<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 20, 1998
SM&A CORPORATION
------------------
(Exact name of registrant as specified in its Charter)
California 0-23585 33-0080929
---------- ------- ----------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 975-1550
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 20, 1998, SM&A Corporation (formerly, Steven Myers &
Associates, Inc.) ("SM&A") acquired Decision-Science Applications, Inc. ("DSA"),
a Virginia corporation, in a forward-triangular merger (the "Acquisition"). The
Acquisition was achieved pursuant to an Agreement and Plan of Reorganization and
Merger (the "Merger Agreement"), dated July 22, 1998, by and among SM&A, DSA,
DSA Acquisition, Inc. ("Sub"), a California corporation, a wholly-owned
subsidiary of SM&A, and certain individual shareholders named therein. Pursuant
to the Merger Agreement, DSA was merged with and into Sub, with Sub surviving as
a wholly-owned subsidiary of SM&A. In connection with the Acquisition, the
shareholders of DSA received an aggregate of 714,839 shares of SM&A Common Stock
and $14,035,419 in cash on a pro rata basis as set forth in the Merger
Agreement. In determining the aggregate purchase price for DSA, SM&A took into
account the value of companies of similar industry and size to DSA, comparable
transactions, and the market for such companies generally.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements of Business Acquired. The audited financial
statements of Decision-Science Applications, Inc. filed with this report are
listed in the Index to Financial Statements on page F-1 of this report.
Pro Forma Financial Information. The pro forma financial statements for
the combined companies filed with this report are listed in the Index to
Financial Statements on page F-1 of this report.
<TABLE>
<CAPTION>
Exhibits.
---------
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger, dated July 22,
1998, by and among Registrant, Decision-Science Applications,
Inc. and certain individual shareholders named therein.*
10.1 Registration Rights Agreement dated August 20, 1998 by and among
Registrant and certain shareholders set forth therein.*
10.2 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Guy A. Ackerson.*
10.3 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Gary L. Lucas.*
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
10.4 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Dana R. Raucher.*
10.5 Escrow Agreement dated August 20, 1998 by and among Registrant,
Decision-Science Applications, Inc., First American Trust
Company and certain shareholders identified therein.*
99.1 Text of Press Release dated July 22, 1998.*
99.2 Text of Press Release dated August 21, 1998.*
* Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated August 20, 1998 and filed August 21,
1998.
</TABLE>
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 20, 1998 SM&A Corporation
By: /s/ STEVEN R. MAST
---------------------------------------
Steven R. Mast, Chief Financial Officer
<PAGE> 5
Index To Financial Statements
To Current Report On Form 8-K/A
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
(a) Financial Statements of Business Acquired
Independent Auditors' Report ...............................................F-1
Consolidated Balance Sheets as of January 31, 1998 and 1997 ................F-2
Consolidated Statements of Earnings for the Years Ended January 31,1998,
1997 and 1996 ............................................................F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
January 31, 1998, 1997 and 1996 ..........................................F-4
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1998, 1997 and 1996...........................................F-5
Notes to Consolidated Financial Statements as of January 31,
1998, 1997, and 1996 .....................................................F-6
Unaudited Consolidated Balance Sheet as of July 31, 1998 ...................F-12
Unaudited Consolidated Statements of Operations for the Six Months
Ended July 31, 1998 and 1997 .............................................F-13
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 1998 and 1997 ......................................F-14
Unaudited Statements of Stockholders' Equity for the Six
Months Ended July 31, 1998 and 1997 ......................................F-15
Notes to Unaudited Consolidated Financial Statements as of
July 31, 1998.............................................................F-16
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Balance Sheet of SM&A Corporation
and Subsidiaries as of June 30, 1998 ....................................F-18
Notes to Unaudited Pro Forma Combined Balance Sheet as of
June 30, 1998 ...........................................................F-19
Unaudited Pro Forma Condensed Combined Statement of Operations of SM&A
Corporation and Subsidiaries for the Six Months Ended June 30, 1998......F-20
Unaudited Pro Forma Condensed Combined Statement Of Operations of SM&A
Corporation and Subsidiaries for the Twelve Months Ended
December 31, 1997 .......................................................F-21
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
for the Six Months Ended June 30, 1998 and Twelve Months Ended December 31,
1997 ......................................................................F-22
</TABLE>
(c) Exhibits:
None
<PAGE> 6
Report of Independent Auditors
To the Board of Directors of Decision-Science Applications, Inc.:
We have audited the accompanying consolidated balance sheets of Decision-Science
Applications, Inc. and subsidiary as of January 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Decision-Science
Applications, Inc. and subsidiary as of January 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
April 13, 1998
F-1
<PAGE> 7
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 30,831 $ 698,321
Accounts receivable ........................................ 12,687,706 10,174,220
Prepaid expenses and other assets .......................... 276,821 236,490
Refundable income taxes .................................... 697,000 --
------------ ------------
Total current assets ............................... 13,692,358 11,109,031
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and equipment .................................... 4,067,829 3,437,679
Leasehold improvements ..................................... 506,656 429,603
------------ ------------
4,574,485 3,867,282
Less accumulated depreciation and amortization ............. (3,366,054) (2,743,567)
------------ ------------
1,208,431 1,123,715
------------ ------------
OTHER ASSETS:
Capitalized software development costs -- net of
accumulated amortization -- $732,067 and $494,294,
respectively ............................................ 1,486,527 1,107,241
DEFERRED TAXES ON INCOME ..................................... 250,700 --
------------ ------------
$ 16,638,016 $ 13,339,987
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank ....................................... $ 1,795,000 $ --
Accounts payable and accrued expenses ...................... 939,709 565,807
Accrued salaries, benefits, and amounts withheld ........... 2,771,725 2,955,129
Unearned revenue ........................................... 144,799 237,362
Income taxes payable ....................................... -- 524,000
Deferred taxes on income ................................... 4,088,000 2,559,500
------------ ------------
Total current liabilities .......................... 9,739,233 6,841,798
------------ ------------
LONG-TERM NOTES PAYABLE ...................................... 20,739 19,162
ACCRUED RENT ................................................. 374,879 523,006
DEFERRED TAXES ON INCOME ..................................... -- 322,000
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share; authorized,
1,000,000 shares; issued, 115,900 shares ................ 1,159 1,159
Retained earnings .......................................... 6,568,185 6,160,061
------------ ------------
6,569,344 6,161,220
Less shares of Common Stock in treasury, at cost -- 8,076
shares -- 1998; 29,467 shares -- 1997 ................... (66,179) (527,199)
------------ ------------
6,503,165 5,634,021
------------ ------------
$ 16,638,016 $ 13,339,987
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 8
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CONTRACT REVENUES....................... $ 36,888,310 $ 30,670,236 $ 24,203,744
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of contract services............. 31,263,866 25,241,811 19,938,474
General and administrative............ 2,732,497 2,320,676 1,663,409
Other expenses........................ 1,988,284 1,045,209 671,231
------------ ------------ ------------
35,984,647 28,607,696 22,273,114
------------ ------------ ------------
903,663 2,062,540 1,930,630
INTEREST AND OTHER INCOME............... 112,630 163,962 86,423
INTEREST EXPENSE........................ (11,026) (29,986) (28,515)
------------ ------------ ------------
EARNINGS BEFORE TAXES ON INCOME......... 1,005,267 2,196,516 1,988,538
TAXES ON INCOME......................... 391,000 900,500 724,200
------------ ------------ ------------
NET EARNINGS............................ $ 614,267 $ 1,296,016 $ 1,264,338
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 9
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------ -------------------------
RETAINED
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1995 .... 115,900 $ 1,159 $ 3,656,082 39,509 $ (659,843) $ 2,997,398
Net earnings ............... -- -- 1,264,338 -- -- 1,264,338
Stock option plan activity . -- -- (86,476) (7,232) 175,299 88,823
Repurchase of common stock . -- -- -- 7,161 (197,580) (197,580)
Tax benefit from exercise of
stock options ........... -- -- 44,400 -- -- 44,400
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 1996 .... 115,900 1,159 4,878,344 39,438 (682,124) 4,197,379
Net earnings ............... -- -- 1,296,016 -- -- 1,296,016
Stock option plan activity . -- -- (126,899) (15,257) 372,893 245,994
Repurchase of common stock . -- -- -- 5,286 (217,968) (217,968)
Tax benefit from exercise of
stock options ........... -- -- 112,600 -- -- 112,600
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 1997 .... 115,900 1,159 6,160,061 29,467 (527,199) 5,634,021
Net earnings ............... -- -- 614,267 -- -- 614,267
Stock option plan activity . -- -- (206,143) (26,363) 686,005 479,862
Repurchase of common stock . -- -- -- 4,972 (224,985) (224,985)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 1998 .... 115,900 $ 1,159 $ 6,568,185 8,076 $ (66,179) $ 6,503,165
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 10
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net earnings to net cash (used in)
provided by operating activities:
Net earnings ......................................... $ 614,267 $ 1,296,016 $ 1,264,338
Depreciation and amortization ........................ 860,260 605,940 723,695
Write-off of investment in joint venture ............. 270,000 -- --
Interest added to principal of notes payable ......... 1,577 1,535 1,543
Deferred taxes on income ............................. 955,900 373,325 683,594
Accrued rent ......................................... (148,127) (316,284) (299,281)
Decrease (increase) in:
Accounts receivable ............................... (2,513,486) 102,703 (1,608,119)
Prepaid expenses and other assets ................. (40,331) (143,981) 30,442
Refundable income taxes ........................... (697,000) 149,000 384,000
Increase (decrease) in:
Accounts payable and accrued expenses ............. 373,802 175,530 (386,321)
Accrued salaries, benefits, and amounts withheld .. (183,404) 1,103,574 156,145
Unearned revenue .................................. (92,563) 157,955 (13,712)
Income taxes payable .............................. (524,000) 524,000 --
----------- ----------- -----------
Net cash (used in) provided by operating
activities ................................. (1,123,105) 4,029,313 936,324
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................... (707,203) (485,125) (441,644)
Capitalized software development costs ............... (617,059) (583,212) (437,909)
Investment in joint venture .......................... (270,000) -- --
----------- ----------- -----------
Net cash used in investing activities ........ (1,594,262) (1,068,337) (879,553)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit agreement ............ 1,795,000 -- 2,300,000
Repayments under line-of-credit agreement ............ -- (2,300,000) (2,250,000)
Repayments of long-term notes payable ................ -- (1,805) --
Stock option plan activity ........................... 479,862 245,994 88,823
Repurchase of common stock ........................... (224,985) (217,968) (197,580)
----------- ----------- -----------
Net cash provided by (used in) financing
activities ................................. 2,049,877 (2,273,779) (58,757)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ... (667,490) 687,197 (1,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........... 698,321 11,124 13,110
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................. $ 30,831 $ 698,321 $ 11,124
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest ............... $ 9,449 $ 33,739 $ 28,515
=========== =========== ===========
Cash paid during the year for taxes .................. $ 656,141 $ 1,688 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Reduction in current tax liability resulting from tax
benefit from exercise of stock options ............ $ -- $ 112,600 $ 44,400
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 11
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Decision-Science Applications, Inc. (the Company) is
a privately owned technical services corporation. DSA's key areas of expertise
are in information systems, software development, electrical engineering,
telecommunications and physics.
Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, DSA Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Contract Revenues -- Substantially all the Company's services are performed for
the United States Government under various cost reimbursable and fixed-price
contracts. For financial reporting purposes, the Company records revenue from
fixed-price contracts on the percentage-of-completion method and from cost-
reimbursable contracts, including cost-plus-fixed-fee contracts, on the basis of
reimbursable costs plus a pro rata portion of the fee. Contract costs for
services supplied to the U.S. Government, including indirect expenses, are
subject to audit by the Government's representatives. All contract revenues are
recorded in amounts that are expected to be realized upon final settlement.
Government audits have been completed through fiscal year 1997.
Software Revenues -- The Company has a Master Development and Distribution
Agreement for the licensing of several software products to a manufacturer of
test instruments. The Company receives royalties from the instrument
manufacturer as software product units are sold and distributed. The Company
recognizes royalty revenue as payments are received from the instrument
manufacturer.
Unbilled Receivables -- Unbilled receivables include certain costs and a portion
of the fee or expected profit which is billable upon completion of the contracts
or the completion of certain tasks under terms of the contracts.
Depreciation and Amortization -- The cost of furniture and equipment is
depreciated from the date of installation using accelerated and straight-line
methods over the estimated useful lives of the various classes of property,
which range from five to eight years.
The cost of leasehold improvements is amortized on the straight-line method
based on the shorter of the estimated useful lives of the improvements or
remaining lease period.
Capitalized Software Development Costs -- The Company capitalizes certain
product related software development costs after technological feasibility has
been reached. These costs are amortized on the greater of the straight-line
method over the product's remaining estimated economic life or the ratio of the
product's current gross revenues to the total of the product's current and
anticipated future gross revenues. Amortization costs for the years ended
January 31, 1998, 1997, and 1996, were approximately $238,000, $104,000, and
$180,000, respectively.
Income Taxes -- Income taxes are accounted for using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
utilizes the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the
future tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-6
<PAGE> 12
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
Cash and Cash Equivalents -- For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Stock Option Plan -- The Company accounts for its stock-based compensation plan
under APB Opinion No. 25. In 1997, the Company adopted the disclosures
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Reclassifications -- Certain reclassifications have been made to prior-year
balances to conform to the current-year presentation.
2. INVESTMENT IN JOINT VENTURE
On January 1, 1996, the Company entered into an agreement which established SMD
Software LLC, a limited liability company (LLC), with SpaceLabs Medical, Inc.
The Company contributed internally developed software for a 45% interest. The
book value of the contributed software was $0.00. During fiscal year 1998, the
Company made an additional capital contribution of $270,000 to the joint
venture. This additional investment was subsequently written down to $0.00
because of the uncertainty of future earnings from the joint venture and the
realizability of this investment. Therefore, no investment has been recorded in
the financial statements of the Company as of and for the years ended January
31, 1997 and 1998. The investment is accounted for under the equity method.
Profits or losses are allocated based upon the respective ownership interest of
each partner.
The Company recorded approximately $700,000 and $1,000,000 of revenues from
sales to SMD Software LLC, during the years ended January 31, 1998 and 1997,
respectively.
3. ACCOUNTS RECEIVABLE
At January 31, accounts receivable consisted of the following:
1998 1997
----------- -----------
Billed .. $11,607,341 $ 9,486,590
Unbilled 1,080,365 687,630
----------- -----------
$12,687,706 $10,174,220
=========== ===========
4. NOTE PAYABLE TO BANK
Effective June 30, 1997, the Company renewed a line of credit with a bank to
provide for borrowings up to $2,750,000 at 1/2 of 1% over the bank's prime rate,
secured by all accounts receivable of the Company. Borrowings at January 31,
1998, amounted to $1,795,000. The agreement requires the Company to maintain
certain working capital and other financial ratios. The agreement, unless
renewed, expires on June 30, 1999.
F-7
<PAGE> 13
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
5. LONG-TERM NOTES PAYABLE
At January 31, notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Notes payable to employees and employees' families: the
notes bear interest at prime less 1/2 of 1%; the
balance includes principal and accumulated interest
and is payable eighteen months after written request
from the holders of the notes and is subordinated to
any Company bank indebtedness; at the Company's
discretion, payments may be made prior to the due
date................................................ $20,739 $ 19,162
======= ========
</TABLE>
6.TAXES ON INCOME
The provision for taxes on income includes the following for the years ended
January 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal .................. $(271,000) $ 495,200 $ 36,000
State .................... (116,000) 116,800 5,200
--------- --------- ---------
(387,000) 612,000 41,200
--------- --------- ---------
Deferred:
Federal .................. 623,000 167,300 605,000
State .................... 155,000 121,200 78,000
--------- --------- ---------
778,000 288,500 683,000
--------- --------- ---------
$ 391,000 $ 900,500 $ 724,200
========= ========= =========
</TABLE>
Deferred Income Taxes -- The principal components of the deferred portion of the
provision for income taxes for the years ended January 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Accrual to cash conversion ........ $ 814,000 $ 351,000 $ 827,000
Capitalized software .............. 133,000 (168,000) (90,000)
Net operating loss ................ (227,000) -- (79,000)
Other ............................. (97,000) (15,700) (53,000)
State income taxes ................ 155,000 121,200 78,000
--------- --------- ---------
$ 778,000 $ 288,500 $ 683,000
========= ========= =========
</TABLE>
The approximate tax effect of each type of temporary difference that gave rise
to the Company's deferred tax liability at January 31, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current:
Accrual to cash conversion ............... $(3,009,000) $(2,208,000)
Capitalized software ..................... (521,000) --
State taxes .............................. (558,000) (403,000)
Other .................................... -- 52,000
----------- -----------
Current deferred tax liability ............. $(4,088,000) $(2,559,000)
=========== ===========
</TABLE>
F-8
<PAGE> 14
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Noncurrent:
Alternative minimum tax credit .................. $ 227,000 $ --
Capitalized software ............................ -- (388,000)
Fixed asset basis difference .................... 23,700 86,000
Other ........................................... -- (20,000)
--------- ---------
Noncurrent deferred tax asset (liability) ......... $ 250,700 $(322,000)
========= =========
</TABLE>
Effective and Statutory Rate Reconciliation - The differences between
the effective rate in the provision for income taxes and the statutory rate for
federal income taxes for the years ended January 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate ......... 35% 35% 35%
========= ========= =========
Provision computed at federal
statutory rate ............................ $ 352,000 $ 769,000 $ 696,000
State income taxes, net of federal benefit 39,000 86,000 43,000
Other ..................................... -- 45,500 (14,800)
--------- --------- ---------
$ 391,000 $ 900,500 $ 724,200
========= ========= =========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company maintains a profit-sharing retirement plan and trust, which
is qualified as to form under Sections 40l(a) and 401(k) of the Internal Revenue
Code. It is Company policy to contribute annually an amount equal to a certain
percentage of qualified employees' salaries. Employees may elect to make
voluntary contributions on either a pretax or after-tax basis, or both, subject
to certain plan and statutory limitations. The Company's contributions for the
years ended January 31, 1998, 1997, and 1996, were $1,187,800, $1,211,744, and
$1,027,475, respectively.
The Company has an Employee Stock Ownership Plan, which is qualified
under Section 401(a) of the Internal Revenue Code. All permanent employees with
two years' service are eligible for the plan. Only the Company may contribute to
the plan. All contributions are discretionary and may be paid in cash or in
shares of Company stock. Contributions will be allocated to eligible
participants based on the ratio that each such eligible participant's
compensation for the plan year bears to the total compensation of all such
eligible participants for the plan year. The Company made no contributions
during the years ended January 31, 1998, 1997, and 1996.
8. STOCKHOLDERS' EQUITY
In accordance with the terms of a stock purchase agreement, the Company
has an option to repurchase outstanding shares should certain events, as defined
in the agreement, occur. The repurchase price is the book value of stock as of
the end of the month in which such events occur.
The Company has a stock option plan which allows for the granting of
incentive options to Company officers and employees to purchase shares of common
stock at an option price set by the Board of Directors to approximate fair
market value on the date of the grant. All options granted expire five years
from the date of grant. A total of 750,000 shares of common stock has been
reserved for this plan.
F-9
<PAGE> 15
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
Stock option activity for the years ended January 31, 1998, 1997, and
1996, is as follows:
<TABLE>
<CAPTION>
END OF YEAR
---------------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING OPTION PRICE EXERCISABLE OPTION PRICE
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at February 1, 1995 132,134 $ 19.07
Granted.................... 63,220 $ 27.96
Exercised.................. (7,232) $ 12.28
Canceled................... (14,959) $ 16.82
-----------
Outstanding at January 31, 1996 173,163 $ 23.79 154,794 $21.77
=========== ======
Granted.................... 38,490 $ 36.78
Exercised.................. (15,257) $ 24.44
Canceled................... (16,720) $ 25.78
Forfeited.................. (2,526) $ 25.78
-----------
Outstanding at January 31, 1997 177,150 $ 26.34 114,285 $23.24
=========== ======
Granted.................... 12,655 $ 44.32
Exercised.................. (26,363) $ 26.02
Canceled................... (57,663) $ 21.09
Forfeited.................. (2,859) $ 17.20
-----------
Outstanding at January 31, 1998 102,920 $ 31.84 67,093 $29.27
=========== =========== ======
Option Price Range........... $21.46 to $44.32
</TABLE>
In 1997, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to continue
to account for its stock-based compensation plan under APB Opinion No. 25. For
SFAS No. 123 purposes, the fair value of each option has been estimated as of
the date of grant using the minimum value method with a risk-free interest rate
of 6% and an expected life of approximately five years. Using these assumptions,
the fair value of the stock options is approximately $139,000, $437,000, and
$350,000 for the years ended January 31, 1998, 1997, and 1996, respectively,
which would be amortized over the vesting period of the options. Had
compensation expense been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net earnings for the years ended
January 31, 1998, 1997, and 1996, would be reduced to the following pro forma
amounts:
<TABLE>
<S> <C>
1998
Net income:
As reported $ 614,267
Pro forma.. 590,693
1997
Net income:
As reported $1,296,016
Pro forma.. 1,227,884
1996
Net income:
As reported $1,264,338
Pro forma.. 1,236,358
</TABLE>
The resulting pro forma compensation expense may not be representative
of that expected in future years.
F-10
<PAGE> 16
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
9. COMMITMENTS
Lease Obligations -- The Company leases office space in Virginia, Texas,
Colorado, and New York. The lease of the New York facility expires in 2001. The
lease of the San Antonio facility expires in 2003. The lease of the Colorado
facility expires in 2000. The lease of the Virginia facility provides for a rent
abatement arrangement during the first two years of the lease term that expires
in 1999. The Company is accounting for the cost of these leases by recognizing
rent expense on a straight-line basis over the lease term. The leases contain an
escalation clause related to increases in the Consumer Price Index and provides
options for both extension and expansion. During the year the Company acquired
additional spaces in Virginia and Texas Offices, which did not affect the lease
expiration periods. The following is a composite schedule, by year, of minimum
rental payments as of January 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31, AMOUNT
- ----------------------------- ------------
<S> <C>
1999........................ $ 2,082,000
2000........................ 273,000
2001........................ 194,000
2002........................ 160,000
2003........................ 13,000
-----------
Total minimum lease payments $ 2,722,000
===========
</TABLE>
Rental expense for the years ended January 31, 1998, 1997, and 1996, was
$1,915,241, $1,708,531, and $1,614,624, respectively. Rental of a portion of the
Company's leased space in Virginia resulted in revenue of $64,100, $58,759, and
$13,035, for the years ended January 31, 1998, 1997, and 1996, respectively.
F-11
<PAGE> 17
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JULY 31, 1998
--------------
<S> <C>
Current Assets:
Cash and cash equivalents ................................... $ 2,845,647
Accounts receivable ......................................... 9,772,605
Prepaid expenses and other current assets ................... 305,879
------------
Total current assets ..................................... $ 12,924,131
------------
Property and Equipment:
Furniture and equipment ..................................... 4,313,653
Leasehold improvements ...................................... 559,665
------------
4,873,318
Less accumulated depreciation and amortization .............. (3,684,454)
------------
Net furniture, equipment and leaseholds .................. 1,188,864
------------
Other Assets:
Capitalized software development costs ...................... 1,670,208
Equity in joint venture ..................................... 66,272
Deferred taxes on income .................................... 250,700
------------
Total assets ............................................. $ 16,100,175
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 1,024,540
Accrued salaries, benefits, and amounts withheld ............ 5,981,742
Unearned revenue ............................................ 375,967
Income taxes payable ........................................ 764,356
------------
Total current liabilities ................................ 8,146,605
Notes payable, excluding current portion ...................... 21,633
Accrued rent .................................................. 214,646
------------
Total liabilities ........................................ 8,382,884
------------
Stockholders' Equity:
Common stock ................................................ 1,159
Retained earnings ........................................... 7,716,132
------------
Total stockholders' equity ............................... 7,717,291
------------
Total liabilities and stockholders' equity ............... $ 16,100,175
============
</TABLE>
See notes to unaudited consolidated financial statements.
F-12
<PAGE> 18
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Contract revenues ............................... $ 16,476,655 $ 17,587,526
Costs and expenses:
Costs and contract services ................... 9,134,107 10,607,323
General and administrative .................... 8,679,076 5,464,108
Other expenses ................................ 17,553 60,594
------------ ------------
Total costs and expenses of revenues ....... 17,830,736 16,132,025
------------ ------------
Operating income (loss) ......................... (1,354,081) 1,455,501
Interest and other income ....................... 51,328 70,873
Interest expense ................................ 22,450 4,300
------------ ------------
Earnings (loss) before income taxes ............. (1,325,203) 1,522,074
Income tax expense (benefit) .................... (526,000) 623,600
------------ ------------
Net earnings (loss) ............................. $ (799,203) $ 898,474
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
F-13
<PAGE> 19
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ............................ $ (799,203) $ 898,474
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization .................. 520,354 354,364
Accrued rent ................................... (160,233) (14,019)
Interest added to notes payable ................ 894 1,853
Deferred taxes on income ....................... -- 623,600
Changes in:
Accounts receivable ......................... 2,915,101 (1,685,248)
Prepaid expenses and other current assets ... 667,942 61,057
Accounts payable ............................ 84,831 786,731
Accrued expenses ............................ 3,210,017 (138,952)
Unearned revenue ............................ 231,168 --
Income taxes payable ........................ (1,225,644) (634,249)
----------- -----------
Net cash provided by operating activities . 5,445,227 253,611
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ............. (298,833) (422,936)
Increase capitalized software .................. (385,635) (338,083)
Investment in joint venture .................... (66,272) --
----------- -----------
Net cash used in investing activities ..... (750,740) (761,019)
----------- -----------
Cash flows from financing activities:
Borrowings under line-of-credit agreement ...... 500,000 --
Repayments under line-of-credit agreement ...... (2,295,000) --
Stock option plan activity ..................... (1,559) 67,865
Repurchase of common stock ..................... (83,112) --
----------- -----------
Net cash (used in) provided by
financing activities ............................. (1,879,671) 67,865
----------- -----------
Net increase (decrease) in cash and cash ......... 2,814,816 (439,543)
equivalents
Cash and cash equivalents, beginning of period ... 30,831 698,321
----------- -----------
Cash and cash equivalents, end of period ......... $ 2,845,647 $ 258,778
=========== ===========
</TABLE>
Supplemental disclosure of non-cash activities: Income taxes payable as
of July 31, 1998 has been reduced by $2.098 million as a result of a
current income tax benefit from the repurchase of stock options prior to
the acquisition.
See notes to unaudited consolidated financial statements.
F-14
<PAGE> 20
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------ ------------------------
RETAINED
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997 .... 115,900 $ 1,159 $ 6,160,061 29,467 $ (527,199) $ 5,634,021
Net earnings ............... -- -- 898,474 -- -- 898,474
Stock option plan activity . -- -- (132,771) (5,470) 227,031 94,260
Repurchase of common stock . -- -- -- 612 (26,396) (26,396)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1997 ....... 115,900 $ 1,159 $ 6,925,764 24,609 $ (326,564) $ 6,600,359
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------ ------------------------
RETAINED
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1998 ...... 115,900 $ 1,159 $ 6,568,185 8,076 $ (66,179) $ 6,503,165
Net loss ..................... -- -- (799,203) -- -- (799,203)
Stock option plan activity ... -- -- (1,559) (560) 15,527 13,968
Repurchase of common stock ... -- -- -- 1,160 (98,639) (98,639)
Write-off of treasury stock
at acquisition ............. -- -- (149,291) (8,676) 149,291 --
Tax benefit of stock option
buyback .................... -- -- 2,098,000 -- -- 2,098,000
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1998 ......... 115,900 $ 1,159 $ 7,716,132 -- $ -- $ 7,717,291
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-15
<PAGE> 21
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Decision-Science Applications, Inc. and Subsidiary ("DSA") have been prepared on
a basis consistent with the rules of the Securities and Exchange Commission for
Reports on Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles. The
information furnished herein includes all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of results for these interim periods.
The results of operations for the six months ended July 31, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
In addition, these financial statements should be read in conjunction
with DSA's audited financial statements and notes thereto for the year ended
January 31, 1998.
NOTE 2. BUSINESS COMBINATION
On August 20, 1998, DSA was acquired by SM&A Corporation for
approximately $28 million in a stock-for-stock and cash exchange merger. The
transaction was accounted for using the purchase method of accounting. The
preliminary allocation of the purchase price to the net assets acquired could
change. The allocation is summarized below:
<TABLE>
(IN THOUSANDS)
<S> <C>
Stock consideration paid ............. $ 14,375
Cash paid ............................ 14,035
Acquisition expenses ................. 656
--------
Total consideration ........ 29,066
Less book value of net assets acquired (7,717)
--------
Estimated goodwill ......... $ 21,349
========
</TABLE>
The purchase price included 714,839 shares of common stock of SM&A
Corporation, valued as of July 21, 1998 based on an average market price (20-day
trading price of $20.11).
F-16
<PAGE> 22
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information is based upon the historical combined financial statements of SM&A,
Space Applications Corporation ("SAC") and DSA and has been prepared to
illustrate the effects of this offering and the Acquisitions.
The unaudited pro forma condensed combined balance sheet as of June 30,
1998 gives effect to the acquisition of DSA under the purchase method of
accounting as if such transaction had been completed on June 30, 1998 and
combines the balance sheet of the Company and DSA as of June 30, 1998.
The unaudited pro forma condensed combined statement of operations for
the twelve months ended December 31, was prepared based upon the pro forma
results of operations of the Company and the historical results of operations of
SAC and DSA for such periods as if the Acquisitions had been completed on
January 1, 1997. The pro forma results of operations of the Company also give
effect to the following: (i) additional compensation for three principal
executive officers under the Executive Compensation Program and (ii) provisions
for federal and state income taxes as if the Company had been taxed as a C
corporation at an assumed statutory rate of approximately 40%. The unaudited pro
forma condensed combined statement of operations for the six months ended June
30, 1998 was prepared based upon the historical results of operations of the
Company (which includes the historical results of SAC from May 18, 1998, the
date of acquisition, to June 30, 1998) and the historical results of operations
of SAC for the period January 1, 1998 to May 18, 1998 and DSA for the six months
ended June 30, 1998 as if the Acquisitions had been completed on January 1,
1998.
The unaudited pro forma condensed combined financial data are a
presentation of historical results with accounting adjustments (consisting of
normal recurring entries), which in the opinion of management, are necessary for
a fair presentation of such information. This financial information has been
provided for comparative purposes only and does not purport to be indicative of
results which would actually have been obtained had the transactions described
above been effected on the date indicated or of results which may be obtained in
the future. The unaudited pro forma financial information does not reflect
certain cost savings that management believes would have been realized had the
Acquisitions been consummated at the beginning of the periods presented.
Management believes that such savings would have been realized primarily through
the discontinuance of certain stock repurchase programs and other special
incentives paid to employees of SAC and DSA in 1997 and 1998 in addition to
scheduled salary and bonus compensation. In addition, management believes that
the Acquisitions would have enabled the Company to achieve additional savings as
a result of certain economies of scale with respect to facility costs and
various selling, general and administrative functions. There can be no assurance
that the Company would have actually realized any such cost savings had the
Acquisitions been consummated at the beginning of the periods presented or that
the Company will realize any such cost savings in the future.
F-17
<PAGE> 23
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- -------------------------------
SM&A DSA ADJUSTMENTS NOTES COMBINED
-------- -------- ----------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 16,217 $ 3,322 $(14,035) (a) $ 3,055
(2,449) (b)
Accounts receivable, net allowance for doubtful
accounts ......................................... 9,636 7,462 -- 17,098
Costs and estimated earnings in excess of
billings on contracts in progress ................ 2,011 1,494 -- 3,505
Inventory ........................................... 198 -- -- 198
Advances to employees ............................... -- -- -- --
Prepaid expenses and other current assets ........... 756 319 -- 1,075
-------- -------- -------- --------
Total current assets ........................ 28,818 12,597 (16,484) 24,931
Property and equipment, net ........................... 1,346 1,231 -- 2,577
Other assets .......................................... 822 1,989 -- 2,811
Notes receivable, officers ............................ 1,124 -- -- 1,124
Costs in excess of net assets of business acquired, net 13,859 -- 21,825 (a) 35,684
-------- -------- -------- --------
Total assets ................................ $ 45,969 $ 15,817 $ 5,341 $ 67,127
======== ======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 1,065 $ 710 $ -- $ 1,775
Current portion of long-term debt ................... 11 -- -- 11
Accrued salaries, wages, and payroll taxes .......... 4,332 3,315 -- 7,647
Accrued bonus ....................................... 815 -- -- 815
Income taxes payable ................................ 841 -- -- 841
Other liabilities ................................... 31 391 656 (c) 1,078
-------- -------- -------- --------
Total current liabilities ................... 7,095 4,416 656 12,167
Accrued rent .......................................... 52 242 -- 294
Deferred tax liability ................................ 161 3,896 -- 4,057
Other deferreds ....................................... 492 -- -- 492
Long-term debt, excluding current portion ............. 534 22 -- 556
-------- -------- -------- --------
Total liabilities ........................... 8,334 8,576 656 17,566
Stockholders' equity:
Common stock, no par value .......................... 158 1 7 (a) 165
(1) (d)
Additional paid-in capital .......................... 39,953 -- 14,368 (a) 51,872
(2,449) (b)
Retained earnings (accumulated deficit) ............. (2,476) 7,240 (7,240) (d) (2,476)
-------- -------- -------- --------
Total Stockholders' equity .................. 37,635 7,241 4,685 49,561
-------- -------- -------- --------
Total liabilities and Stockholders' equity .. $ 45,969 $ 15,817 $ 5,341 $ 67,127
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma combined balance sheet.
F-18
<PAGE> 24
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
The unaudited pro forma combined balance sheet for SM&A as of June 30,
1998 has been prepared to reflect the acquisition of the net assets of DSA under
the purchase method of accounting. The purchase price has been allocated to the
net assets purchased based upon the book value, which approximates the estimated
fair values, on the date of the acquisition. The Company is currently in the
process of valuing the assets acquired. The preliminary allocation of the
purchase price to the net assets acquired follows:
<TABLE>
(IN THOUSANDS)
<S> <C>
Stock consideration ................................. $ 14,375(a)
Cash ................................................ 14,035(a)
Acquisition expenses ................................ 656(d)
--------
Total consideration ....................... 29,066
Less book value of net assets
acquired as of June 30, 1998 ........................ (7,241)
--------
Estimated goodwill ........................ $ 21,825(a)
========
</TABLE>
(a) To record the acquisition of DSA for an aggregate purchase price of
approximately $28.0 million, subject to adjustment. The purchase price
will be in the form of (a) cash of approximately $14.0 million and (b)
714,839 shares of SM&A common stock, valued as of July 21, 1998 based on
an average market price (20-day trailing price of $20.11). The purchase
will result in $21.8 million in goodwill based on total consideration
costs and book value of DSA assets and liabilities at June 30, 1998. The
preliminary allocation of the purchase price to net assets acquired
could change.
(b) To reflect cash paid by DSA to cancel certain DSA options outstanding,
prior to the Company's acquisition of DSA.
(c) To reflect $656,000 of estimated liability incurred by SM&A associated
with professional services (legal and accounting) rendered in connection
with the acquisition of DSA.
(d) To eliminate all DSA shareholders' equity balances as of June 30, 1998.
F-19
<PAGE> 25
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SAC JANUARY SAC/DSA
1, 1998- PRO FORMA
SM&A MAY 18, 1998 DSA ADJUSTMENTS NOTES COMBINED
-------- ------------- -------- --------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues ......................... $ 24,121 $ 11,877 $ 17,378 $ -- $ 53,376
Cost of revenues ..................... 13,499 8,655 14,655 (2,738) (a) 34,071
-------- -------- -------- -------- --------
Gross profit .................... 10,622 3,222 2,723 2,738 19,305
Selling, general and administrative
expenses ........................... 4,637 3,338 2,377 574 (c) 13,664
2,738 (a)
-------- -------- -------- -------- --------
Operating income ................ 5,985 (116) 346 (574) 5,641
Other (income) expense:
Interest expense ................... 66 89 23 -- 178
Other (income) expense, net ........ (1,220) 90 (44) 352 (e) (822)
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes ......................... 7,139 (295) 367 (926) 6,285
Income tax expense (benefit) ......... 2,936 (115) 116 (141) (e) 2,796
-------- -------- -------- -------- --------
Net earnings (loss) ............. $ 4,203 $ (180) $ 251 $ (785) $ 3,489
======== ======== ======== ======== ========
Earnings per common share:
Basic .............................. $ 0.28 $ 0.22
======== ========
Diluted ............................ $ 0.28 $ 0.21
======== ========
Weighted average common shares used in
computing share amounts:
Basic .............................. 14,825 16,210
======== ========
Diluted ............................ 15,042 16,524
======== ========
</TABLE>
See notes to unaudited pro forma condensed combined statement of operations.
F-20
<PAGE> 26
SM&A CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SM&A SAC/DSA
PRO FORMA SM&A PRO FORMA
SM&A ADJUSTMENTS NOTES PRO FORMA SAC DSA ADJUSTMENTS NOTES COMBINED
-------- ----------- ------- --------- -------- -------- ----------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <S> <C> <C> <C> <C> <C> <C>
Net revenues ................. $ 36,962 $ -- $ 36,962 $ 26,816 $ 37,742 $ -- $101,520
Cost of revenues ............. 20,529 -- 20,529 18,556 31,457 (4,934) (a) 65,608
-------- -------- -------- -------- -------- -------- --------
Gross profit ............. 16,433 16,433 8,260 6,285 4,934 35,912
Selling, general and
administrative expenses .... 6,927 1,007 (b) 7,934 7,786 4,173 1,147 (c) 25,974
4,934 (a)
-------- -------- -------- -------- -------- -------- --------
Operating income ......... 9,506 (1,007) 8,499 474 2,112 (1,147) 9,938
Other (income) expense:
Interest expense ........... 505 -- 505 210 10 -- 725
Other (income) expense, net 37 -- 37 266 (124) -- 179
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes ........... 8,964 (1,007) 7,957 (2) 2,226 (1,147) 9,034
Income tax expense ........... 147 3,036 (d) 3,183 259 915 -- 4,357
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) ...... $ 8,817 $ (4,043) $ 4,774 $ (261) $ 1,311 $ (1,147) $ 4,677
======== ======== ======== ======== ======== ======== ========
Earnings per common share:
Basic ...................... $ 0.37 $ 0.30
======== ========
Diluted .................... $ 0.37 $ 0.30
======== ========
Weighted average common shares
used in computing share
amounts:
Basic ...................... 12,948 15,743
======== ========
Diluted .................... 12,948 15,861
======== ========
</TABLE>
See notes to unaudited pro forma condensed combined statement of operations.
F-21
<PAGE> 27
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
Pursuant to Statement of Financial Accounting Standards No. 128, basic
and diluted earnings per share have been included. Basic earnings per share is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period and shares repurchased during the period are weighted
for the portion of the period that they are outstanding. For the combined pro
forma basic earnings per share figures, it is assumed that 12,900,000 shares of
SM&A common stock were outstanding since January 1, 1997 along with 819,743
shares issued in the SAC acquisition and 714,839 shares issued in the DSA
acquisition. The December 31, 1997 and June 30, 1997 combined pro forma basic
earnings per share figures also give effect to 1,261,000 shares issued in the
Company's IPO to provide the cash paid in the DSA acquisition. The June 30, 1998
combined pro forma basic earnings per share figures also include 2,100,000
shares issued in the Company's IPO, weighted from January 28, 1998 to June 30,
1998. Diluted earnings per share is consistent with that of basic earnings per
share while giving effect to all dilutive potential common shares that were
outstanding during the period. The dilutive effect of outstanding options issued
by the Company has been reflected in diluted earnings per share by application
of the treasury stock method. The Company's December 31, 1997 combined pro forma
diluted earnings per share is calculated by arriving at basic earnings per share
and factoring in the dilutive effect of 175,925 SM&A options granted to SAC
employees as if they had been outstanding since January 1, 1997. The Company's
June 30, 1998 combined pro forma diluted earnings per share is calculated by
arriving at basic earnings per share and factoring in the dilutive effect of
175,925 SM&A options granted to SAC employees as if they had been outstanding
since January 1, 1998 and weighing in the effect of 803,000 SM&A options granted
to SM&A directors and employees and outstanding as of June 30, 1998.
The unaudited pro forma combined statement of operations gives effect to
the following adjustments:
(a) To reclassify certain overhead expenses of DSA, which have
historically been included in cost of sales, to selling, general, and
administrative expenses in order to conform to SM&A's historic
presentation of such expenses.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------- --------------
<S> <C> <C>
Reclassification of overhead expenses....... $4,934,000 $2,738,000
========== ==========
</TABLE>
(b) To record additional compensation for two principal
executive officers of SM&A which, combined with 1997 wages in the
aggregate, total the maximum salaries and bonuses payable of $2,700,000
under the 1998 Executive Compensation Program.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------
<S> <C>
Pro forma additional compensation .......... $1,007,000
</TABLE>
(c) To record goodwill amortization expense for the acquisitions
of SAC and DSA based on goodwill of $12,575,000 and $21,825,000,
respectively, assuming a 30 year estimated useful life.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
-------------------- --------------
<S> <C> <C>
Pro forma amortization expense ............. $1,147,000 $ 574,000
========== =========
</TABLE>
(d) To adjust the provision for income taxes to reflect federal
and state income taxes for the Company as if it had been taxed as a C
corporation rather than an S corporation. The adjustment reflects a 40%
combined federal and state income tax rate on the pro forma SM&A
earnings before income taxes.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------
<S> <C>
Pro forma income tax expenses .............. $3,036,000
</TABLE>
(e) To record a reduction in interest income and its related
income tax effect for the $14.0 million in cash to be paid in connection
with the acquisition of DSA.
F-22
