of court
in the event of receivership, liquidation, readjustment, any proceeding under
Title 11 of the United States Code, as amended, or assignment for the benefit of
creditors of Obligor, and anything whatever whether or not herein specified
which may be done or waived by or between NationsBanc and Obligor, or Obligor
and any other person whose claim against Obligor has been or shall be assigned
or transferred to NationsBanc. The undersigned agrees that it shall have no
right of subrogation, reimbursement or indemnity, whatsoever and no right or
recourse to or with respect to any assets or property of Obligor or to any
collateral for the Obligations, even upon payment in full of the Obligations.
The undersigned agrees that if any notification of intended disposition of
collateral or of any other act by NationsBanc is required by law and a specific
time period is not stated therein, such notification, if mailed by first class
mail at least five (5) days before such disposition or act, postage prepaid,
addressed to the undersigned either at the address shown below or at any other
address of the undersigned appearing on the records of NationsBanc, shall be
deemed reasonably and properly given. NationsBanc may, without notice of any
kind, sell, assign or transfer any or all of the Obligations and the Guarantee
and in such event each and every immediate and successive assignee, transferee
or holder of any of the Obligations shall have the right to enforce this
Guarantee, by suit or otherwise for the benefit of such assignee, transferee or
holder, as fully as if such assignee, transferee or holder were herein, by name
specifically given such rights, powers and benfits; NationsBanc shall have an
unimpaired right prior and superior to
-2-
<PAGE> 9
that of any such assignee, transferee or holder to enforce this Guarantee for
the benefit of NationsBanc as to such of the Obligations as is not sold,
assigned or transferred.
III. CONSTRUCTION.
This Guarantee shall be governed by and constructed and enforced in accordance
with the laws of the State of North Carolina. Wherever possible, each provision
of this Guarantee shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Guarantee shall be
prohibited by or invalid under applicable law, said provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Guarantee. This Guarantee does not supersede any other guaranty, jointly
or severally, in favor of NationsBanc. If more than one party shall execute
this Guarantee, the term undersigned shall mean all and each of them, who shall
be jointly and severally liable hereunder.
IV. Benefit.
This Guarantee shall bind the undersigned, its successors and assigns, and the
rights and privileges of NationsBanc hereunder shall inure to the benefit of
its successors and assigns, and this Guarantee shall be effective with respect
to accommodations made by NationsBanc's successors and assigns to Obligor.
[Signatures appear on the following page.]
-3-
<PAGE> 10
Signed and sealed this _____ day of December, 1996.
/s/ PAULA K. MYERS
---------------------------
Paula Myers
Address: 5 Summit
Irvine CA 92612
Acceptance:
The foregoing Guarantee is accepted in Charlotte, North Carolina this
__________ day of December, 1996.
NATIONSBANC LEASING CORPORATION
OF NORTH CAROLINA
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 11
GUARANTEE
FOR VALUE RECEIVED and in consideration of any financial accommodations now or
hereafter made to Summit Aviation, Inc. (together with its successors and
assigns, "Obligor"), which accommodations will be to the direct interest and
advantage of the undersigned, by NationsBanc Leasing Corporation of North
Carolina ("NationsBanc"), and to induce NationsBanc from time to time to make
any such accommodations to Obligor and/or enter into any loan or lease
agreement with Obligor with regard to any such accommodations, the undersigned
and NationsBanc agree as follows:
I. CHARACTER OF OBLIGATION.
The undersigned hereby unconditionally guarantees the full payment and
performance by Obligor of all such financial accommodations, including all
interest and other charges with respect thereto, and including all obligations
of Obligor under any promissory note, loan agreement, lease, conditional sales
contract, security agreement, instrument of lien, security deed or other
security device in favor of NationsBanc, and all other obligations of Obligor
to NationsBanc, however and whenever incurred or evidenced, whether direct or
indirect, absolute or contingent, or due or to become due (hereafter the
"Obligations"). The obligation of the undersigned hereunder is primary and
unconditional and shall be enforceable before, concurrently or after any claim
or demand made or suit filed against Obligor or any other guarantor or surety,
and before, concurrently or after any proceeding by NationsBanc against any
security. The obligation of the undersigned shall be effective regardless of
(i) the solvency or insolvency of Obligor at any time, (ii) the extension or
modification of the Obligations by operation of law or (iii) any other change
in Obligor's composition, nature, personnel or location. The obligation
hereunder may be considered by NationsBanc either as a guaranty or an agreement
of surety. All sums owing hereunder shall be deemed to become immediately due
and payable if (a) Obligor defaults in any of the Obligations or under any
material agreement with NationsBanc; (b) Obligor or the undersigned becomes
insolvent or unable to pay debts as they mature or admits in writing to such
effect, makes a conveyance fraudulent as to creditors under any state or
federal law, makes an assignment for the benefit of creditors, or any proceeding
is instituted by or against Obligor or the undersigned alleging that Obligor or
the undersigned is insolvent or unable to pay debts as they mature, or a
petition under any provision of Title 11 of the United States Code, as amended,
is brought by or against Obligor or the undersigned and, in the case of a
petition or proceeding which is brought by a third party, such petition or
proceeding is not removed within thirty (30) days; (c) a receiver is appointed
for any part of the property or assets of Obligor or the undersigned; (d) there
occurs the sale, transfer or exchange, either directly or indirectly, of a
controlling interest of the Obligor other than as permitted hereunder; or (e)
any statement, representation or warranty at any time furnished or made by
Obligor or the undersigned to NationsBanc is untrue in any material respect as
of the date made or furnished. Payment of any sum or sums due to NationsBank
hereunder will then be made by the undersigned immediately upon demand by
NationsBanc. To the extent that NationsBanc receives payment of the
Obligations, which payment is thereafter set aside or required to be repaid in
whole or in part, then, to the extent of any sum not finally retained by
NationsBanc, the obligation of the undersigned hereunder shall remain in full
force and effect (or be reinstated). The undersigned agrees to pay all costs
of NationsBanc of collection of any sum or sums due
<PAGE> 12
hereunder, and, if collected by or through an attorney, all attorneys' fees
together with all other legal and court expenses. The undersigned hereby
transfers and conveys to NationsBanc any and all of its balances, credits,
deposits, accounts, items and monies now or hereafter in possession or control
of, or otherwise with NationsBanc, and NationsBanc is hereby given a security
interest upon and in all property of the undersigned of every kind and
description now or hereafter in the possession or control of NationsBanc for any
reason, including all dividends and distributions or other rights in connection
therewith.
II. CONSENT AND WAIVER.
The undersigned waives notice of acceptance hereof, creation of any of the
Obligations, or nonpayment or default by Obligor under any of the Obligations
or any agreement now or hereafter existing between Obligor and NationsBanc,
presentment, demand, notice of dishonor, protest and any other notices
whatever. The undersigned, without affecting its liability hereunder, consents
to and waives notice of all changes of terms of the Obligations, the withdrawal
or extension of credit or time to pay, the release of the whole or any part of
the Obligations, renewal, indulgence, settlement, compromise or failure to
exercise due diligence in collection, the acceptance or release of security,
extension of the time to pay for any period or periods whether or not longer
than the original period, or any surrender, substitution or release of any
other person directly or indirectly liable for any of the Obligations or any
collateral security given by Obligor. The undersigned waives any provisions of
North Carolina law, including any and all rights under Section 26-7 through
Section 26-9 of the North Carolina General Statutes (or any similar provisions
of other jurisdictions), relating to the undersigned's rights to discharge upon
the undersigned's giving notice to NationsBanc to proceed against Obligor for
collection after the Obligations are due and payable and the failure or refusal
of NationsBanc thereupon to commence an action or foreclose any collateral
within any specified time period or at any time. The undersigned also consents
to and waives notice of any arrangements of settlements made in or out of court
in the event of receivership, liquidation, readjustment, any proceeding under
Title 11 of the United States Code, as amended, or assignment for the benefit
of creditors of Obligor, and anything whatever whether or not herein specified
which may be done or waived by or between NationsBanc and Obligor, or Obligor
and any other person whose claim against Obligor has been or shall be assigned
or transferred to NationsBanc. The undersigned agrees that it shall have no
right of subrogation, reimbursement or indemnity, whatsoever and no right or
recourse to or with respect to any assets or property of Obligor or to any
collateral for the Obligations, even upon payment in full of the Obligations.
The undersigned agrees that if any notification of intended disposition of
collateral or of any other act by NationsBanc is required by law and a specific
time period is not stated therein, such notification, if mailed by first class
mail at least five (5) days before such disposition or act, postage prepaid,
addressed to the undersigned either at the address shown below or at any other
address of the undesigned appearing on the records of NationsBanc, shall be
deemed reasonably and properly given. NationsBanc may, without notice of any
kind, sell, assign or transfer any or all of the Obligations and the Guarantee
and in such event each and every immediate and successive assignee, transferee
or holder of any of the Obligations shall have the right to enforce this
Guarantee, by suit or otherwise for the benefit of such assignee, transferee or
holder, as fully as if such assignee, transferee or holder were herein, by name
specifically given such rights, powers and benefits; NationsBanc shall have an
unimpaired right prior and superior to
-2-
<PAGE> 13
that of any such assignee, transferee or holder to enforce this Guarantee for
the benefit of NationsBanc as to such of the Obligations as is not sold,
assigned or transferred.
III. COVENANTS.
(a) The undersigned agrees to maintain the insurance subject to the Life
Insurance Assignment (as such term is defined in the Aircraft Loan and Security
Agreement dated as of April 25, 1996, as amended, by and between Steven Myers &
Associates, Inc. and NationsBanc, and assigned to Obligor) and to pay on a
timely basis all premiums relating to such insurance. Failure to maintain such
insurance and pay such premiums shall be a default under this Guarantee.
(b) The undesigned shall not sell, assign, convey, transfer or exchange,
either directly or indirectly, a controlling interest in Obligor to anyone
other than a family trust or other entity, in each case controlled by the
undersigned.
IV. CONSTRUCTION.
This Guarantee shall be governed by and constructed and enforced in accordance
with the laws of the State of North Carolina. Wherever possible, each
provision of this Guarantee shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Guarantee shall be prohibited by or invalid under applicable law, said
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guarantee. This Guarantee does not supersede any
other guaranty or other agreement executed by the undersigned, or any of them,
or any other guaranty, jointly or severally, in favor of NationsBanc. If more
than one party shall execute this Guarantee, the term undersigned shall mean all
and each of them, who shall be jointly and severally liable hereunder.
V. BENEFIT.
This Guarantee shall bind the undersigned, its successors and assigns, and the
rights and privileges of NationsBanc hereunder shall inure to the benefit of
its successors and assigns, and this Guarantee shall be effective with respect
to accommodations made by NationsBanc's successors and assigns to Obligor.
[Signatures appear on the following page.]
-3-
<PAGE> 14
Signed and sealed this ____ day of December, 1996.
/s/ STEVEN S. MYERS
--------------------------------
Steven Myers
Address: 5 Summit
Irvine, CA 92612
Acceptance:
The foregoing Guarantee is accepted in Charlotte, North Carolina this ____ day
of December, 1996.
NATIONSBANC LEASING CORPORATION
OF NORTH CAROLINA
By:
-------------------------------
Name:
------------------------------
Title:
------------------------------
<PAGE> 15
<TABLE>
<S><C>
- -----------------------------------------------------------------
UNITED STATES OF AMERICA FORM APPROVED
U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION OMB NO. 2120-0042
AIRCRAFT BILL OF SALE
- -----------------------------------------------------------------
FOR AND IN CONSIDERATION OF $ THE
UNDERSIGNED OWNER(S) OF THE FULL LEGAL
AND BENEFICIAL TITLE OF THE AIRCRAFT DESCRIBED
AS FOLLOWS:
- -----------------------------------------------------------------
UNITED STATES
REGISTRATION NUMBER N 850SM
- -----------------------------------------------------------------
AIRCRAFT MANUFACTURER & MODEL
British Aerospace BAe12S Series 800A
- -----------------------------------------------------------------
AIRCRAFT SERIAL No.
258074
- ------------------------------------------------------------------
DOES THIS DAY OF DECEMBER 1996
HEREBY SELL, GRANT, TRANSFER AND
DELIVER ALL RIGHTS, TITLE, AND INTERESTS Do Not Write in This Block
IN AND TO SUCH AIRCRAFT UNTO: FOR FAA USE ONLY
- ----------------------------------------------------------------------------------------------
P NAME AND ADDRESS
U (IF INDIVIDUAL(S), GIVE LAST NAME, FIRST NAME, AND MIDDLE INITIAL)
R
C Summit Aviation
H 1301 Dove Street, Suite 720
A Newport Beach, California 92660
S
E
R ------------------------------------------------------------------------------------------
DEALER CERTIFICATE NUMBER
- ----------------------------------------------------------------------------------------------
AND TO its successors XXXXXXXXXXXXXXXXXX AND ASSIGNS TO HAVE AND TO HOLD
SINGULARLY THE SAID AIRCRAFT FOREVER, AND WARRANTS THE TITLE THEREOF.
- ----------------------------------------------------------------------------------------------
IN TESTIMONY WHEREOF I HAVE SET MY HAND AND SEAL THIS DAY OF Dec. 1997
- ----------------------------------------------------------------------------------------------
NAME(S) OF SELLER SIGNATURE(S) TITLE
(TYPED OR PRINTED) (IN INK) (IF EXECUTED (TYPED OR PRINTED)
FOR CO-OWNERSHIP, ALL
MUST SIGN)
---------------------------------------------------------------------------
S Steven Myers & /s/ STEVEN S. MYERS President
E Associates, Inc.
L ---------------------------------------------------------------------------
L
E
R ---------------------------------------------------------------------------
|
---------------------------------------------------------------------------
|
|
- --------------------------------------------------------------------------------
ACKNOWLEDGEMENT (NOT REQUIRED FOR PURPOSES OF FAA RECORDING; HOWEVER, MAY BE
REQUIRED BY LOCAL LAW FOR VALIDITY OF THE INSTRUMENT)
|
ORIGINAL: TO FAA |
- ----------------------------------------------------------------------------------------------
AC Form 8050-2 (9/92) (NSN 0052-00-629-000S) Supersedes Previous Edition
|
SIGN
HERE
</TABLE>
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Steven Myers & Associates, Inc.:
We consent to the use of our report included in Amendment No. 4 to the
Registration Statement on Form S-1 (no. 333-40725) and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Orange County, California
January 26, 1998
