<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarter Ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 000-23585
SM&A CORPORATION
----------------
(Exact name of registrant as specified in its charter)
California 33-0080929
---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(949) 975-1550
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Outstanding at
Class September 30, 1999
----- ------------------
Common Stock 16,136,239
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998........................................... 3
Consolidated Statements of Earnings for the three months and
nine months ended September 30, 1999 and 1998............... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998........................... 5
Notes to Consolidated Financial Statements................... 6-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-21
PART II. OTHER INFORMATION
Item 1 Legal Proceedings............................................ 22
Item 2 Changes in Securities and Use of Proceeds.................... 22
Item 3 Defaults Upon Senior Securities.............................. 22
Item 4 Submission of Matters to Vote of Security Holders............ 22
Item 5 Other Information............................................ 22
Item 6 Exhibits and Reports on Form 8-K............................. 22
Signature.............................................................. 23
</TABLE>
2
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 442 $ 454
Accounts receivable, net of allowance for doubtful
accounts......................................... 17,150 15,326
Costs and estimated earnings in excess of billings
on contracts in progress, net of allowance....... 12,023 7,545
Prepaid income taxes.............................. 3,455 2,085
Prepaid expenses and other assets................. 1,575 559
------- -------
Total current assets............................ 34,645 25,969
Property and equipment.............................. 4,363 2,390
Notes receivable--affiliates........................ 1,724 2,832
Other assets........................................ 6,536 3,346
Goodwill............................................ 39,147 31,787
------- -------
Total assets.................................... $86,415 $66,324
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade accounts payable............................ $ 2,903 $ 2,496
Accrued compensation and payroll taxes............ 5,189 6,585
Deferred income taxes............................. 566 265
Other liabilities................................. 484 644
------- -------
Total current liabilities....................... 9,142 9,990
Deferred income taxes............................... 659 725
Other liabilities................................... 566 280
Long-term debt, excluding current portion........... 21,517 --
------- -------
Total liabilities............................... 31,884 10,995
Shareholders' equity:
Common stock, no par value........................ 154 165
Additional paid in capital........................ 45,294 54,164
Retained earnings................................. 9,083 1,000
------- -------
Total shareholders' equity...................... 54,531 55,329
------- -------
Total liabilities and shareholders' equity...... $86,415 $66,324
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................ $ 27,183 $ 20,546 $ 79,424 $ 43,889
Cost of revenues.................... 17,027 12,077 47,429 25,025
--------- --------- -------- --------
Gross margin...................... 10,156 8,469 31,995 18,864
Selling, general and administrative
expenses........................... 6,182 5,343 17,035 9,756
Amortization of goodwill and other
intangibles........................ 322 302 952 388
--------- --------- -------- --------
Operating income.................. 3,652 2,824 14,008 8,720
Other income (expense):
Interest expense.................. (300) (28) (522) (87)
Other, net........................ 146 229 278 1,485
--------- --------- -------- --------
Income before income taxes...... 3,498 3,025 13,764 10,118
Income tax expense.................. 1,447 1,326 5,681 4,243
--------- --------- -------- --------
Income from continuing
operations....................... 2,051 1,699 8,083 5,875
Income from operations of
discontinued business,
Net of income tax benefit......... -- (86) -- (57)
--------- --------- -------- --------
Net income.......................... $ 2,051 $ 1,613 $ 8,083 $ 5,818
--------- --------- -------- --------
Income per share from continuing
operations:
Basic............................. $ 0.13 $ 0.10 $ 0.50 $ 0.38
========= ========= ======== ========
Diluted........................... $ 0.13 $ 0.10 $ 0.49 $ 0.37
========= ========= ======== ========
Net income per share:
Basic............................. $ 0.13 $ 0.10 $ 0.50 $ 0.38
========= ========= ======== ========
Diluted........................... $ 0.13 $ 0.10 $ 0.49 $ 0.37
========= ========= ======== ========
Weighted average common shares
outstanding:
Basic............................. 16,307 16,371 16,316 15,346
Diluted........................... 16,371 16,794 16,420 15,674
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 8,083 $ 5,818
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for doubtful accounts........................ 112 96
Depreciation and amortization.......................... 1,885 780
Gain on sale of fixed assets........................... -- (788)
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable.................................. (2,193) 2,937
Costs and estimated earnings in excess of billings... (5,346) (5,479)
Prepaid expenses and other assets.................... (780) 52
Other assets......................................... (238) (335)
Deferred tax asset................................... 66 13
Trade accounts payable............................... 305 (1,799)
Accrued compensation and payroll taxes............... (1,693) (2,837)
Income taxes......................................... (1,216) (1,208)
Deferred tax liability............................... (140) 1,154
Other deferred liabilities........................... 23 (32)
Other liabilities.................................... (403) (801)
-------- --------
Net cash used in operating activities.............. (1,535) (2,429)
Cash flows from investing activities:
Acquisitions, net of cash acquired...................... (5,889) (11,874)
Additional expenditures related to acquisitions......... (815) --
Increase in capitalized software........................ (3,252) (251)
Purchases of property and equipment..................... (2,264) (314)
Collection of advances to shareholder................... 1,108 679
-------- --------
Net cash used in investing activities.............. (11,112) (11,760)
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 329 22,421
Advances (repayments) of long-term debt, net............ 21,517 (5,736)
Distributions to shareholders........................... -- (710)
Common stock repurchases................................ (9,211) --
-------- --------
Net cash provided by financing activities............... 12,635 15,975
Net increase (decrease) in cash and cash equivalents.... (12) 1,786
Cash at beginning of period............................... 454 150
-------- --------
Cash at end of period..................................... $ 442 $ 1,936
======== ========
Supplemental information-Cash paid for:
Interest................................................ $ 274 $ 169
Income taxes............................................ $ 6,865 $ 3,378
======== ========
Supplemental schedule of noncash investing activity:
Detail of businesses acquired and other purchase
accounting adjustments as follows (in thousands):
Cash consideration paid for acquisitions................ $ 5,636
Plus acquisitions expenses.............................. 353
Less cash acquired in acquisitions...................... (100)
--------
Cash paid for acquisitions, net of cash acquired....... $ 5,889
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months and Nine Months Ended September 30, 1999 and 1998
NOTE 1. GENERAL
SM&A Corporation (formerly Steven Myers & Associates, Inc.) and Subsidiaries
("the Company") was incorporated in California on January 25, 1985. The
Company's primary business is providing proposal management and contract
support services. In January 1998, the Company completed an initial public
offering ("IPO") of Common Stock. Subsequently, in May 1998, the Company
acquired Space Applications Corporation ("SAC"). SAC provides systems
engineering, scientific research, program management support and technical
support to military and civilian space programs, the intelligence community,
and the armed services. In August 1998, the Company acquired Decision-Science
Applications, Inc. ("DSA"). DSA provides system engineering, information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. In March 1999, the
Company acquired Systems Integration Software, Inc. ("SIS"). SIS provides
systems engineering, information systems development, scientific research and
program management support to the U.S. Government, principally the Department
of Defense. In September 1999, the Company acquired Kapos Associates Inc.
("KAI"). KAI provides simulation and test systems engineering services to the
U.S. Government. SAC, DSA, SIS and KAI are collectively referred to as "the
Acquisitions". These transactions were accounted for as purchases and,
accordingly, the consolidated financial statements include the financial
results of the Acquisitions from the effective dates of each such acquisition.
On December 31, 1998, SAC merged into DSA. In connection with the merger, the
surviving corporation changed its name to SM&A Corporation (East).
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly Reports on Form 10-Q and do not include all
of the information and note disclosures required by generally accepted
accounting principles. The information furnished herein includes all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of results for these
interim periods.
The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1999.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 30 years. The recoverability of goodwill is
determined by comparing the carrying value of intangible assets to the
estimated future operating income of the Company on an undiscounted cash-flow
basis. Should the carrying value of goodwill exceed the estimated operating
income for the expected period of benefit, an impairment for the excess would
be recorded at that time. As of September 30, 1999, no impairment has been
recognized.
In addition, these financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto for the year
ended December 31, 1998. This supplementary information is included in Form
10-K filed by the Company with the Securities and Exchange Commission on March
31, 1999.
Additional supplementary information which includes the historical pro-forma
financial statements of the Company prior to its IPO is included in Form S-1
filed by the Company with the Securities and Exchange Commission on January
28, 1998, as amended (the "S-1"). Due to the Company converting from an
S corporation to a C corporation, the information found in the S-1 filing
includes pro forma operating results. These pro formas reflect an adjustment
of salaries and bonuses paid to three principal executive officers (which
6
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 1998
have historically been included in selling, general, and administrative
expenses) in excess or less than $2.7 million ($675,000 per quarter) in the
aggregate (the maximum salaries and bonuses payable for 1998 under the
Company's Executive Compensation Program) and adjustments for Federal and
state income taxes as if the Company had been taxed as a C corporation rather
than an S corporation during such period.
Certain reclassifications have been made to the prior period financial
statements to conform to current period presentation.
NOTE 2. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the periods presented. Diluted net income per share is
computed by dividing net income available to common shareholders by the
weighted average number of common and common equivalent shares outstanding
during the periods presented assuming the exercise of all in-the-money stock
options. Common equivalent shares have not been included where inclusion would
be anti-dilutive.
The following table illustrates the computation of basic and diluted
earnings per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per
common share - net earnings................... $ 2,051 $ 1,613 $ 8,083 $ 5,818
======= ======= ======= =======
Denominator:
Denominator for basic income per share -
weighted average shares outstanding during the
period........................................ 16,307 16,371 16,316 15,346
Incremental common shares attributable to
dilutive outstanding stock options............ 64 423 104 328
------- ------- ------- -------
Denominator for diluted income per common
share......................................... 16,371 16,794 16,420 15,674
======= ======= ======= =======
Basic net income per common share.............. $ .13 $ .10 $ .50 $ .38
======= ======= ======= =======
Diluted net income per common share............ $ .13 $ .10 $ .49 $ .37
======= ======= ======= =======
</TABLE>
NOTE 3. INCOME TAX PROVISION
The Company provides for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
NOTE 4. ACQUISITIONS
In March 1999, the Company purchased all the outstanding common shares of
SIS. The transaction was for cash of $3,263,000 and a one-year earn-out,
contingent upon the achievement of certain operating results. This transaction
was accounted for under the purchase method of accounting and, accordingly,
the consolidated
7
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 1998
financial statements of the Company for the nine months ended September 30,
1999, include the financial results of SIS from March 1, 1999, the beginning
of the accounting period in which the purchase transaction was finalized.
In September 1999, the Company purchased all of the outstanding shares of
KAI for cash of $2,373,000 and a two-year earn out, contingent upon
achievement of certain operating results. The transaction was accounted for
under the purchase method of accounting and, accordingly, the consolidated
financial statements of the Company for the three months and nine months ended
September 30, 1999 include the financial results of KAI from September 1,
1999, the beginning of the accounting period in which the transaction was
finalized.
In August 1998, the Company issued 714,839 unregistered shares of common
stock valued at approximately $14.4 million, and $14 million cash for all the
outstanding common stock and options of DSA. This transaction was accounted
for as a purchase and, accordingly, the consolidated financial statements of
the Company for twelve months ended December 31, 1998 include the financial
results of DSA from August 1, 1998, the beginning of the accounting period in
which the purchase transaction was finalized.
In May 1998, the Company issued 819,743 unregistered shares of common stock
valued at approximately $14.7 million, and stock options with a fair value of
$2.7 million for all the outstanding common stock of SAC. This transaction was
accounted for as a purchase and, accordingly, the consolidated financial
statements of the Company for the twelve months ended December 31, 1998,
include the financial results of SAC from May 18, 1998, the date of the
private placement memorandum for SAC. Due to certain price protection
provisions relating to the shares of common stock issued in connection with
the acquisition of SAC and the recent market price of the Company's common
stock, the Company issued 703,530 additional shares of common stock to former
shareholders of SAC based upon the market price of the common stock at certain
defined liquidation dates.
The shareholders of common stock issued in the SAC and DSA acquisitions had
demand registration rights. Substantially all of the shareholders exercised
such demand rights on February 1, 1999 and on April 29, 1999, the Company
filed a registration statement with the SEC on Form S-3 to register these
common shares.
The Company recorded goodwill of approximately $40.5 million as a result of
the Acquisitions. The Company incurred costs and expenses in connection with
the Acquisitions, including legal and accounting, and other various expenses.
Eligible costs will be capitalized as part of goodwill in accordance with
generally accepted accounting principles (GAAP). The allocation of the
purchase price for the Acquisitions and other purchase accounting adjustments
is as follows (in thousands):
<TABLE>
<S> <C>
Total purchase price, net....................................... $ 51,403
Net assets acquired............................................. (12,615)
Acquisition costs............................................... 1,759
--------
Goodwill........................................................ 40,547
Less accumulated amortization................................... (1,400)
--------
Goodwill, net................................................... $ 39,147
========
</TABLE>
8
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 1998
The following table presents unaudited historical results of operations for
the three months and nine months ended September 30, 1999 and unaudited pro
forma results of operations for three months and nine months ended September
30, 1998 assuming the acquisitions of SAC and DSA occurred as of January 1,
1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue................................... $27,183 $23,019 $79,424 $71,882
======= ======= ======= =======
Income from continuing operations............. 2,051 1,578 8,083 5,468
Income from discontinued operations........... -- (86) -- (25)
------- ------- ------- -------
Net income.................................... $ 2,051 $ 1,492 $ 8,083 $ 5,443
======= ======= ======= =======
Net income per share:
Basic....................................... $ .13 $ .09 $ .50 $ .33
======= ======= ======= =======
Diluted..................................... $ .13 $ .09 $ .49 $ .32
======= ======= ======= =======
Weighted average shares outstanding:
Basic....................................... 16,307 16,371 16,316 16,346
Diluted..................................... 16,371 16,794 16,420 16,674
</TABLE>
The pro forma data includes adjustments which have been applied to reflect
the purchases of SAC and DSA and the addition of amortization related to
intangible assets acquired. The pro forma data adjustments also include the
presentation of Staminet, Inc. (a subsidiary of the Company) as a discontinued
operation as of January 1, 1998.
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,
1998 along with 819,743 shares issued in the SAC acquisition and 714,839
shares issued in the DSA acquisition. The pro forma results presented above
may not be indicative of future performance.
NOTE 5. LONG-TERM DEBT
In September 1998, the Company entered into a credit agreement with a bank
which provided for a $25.0 million revolving line of credit. Subsequently, in
June 1999, the Company renegotiated with its lenders to increase the amount
provided under the agreement to $50.0 million. The credit agreement, which is
secured by a first priority interest in substantially all of the assets of the
Company, matures in May 2004 and has two interest rate options; the Bank's
Prime rate or LIBOR plus 1.25% to 2.0%, based on the ratio of total
indebtedness to earnings before interest and taxes. The credit agreement
requires payment of fees on the unused portion of the facility and contains
certain covenants. The most restrictive covenant requires the Company to
maintain minimum consolidated net worth, as defined in the credit agreement.
As of September 30, 1999, the Company was in compliance with all covenants.
The Company had $21,517,000 outstanding under the credit agreement at
September 30, 1999 at an effective interest rate of 7.75%.
NOTE 6. SHARES REPURCHASED
During the first nine months of 1999 the Company purchased 680,000 shares of
its common stock through open market transactions. The aggregate cost of these
shares was $4.9 million for an average price of $7.28 per share. Additionally,
the Company purchased 549,000 shares of its common stock from the former chief
executive officer of SAC for an aggregate cost of $4.4 million for an average
price of $8.00 per share.
9
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 1998
NOTE 7. SEGMENT REPORTING DATA
SM&A Corporation classifies its operations into three lines of business,
each offering a distinct set of services. These lines of business are
summarized as follows; Proposal Management, which involves assisting clients
with the procurement of government and commercial programs; Systems Solutions,
which includes systems engineering, scientific research, program management
and technical support services; and Information Technology Solutions, which
focuses on information systems development.
The Company evaluates performance based on several factors, of which a
primary financial measure is business segment revenue earned. The revenue
recognition policies of the business segments vary according to the type of
contract being worked.
Information as to the net revenues of the lines of business is set forth
below. The information presented for the three months and nine months ended
September 30, 1998 and 1999 represents historical supplemental data as
described on the statements of income (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues:
Proposal Management Group................... $ 7,804 $ 7,236 $30,155 $28,207
Systems Solutions Group..................... 13,454 7,125 33,191 9,497
Information Technology Solutions Group...... 5,925 6,185 16,078 6,185
------- ------- ------- -------
Total revenues............................ $27,183 $20,546 $79,424 $43,889
======= ======= ======= =======
Operating income (loss):
Proposal Management Group................... $ 2,134 $ 2,388 $10,081 $ 9,193
Systems Solutions Group..................... 3,440 1,853 8,560 2,963
Information Technology Solutions Group...... 1,696 1,732 5,325 1,732
Executive Group............................. (3,618) (3,149) (9,958) (5,168)
------- ------- ------- -------
Total operating income.................... $ 3,652 $ 2,824 $14,008 $ 8,720
======= ======= ======= =======
Income (loss) from continuing operations:
Proposal Management Group................... $ 1,248 $ 1,337 $ 5,132 $ 5,389
Systems Solutions Group..................... 2,012 1,037 5,835 1,698
Information Technology Solutions Group...... 992 970 3,122 970
Executive Group............................. (2,201) (1,645) (6,006) (2,182)
------- ------- ------- -------
Total income from continuing operations... $ 2,051 $ 1,699 $ 8,083 $ 5,875
======= ======= ======= =======
</TABLE>
In July 1999, a number of employees and their related projects were
transferred from the Proposal Management Group to the Systems Solutions Group.
Had the transfer not been made, PMG revenues would have been $1,186,000 higher
for the quarter and nine months ended September 30, 1999 and cost of revenues
would have been $688,000 higher. Correspondingly, SSG revenues and costs would
have been lower by these amounts for the same period. There was no effect on
the 1998 amounts.
Certain reclassifications have been made to prior period information to
conform to current period presentation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
From time to time, the Company through its management, may make forward-
looking public statements, such as statements concerning then expected future
revenues or earnings or concerning projected plans, performance, contract
procurement as well as other estimates relating to future operations. Forward-
looking statements may be in reports filed under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), in press releases or informal
statements made with the approval of an authorized executive officer. The
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended, as
enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors
listed below, as well as other factors not currently identified by management,
could affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in
any current statement.
The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events
which may cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company.
RISK FACTORS
There are risks associated with our acquisition strategy
An element of our growth strategy is to expand our operations through the
acquisition of complementary businesses. We cannot be sure that we will be
able to identify suitable acquisition candidates. If identified, we are not
sure we will be able to acquire such companies on suitable terms. Also, other
companies which may have greater resources than us may compete for acquisition
candidates. Such competition could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition by us.
There can be no assurance that the anticipated economic, operational and
other benefits of the Acquisitions or any future acquisitions will be
realized. We cannot be sure that we will be able to successfully integrate
acquired businesses in a timely manner without substantial costs, delays or
other operational or financial problems. The difficulties of such integration
may initially be increased by our need to integrate personnel with different
business backgrounds and corporate cultures. In addition, acquisitions may
involve our spending significant funds. Our failure to effectively integrate
the acquired companies may adversely affect our ability to bid successfully on
certain engagements and otherwise grow our business. Client dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on our reputation as a whole, and this could result in increased difficulty in
marketing services or acquiring companies in the future. In addition, we
cannot be certain that the acquired companies will operate profitably or will
not otherwise hurt operating results. There are other risks with acquisitions.
These include diversion of management attention, potential loss of key clients
or personnel, risks associated with unanticipated problems, liabilities or
contingencies and risks of entering markets in which we have limited or no
direct expertise. The occurrence of some or all of the events described in
these risks could have a material adverse effect on our business, operating
results and financial condition.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
We may fail to manage our future growth effectively
We are currently experiencing significant growth and we intend to pursue
further growth as part of our business strategy. Our ability to manage the
growth of our operations will require us to continue to improve our
operational, financial and other internal systems and to attract, develop,
motivate and retain our employees. Our rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation
of financial reporting systems and increased pressure on our senior management
and will increase the demands on our systems and internal controls. In
addition, our success depends in large part upon our ability to attract,
develop, motivate and retain highly-skilled professionals and administrative
employees. Our growth strategy will require an increase in our 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 we will be able to
attract and retain the qualified personnel necessary to pursue our growth
strategy. There can be no assurance that we will be able to maintain or
increase our current rate of growth, effectively manage our expanding
operations or achieve planned growth on a timely or profitable basis. To the
extent that we are unable to manage our growth effectively and efficiently,
our business, financial condition and results of operations could be
materially and adversely affected.
Our business depends substantially on the defense industry
Approximately 56.3% of our revenues were derived from Proposal Management
Group services related to government procurement contracts for the fiscal year
ended December 31, 1998. In addition, a significant portion of our revenues
are derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, we expect that the percentage of revenues attributable to
such contracts will continue to be substantial. U.S. Government expenditures
for defense products may decline in the future with such reductions having an
effect on our clients, or, indirectly, on us. A number of trends may
contribute to such a decline, including:
. large weapon systems being replaced with smaller, more precise high
technology systems
. multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter
. threat scenarios evolving away from global conflicts to regional
conflicts
. the continuing draw down of U.S. military forces in response to the end
of the Cold War
In the event expenditures for products of the type manufactured by our
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 our clients and, as a result, a reduction in the volume of proposals
managed by us. Unless offset, such reductions could materially and adversely
affect our business, operating results and financial condition.
There are risks associated with government contracting
We are subject to compliance with governmental regulations, both directly
and through government-contractor clients. Fines and penalties could result
from noncompliance or suspension or debarment from the bidding process for
future government contracts. We rely for the continuance and expansion of our
business on a facility security clearance from the U.S. Government, and
individual security clearances, at various levels, for nearly all members of
our staff. There can be no assurance that necessary security clearances will
continue to be made available by the U.S. Government.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
In addition, a significant portion of our revenues are derived from
contracts or subcontracts with the U.S. Government. Our services are performed
pursuant to the following types of contracts:
. cost reimbursable
. time-and-materials
. fixed-price contracts and subcontracts
Under fixed-price contracts and time-and-materials contracts, we bear any
risk of increased or unexpected costs that may reduce our profits or cause us
to sustain a loss.
Our U.S. Government contracts and subcontracts are subject to termination,
reduction or modification as a result of changes in the U.S. Government's
requirements or budgetary restrictions, or at the convenience of the U.S.
Government. When we participate as a subcontractor, we are also subject to the
risk that the primary contractor may fail or become unable to perform its
duties and responsibilities as a prime contractor. If a contract were to be
terminated for convenience, we would be reimbursed for allowable costs
incurred up to the date of termination and would be paid a proportionate
amount of the stipulated profits or fees attributable to the work actually
performed.
Contracts with the U.S. Government are generally complex in nature, and
require us to comply with numerous U.S. Government regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping
and accounting, management qualifications, drug free work place and numerous
other matters.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of us or of
our major clients could have a material adverse effect upon us. Our books and
records are subject to annual audit by the Defense Contract Audit Agency,
which can result in adjustments to contract costs and fees. If any costs are
improperly allocated to a contract, such costs are not reimbursable and, if
already reimbursed, will require us to refund such amounts to the government.
If improper or illegal activities are discovered in the course of any audits
or investigations, the contractor may also be subject to various civil and
criminal penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines and
suspension or disqualification from doing business with the government. If we
become subject to penalties or sanctions, such penalties or sanctions could
have a material adverse effect on our business, financial condition and
results of operations.
We rely on a relatively limited number of clients
We derive a significant portion of revenues from a relatively limited number
of clients. For example, our revenues from the ten most significant clients
accounted for approximately 76.0%, 90.3%, 98.0%, 92.9% and 91.2% of our total
revenues for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. The U.S. Government, Lockheed Martin Corporation, and Raytheon
Company accounted for approximately 57.2% of our total revenues in 1998 and
33.3% of our total revenues in 1997. Lockheed Martin Corporation was our
single largest commercial client, accounting for approximately 16.6%, 22.5%
and 22.9% of our total revenues for the years ended December 31, 1998, 1997
and 1996, respectively. For the nine months ended September 30, 1999 Raytheon
Company is our largest commercial customer accounting for approximately 21% of
total revenues.
Clients typically retain us for major proposals as needed on an engagement
basis rather than pursuant to long-term contracts, and a client can usually
terminate our engagement at any time without a significant penalty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
Moreover, there can be no assurance that our existing clients will continue
to engage us for additional assignments or do so at the same revenue levels.
The loss of any significant client could materially and adversely affect our
business, financial condition and results of operations. In addition, the
level of our services required by an individual client may diminish over the
life of our relationship and there can be no assurance that we will be
successful in establishing relationships with new clients as this occurs.
The markets in which we compete are highly competitive
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. We are the largest provider of such services and
principally compete with numerous smaller proposal management companies in
this highly specialized industry. We also compete with some of our clients'
internal proposal development resources.
We recently entered and seek to achieve significant growth in the contract
support services market, however, there can be no assurance that we will be
successful in such efforts. The market for services in the contract support
industry is highly competitive, highly fragmented and subject to rapid change.
Such competition is likely to increase in the future. Many of our competitors
have greater personnel, financial, technical and marketing resources. Such
competitors include many larger management consulting firms such as McKinsey &
Company, Booz Allen & Hamilton, and Science Applications International Corp.,
as well as the consulting arms of major accounting firms. We also compete with
our clients' in-house resources. This source of competition may increase as
consolidation of the aerospace and defense industry creates larger
organizations. In addition, there can be no assurance that we will be
successful in such efforts. In addition, significant further expense for sales
and marketing may require us to promote a major expansion of our services in
such area. If we are unsuccessful in our efforts to penetrate further the
market for such services, or our current win rate of approximately 90% in the
proposal management business drops significantly, our growth prospects could
be materially and adversely affected.
Because we believe our proprietary rights are material to our success,
misappropriation of such rights or claims of infringement or legal actions
related to intellectual property could adversely impact our financial
condition
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, patent, copyright and trademark laws to protect
our proprietary rights. There can be no assurance that the steps taken by us
to protect our proprietary rights will be adequate to deter misappropriation
of proprietary information or that we will be able to detect unauthorized use
and take appropriate steps to enforce our intellectual property rights.
Although we believe that our services do not infringe on the intellectual
property rights of others and that we have all rights necessary to utilize the
intellectual property employed in our business, we are subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to
the intellectual property which is the subject of asserted infringement.
Capitalized software development costs may not be recovered
At September 30, 1999 the Company had capitalized software development costs
amounting to $4.4 million. While the Company anticipates substantial revenues
from these products, there can be no assurance that such revenues would be
sufficient to fully recover this investment in software development.
We rely heavily upon our key employees
Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution of our executive officers, in
particular those of Steven S. Myers, our Chief Executive Officer and Chairman
of the Board and Michael A. Piraino, our President and Chief Operating
Officer. We entered into a two-year employment agreement with Mr. Myers in
November 1997, and a three-year employment agreement with Mr. Piraino in
December 1998. The loss of the services of either of these individuals for any
reason could materially and adversely affect our business, operating results
and financial condition, including our ability to
14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
secure and complete engagements. We currently maintain a key-man life
insurance policy in the amount of $2.0 million on Mr. Myers and have obtained
a similar policy on Mr. Piraino.
Our quarterly results may fluctuate significantly
We may experience significant fluctuations in future quarterly operating
results due to a number of factors, including the size, timing and duration of
client engagements and mix of revenue.
Our stock price is subject to significant volatility
Our common stock was first publicly traded on January 29, 1998 after our
initial public offering at $12.00 per share. Between January 29, 1998 and
September 30, 1999 the closing sale price has ranged from a low of $6.06 per
share to a high of $31.13 per share. The market price of our common stock
could continue to fluctuate substantially due to a variety of factors,
including:
. quarterly fluctuations in results of operations
. adverse circumstances affecting the introduction or market acceptance of
new services offered by us
. announcements of new services by our competitors
. our loss of key employees
. changes in the regulatory environment or market conditions affecting the
defense and aerospace industry
. changes in earnings estimates ratings by analysts
. lack of market liquidity resulting from a relatively small amount of
public stock float
. changes in generally accepted accounting principles
. sales of common stock by existing holders
. the announcement and market acceptance of proposed acquisitions
The market price for our common stock may also be affected by our ability to
meet analysts' expectations, and any failure to meet such expectations, even
if minor, could have a material adverse effect on the market price of our
common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
the operating performance of these companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation instigated against us could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on our business, operating results and financial condition.
Year 2000 issues could affect our business
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failure or
miscalculations. We have performed a review of our internal systems to
identify and resolve the effect of Year 2000 software issues on the integrity
and reliability of our financial and operational systems.
Based on this review, our management believes that our internal systems are
substantially compliant with Year 2000 issues. In addition, we are also
communicating with our principal service providers to ensure
15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
Year 2000 issues will not have an adverse impact on us. If we, and third
parties upon which we rely, are unable to address this issue in a timely
manner, it could result in a material financial risk. In order to assure that
this does not occur, we plan to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
Additionally, we noted some risk with legacy products marketed and
maintained by us, the vast majority of which have been delivered to the U.S.
Government. Information which we have collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most of our products have been heavily modified by the licensee or
by a third party integrator with whom we have no obligatory agreement.
Consequently, management believes the exposure has been reduced. However, we
will continue to evaluate these products and implement remediation plans, as
deemed appropriate. These products do not affect our internal operations.
Our principal shareholder has significant control over SM&A
Steven S. Myers, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 44.7% of our outstanding common stock at
September 30, 1999 and will have the ability to control or significantly
influence the election of directors and the results of other matters submitted
to a vote of shareholders. Such concentration of ownership may have the effect
of delaying or preventing a change in control of SM&A and may adversely affect
the voting or other rights of other holders of common stock. Our board of
directors is currently comprised entirely of individuals supported by Mr.
Myers.
If we issue preferred stock, the rights of holders of common stock will be
subject to the rights of holders of preferred stock
Our 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. We have no present plan to issue any shares of
preferred stock.
The number of shares available for future sale could adversely affect the
price of our publicly traded stock
As of September 30, 1999, we had 16,136,239 shares of common stock
outstanding. As of September 30, 1999, we had outstanding options to acquire,
subject to certain vesting requirements, 2,182,450 shares of common stock
pursuant to our 1997 Stock Option Plan. Additionally, in connection with our
acquisition of SAC, options were granted to purchase an aggregate of 145,008
shares of common stock.
We have registered on a registration statement on Form S-8 all 2,500,000
shares of common stock underlying the options outstanding or issuable under
our 1997 Stock Option Plan. 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 our common stock and could impair our
ability to raise capital through the sale of our equity securities.
Overview
The Company is the largest provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform on such contracts. The
Company's clients include leading firms in the aerospace, defense and
communications industries.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
The 1998 acquisitions of SAC and DSA, and the 1999 acquisitions of SIS and
KAI, which collectively added approximately 510 employees to the Company's
workforce, provide for a greater percentage of the Company's revenues derived
from high-end contract support services. The majority of these services are
with the U.S. Government. Within high-end contract support services, two new
lines of business were established, the Information Technology Solutions Group
("ITSG") and the Systems Solutions Group ("SSG"). ITSG provides information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. SSG provides systems
engineering, program management support and technical support to military and
civilian space programs, the intelligence community, wargaming and simulation
and the armed services.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Revenues. Net revenues for the three months ended September 30, 1999
were $27.2 million compared to $20.5 million for the three months ended
September 30, 1998, an increase of $6.7 million or 32.7%. Net revenues from
Proposal Management Services were $7.8 million for the three months ended
September 30, 1999 compared to $7.2 million for the comparable three months of
the prior year. Net revenues from high-end contract support services,
specifically SSG and ITSG were $13.5 million and $5.9 million, respectively,
for the three months ended September 30, 1999 compared to $7.1 million and
$6.2 million for the same three months of the prior year. Revenues from high-
end contract support services in total increased $6.1 million or 45.9% due to
the Company expanding their scope of high-end contract support services as a
result of the acquisitions of SAC, DSA, SIS and KAI in May and August 1998,
and March and September 1999, respectively. In July 1999, a number of
employees and their related projects were transferred from PMG to SSG. Had the
transfer not been made, PMG revenues would have been $1,186,000 higher for the
quarter ended September 30, 1999 and cost of revenues would have been $688,000
higher. SSG revenues and costs would have been correspondingly lower by these
amounts for the same period. There was no effect on the 1998 amounts.
Gross Margin. Gross margin was $10.2 million for the three months ended
September 30, 1999 compared to $8.5 million for the three months ended
September 30, 1998, an increase of $1.7 million or 20%. This increase in gross
margin was primarily attributable to the increase in high-end contract support
services provided as a result of the acquisitions of SAC, DSA, SIS and KAI in
May and August 1998, and March and September 1999, respectively. As a
percentage of net revenues, gross margin decreased to 37.2% compared to 41.5%
for the prior year period. The decrease in gross margin as a percentage of net
revenues was primarily attributable to a higher mix in revenues of lower
margin business such as subcontracts and other billable costs, and its
inability to pass through certain annual merit increases for its labor force
to time and material contracts. The decrease in gross margin was also caused
in part by the decrease in the revenue contribution by PMG, a higher margin
business and increases in employee health benefit costs.
Selling, General & Administrative Expenses. Selling, General and
Administrative expenses for the three months ended September 30, 1999 were
$6.2 million compared to $5.3 million for the three months ended September 30,
1998, an increase of $0.9 million or 17%. The increase was primarily the
result of increased overhead and facility expenses related to the
Acquisitions, an increase in senior management staff to position the Company
for continued growth, and an increase in facility lease costs. As a percentage
of total revenues, Selling, General and Administrative expenses decreased from
25.7% in the 1998 third quarter to 22.8% in 1999.
Goodwill Amortization. Amortization of goodwill was $322,000 for the three
month period ended September 30, 1999 and $302,000 for the same 1998 period.
Operating Income. Operating income from continuing operations for the three
months ended September 30, 1999 was $3.7 million compared to $2.8 million for
the three months ended September 30, 1998, an increase of $0.9 million or
32.1%. As a percentage of total revenues, operating income was 13.6% for both
periods.
17
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
Other Income (Expense). Other expense, net was $154,000 for the three months
ended September 30, 1999 compared to other income, net of $201,000 for the
same three months of 1998. The decrease in income was a result of higher
interest expense attributable to increased bank borrowings required to finance
share purchases, acquisitions and working capital in the three months ended
September 30, 1999 and lower interest income due to fewer cash equivalents in
1999 compared to the same three month period of 1998.
Income From Continuing Operations. Income from continuing operations was
$2.1 million for the three months ended September 30, 1999 compared to $1.7
million for the three months ended September 30, 1998, an increase of $0.4
million or 23.5%.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net Revenues. Net revenues for the nine months ended September 30, 1999 were
$79.4 million compared to $43.9 million for the nine months ended September
30, 1998, an increase of $35.5 million or 80.9%. Net revenues from Proposal
Management Services were $30.2 million for the nine months ended September 30,
1999 compared to $28.2 million for the comparable nine months of the prior
year, an increase of $2.0 million or 7.0%. This increase was attributable to
continued strong demand for the Company's proposal management services and an
increased customer base. Net revenues from high-end contract support services,
specifically SSG and ITSG were $33.2 million and $16.1 million, respectively,
for the nine months ended September 30, 1999 compared to $9.5 million and $6.2
million for the same nine months of the prior year. Revenues from high-end
contract support services in total increased $33.6 million or 2,140.1% due to
the Company expanding the scope of high-end contract support services as a
result of the acquisitions of SAC, DSA, SIS and KAI in May and August 1998 and
March and September 1999, respectively. In July 1999, a number of employees
and their related projects were transferred from PMG to SSG. Had the transfer
not been made, PMG revenues would have been $1,186,000 higher for the nine
month period ended September 30, 1999 and cost of revenues would have been
$688,000 higher. SSG revenues and costs would have been correspondingly lower
by these amounts for the same period. There was no effect on the 1998 amounts.
Gross Margin. Gross margin was $32.0 million for the nine months ended
September 30, 1999 compared to $18.9 million for the nine months ended
September 30, 1998, an increase of $13.1 million or 69.3%. This increase in
gross margin was primarily attributable to the increase in high-end contract
support services provided as a result of the acquisitions of SAC, DSA, SIS and
KAI in May and August 1998 and March and September 1999, respectively. As a
percentage of net revenues, gross margin decreased to 40.3% compared to 43.0%
for the prior year period. The decrease in gross margin as a percentage of net
revenues was primarily attributable to lower gross margin contributions from
the newly acquired entities.
Selling, General & Administrative Expenses. Selling, General and
Administrative expenses for the nine months ended September 30, 1999 were
$17.0 million compared to $9.8 million for the nine months ended September 30,
1998, an increase of $7.2 million or 73.5%. The increase was primarily the
result of increased overhead and facility expenses related to the
Acquisitions, an increase in senior management staff to position the Company
for continued growth, and an increase in facility lease costs. As a percentage
of total revenues, Selling, General and Administrative expenses were 21.4% for
the nine months ended September 30, 1999, down from 22.3% for the nine months
ended September 30, 1998.
Goodwill Amortization. Amortization of goodwill was $952,000 for the nine
months ended September 30, 1999 and $388,000 for the nine months ended
September 30, 1998.
Operating Income. Operating income from continuing operations for the nine
months ended September 30, 1999 was $14.0 million compared to $8.7 million for
the nine months ended September 30, 1998, an increase of $5.3 million or
60.9%. As a percentage of total revenues, operating income decreased to 17.6%
for the nine months ended September 30, 1999 from 19.8% for the nine months
ended September 30, 1998.
18
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
Other Income (Expense). Other expense, net was $244,000 for the nine months
ended September 30, 1999 compared to other income, net of $1,185,000 for the
same nine months of 1998. The 1998 amount included income of $880,000 from the
sale of an aircraft. The balance of the decrease was a result of higher
interest expense attributable to increased bank borrowings in the nine months
ended September 30, 1999 and lower interest income due to fewer cash
equivalents in 1999 compared to the same nine month period of 1998.
Income From Continuing Operations. Income from continuing operations was
$8.1 million for the nine months ended September 30, 1999 compared to $5.9
million for the nine months ended September 30, 1998, an increase of $2.2
million or 37.3%.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, the Company's net cash used in
operating activities was approximately $1.5 million, compared to net cash used
in operating activities of $2.4 million in the same period of the prior year.
The decrease resulted primarily from increases in income before depreciation,
offset by increased investment in accounts receivable and costs and estimated
earnings in excess of billings on contracts in progress.
Net cash used in investing activities was $11.1 million for the nine months
ending September 30, 1999, compared to net cash used in investing activities
of $11.8 million for the same period of the prior year. The Company's primary
uses during the nine months ended September 30, 1999 were the acquisitions of
SIS and KAI, expenses related to the acquisitions of DSA and SAC, increases in
capitalized software due to a higher level of software development activity,
and purchases of new office furniture and computer equipment related to the
east coast operations move into new facilities. Previously completed
acquisitions obligate the Company to make earnout payments contingent upon
obtaining specific thresholds. The Company expects earnouts obligations will
be made
Net cash provided by financing activities was $12.6 million for the nine
months ended September 30, 1999, compared to $16.0 million for the same period
of the prior year. The primary source for the nine months ended September 30,
1999, was advances on the bank line of credit of $21.5 million used to fund
the deterioration of days sales outstanding ("DSO") in receivables. DSO has
increased from 75 days at December 31, 1998 to approximately 99 days at
September 30, 1999. The Company has initiated a program to dramatically
improve its billing processes, to reduce unbilled accounts receivable and to
intensify its collection efforts. The primary use of cash in financing
activities was the payment of $9.2 million for purchase of 1.2 million shares
of the Company's outstanding common stock.
The Company believes that funds generated by operations will provide
adequate cash to fund its anticipated operating cash needs for at least the
next twelve months. The Company has a $50 million revolving line of credit
facility with three banks. The revolving line of credit will be used, as
considered necessary, for operating cash and for future acquisitions. As of
September 30, 1999, the Company had $21.5 million of borrowings outstanding on
the line.
INFLATION
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible,
seeking to insure that billing rates reflect increases in costs due to
inflation.
YEAR 2000
The Company completed its assessment of the impact of the Year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems ("Year 2000 Issues"). The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to
define the applicable year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
Among other issues, any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
The Company completed its assessment of the impact of Year 2000 Issues on
its business, including the Company's operational, information and financial
systems (e.g. general ledger, payroll, accounts receivable and payable, etc.).
Similarly, non informational systems, such as communication systems and
security systems were also assessed. A detailed work plan was developed to
ensure that each area requiring remedy was adequately and timely addressed. At
this time, the Company's work plan continues to indicate that most significant
areas have been or are scheduled to be remedied by December 1999. Such work
plan includes adequate time for remediation of the area, as well as testing to
ensure the remediation efforts are complete. Additionally, the Company has
established an Executive Oversight Committee to monitor implementation plans
and to determine whether all areas have been assessed and evaluated, resources
identified and remediation completed on a timely basis.
The Company has initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties' to remediate their Year 2000 problems. While the Company has not been
informed of any material risks associated with Year 2000 Issues of these
entities, there can be no assurance that the computerized information systems
of these third parties will be Year 2000 compliant on a timely basis. The
inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company.
Additionally, management noted some risk with legacy products marketed and
maintained by the Company, the vast majority of which have been delivered to
the U.S. Government. Information collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most products have been heavily modified by the licensee or by a
third party integrator with whom the Company has no obligatory agreement.
Consequently, the Company's exposure has been reduced. However, the Company
will continue to evaluate these products and implement remediation plans, as
deemed appropriate. Costs to remediate these products, if any, will not be
material. These products do not affect internal operations.
To date, management estimates that the total cost (including hardware,
software and services) incurred by the Company to evaluate, assess and remedy
Year 2000 Issues, has been approximately $350,000. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to range from $200,000 to $400,000. The
Company has expensed all internal costs related to the remediation of Year
2000 Issues.
The cost and the date on which the Company plans to complete the Year 2000
Issues modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties. The Company's total Year 2000 Issues project cost and estimates
to complete exclude the estimated costs and time associated with the impact of
a third party's Year 2000 Issues, which are not yet determinable.
It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts
are not completed by either the Company or significant third parties. In such
an event, it is possible that the ability to maintain accurate and complete
financial records of the Company's activities and transactions may be
impaired. Such events, should they occur, may significantly impair the
Company's ability to operate as it does today, creating business interruption,
potential loss of business, and earnings and liquidity difficulties. The
Company presently believes that with current and planned modifications
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
to existing software and conversions to new software, the risk of potential
loss associated with the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issues could have a material impact on the operations of
the Company.
Though the Company's preliminary Year 2000 Issue work plan is believed to be
adequate to achieve compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company is
designing its work plan to address this potential occurrence. First, the work
plan is being designed to ensure that the most critical systems and areas are
addressed first, and in a manner that provides adequate time to remediate and
test. Second, the Company has secured external expert resources to assist in
evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. The Company will continue to monitor and adjust
its contingency plan needs in conjunction with the progress made on the
primary work plan.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In July 1999, the
FASB issued SFAS 137 deferring the effective date of SFAS 133 until June 30,
2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities.
Application of this accounting standard is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor-specific objective evidence, as defined.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a SOP which will delay for one year the effective date of
certain provisions of SOP 97-2 with respect to what constitutes vendor-
specific objective evidence of fair value of the delivered software element in
certain multiple-element arrangements that include service elements entered
into by entities that never sell the software elements separately. The Company
does not anticipate that the adoption of SOP 97-2 and the subsequent SOP will
have a material effect on the Company's results of operations. However, the
ultimate resolution of the implementation issues referred to above could
change the Company's expectation.
21
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
On June 8, 1999 the Company announced the amendment of its open market Stock
Repurchase Program to provide authority for the repurchase of up to 1,300,000
shares of its issued and outstanding common stock. As of September 30, 1999
the Company has repurchased 1,229,000 shares at an average purchase price of $
7.49. These repurchases are made at the sole discretion of the Company's
management.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
10.1* Stock Purchase Agreement dated September 20, 1999 among the
Company, Kapos Associates Inc, Ervin Kapos and June Kapos.
10.2* Escrow Agreement dated September 20, 1999 among the Company,
Kapos Associates Inc. Ervin Kapos and June Kapos.
27.1* Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
- -----------
* filed herewith
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SM&A CORPORATION
Date: November 12, 1999 By: /s/ Daniel P. O'Connell
----------------------------------
Daniel P. O'Connell
Corporate Controller and
Assistant Secretary
(Principal Accounting Officer)
23
<PAGE>
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
among
SM&A CORPORATION (EAST)
and
KAPOS ASSOCIATES INC.
and
ERVIN KAPOS AND JUNE KAPOS
AS THE "PRINCIPAL SHAREHOLDERS"
and
VERONA OLIVER AND CORDELLIA SCRUGGS
AS THE "ADDITIONAL FOUNDERS"
Dated as of September 20, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. ACQUISITION OF OUTSTANDING COMPANY SHARES............................ 1
2. CONSIDERATION........................................................ 1
2.1 Consideration................................................... 1
2.2 Capital Stock of the Company.................................... 1
2.3 Escrow of Cash.................................................. 2
3. CLOSING.............................................................. 2
3.1 Closing......................................................... 2
3.2 Closing Deliveries.............................................. 2
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE
ADDITIONAL FOUNDERS AND THE PRINCIPAL SHAREHOLDERS..................... 4
4.1 Due Organization................................................ 4
4.2 Authorization; No Conflicts..................................... 5
4.3 Capital Stock................................................... 5
4.4 Transactions in Capital Stock and Spin-offs..................... 5
4.5 No Bonus Shares................................................. 6
4.6 Subsidiaries.................................................... 6
4.7 No Options, Warrants, Related Rights............................ 6
4.8 Financial Statements............................................ 6
4.9 Liabilities and Obligations..................................... 7
4.10 Approvals....................................................... 7
4.11 Accounts and Notes Receivable................................... 7
4.12 Intellectual Property........................................... 7
4.13 Permits......................................................... 8
4.14 Real and Tangible Personal Property............................. 8
4.15 Material Contracts and Commitments.............................. 8
4.16 Insurance....................................................... 10
4.17 Employees, Consultants, Etc..................................... 10
4.18 Benefit Plans; ERISA Compliance................................. 11
4.19 Conformity with Law; Pending or Threatened Claims............... 14
4.20 Taxes........................................................... 14
4.21 Government Contracts............................................ 15
4.22 Absence of Changes.............................................. 16
4.23 Deposit Accounts; Powers of Attorney............................ 17
4.24 Relations with Governments...................................... 17
4.25 Conflicts of Interest........................................... 18
4.26 Environmental Matters........................................... 18
4.27 Disclosure...................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL
SHAREHOLDERS......................................................... 18
5.1 Authorization; No Conflicts..................................... 19
5.2 Title to Company Stock.......................................... 19
6. REPRESENTATIONS AND WARRANTIES OF SM&A............................... 19
6.1 Organization and Standing....................................... 19
6.2 Authorization and Binding Obligation............................ 19
6.3 No Conflicts.................................................... 20
6.4 Approvals....................................................... 20
6.5 Litigation and Administrative Proceedings....................... 20
6.6 SEC Reports and Financial Statements............................ 20
6.7 Ability to Perform Classified Programs.......................... 21
6.8 No Registration Under the Securities Act........................ 21
6.9 Acquisition for Investment...................................... 21
6.10 Evaluation of Merits and Risks of Investment.................... 21
7. COVENANTS............................................................ 22
7.1 Access and Cooperation.......................................... 22
7.2 Conduct of Business Pending Closing............................. 22
7.3 Prohibited Activities........................................... 22
7.4 Release by Principal Shareholders and Additional Founders....... 24
7.5 No Shop......................................................... 24
7.6 Flow of Funds................................................... 24
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY, THE
ADDITIONAL FOUNDERS AND THE PRINCIPAL SHAREHOLDERS................... 25
8.1 Representations and Warranties; Performance of Obligations...... 25
8.2 No Litigation................................................... 25
8.3 No Material Adverse Change...................................... 25
8.4 Consents and Approvals.......................................... 25
8.5 Opinion of Counsel.............................................. 25
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SM&A.......................... 25
9.1 Representations and Warranties; Performance of Obligations...... 26
9.2 No Litigation................................................... 26
9.3 Examination of Financial Statements............................. 26
9.4 No Material Adverse Change...................................... 26
9.5 Opinion of Counsel.............................................. 26
9.6 Consents and Approvals.......................................... 26
9.7 Additional Liabilities and Obligations.......................... 26
9.8 Additional Contracts............................................ 27
9.9 Good Standing Certificates...................................... 27
9.10 Resignation of Directors and Officers........................... 27
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
10. INDEMNIFICATION...................................................... 27
10.1 Survival....................................................... 27
10.2 Indemnification................................................ 27
10.3 Indemnification by SM&A........................................ 28
10.4 Indemnification Procedures..................................... 29
11. NONCOMPETITION....................................................... 30
11.1 Prohibited Activities.......................................... 30
11.2 Acknowledgments................................................ 31
11.3 Independent Covenant........................................... 32
12. CERTAIN DEFINITIONS.................................................. 32
12.1 "Affiliate".................................................... 32
12.2 "Base Purchase Price".......................................... 32
12.3 "Company Stock"................................................ 32
12.4 "Earn-Out Purchase Price"...................................... 32
12.5 "Encumbrances"................................................. 32
12.6 "GAAP"......................................................... 32
12.7 "Government Authority"......................................... 33
12.8 "Knowledge".................................................... 33
12.9 "Legal Requirement"............................................ 33
12.10 "Material Adverse Effect"...................................... 33
12.11 "Outstanding Company Shares"................................... 33
12.12 "Person"....................................................... 33
12.13 "Purchase Price Adjustment Amount"............................. 33
12.14 "Technology"................................................... 34
13. TERMINATION.......................................................... 34
13.1 Circumstances of Termination................................... 34
13.2 Effect of Termination.......................................... 34
14. GENERAL.............................................................. 35
14.1 Cooperation.................................................... 35
14.2 Successors and Assigns......................................... 35
14.3 Entire Agreement............................................... 35
14.4 Counterparts................................................... 35
14.5 Brokers and Agents............................................. 35
14.6 Payment of Expenses............................................ 35
14.7 Arbitration; Attorneys' Fees, Prevailing Party................. 35
14.8 Notices........................................................ 36
14.9 Governing Law.................................................. 37
14.10 Exercise of Rights and Remedies................................ 37
14.11 Reformation and Severability................................... 37
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
14.12 General Terms.................................................. 38
15. CERTAIN POST-CLOSING MATTERS......................................... 38
15.1 Appointment of President and Deputy General Manager............ 38
15.2 Payment of Earn-Out Purchase Price............................. 38
15.3 Confidentiality and Intellectual Property...................... 38
</TABLE>
iv
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of September 20,
---------
1999, among SM&A CORPORATION (EAST), a California corporation ("SM&A"); KAPOS
----
ASSOCIATES INC., a Virginia corporation (the "Company"); and ERVIN KAPOS AND
-------
JUNE KAPOS (each a "Principal Shareholder" and collectively the "Principal
--------------------- ---------
Shareholders"); and VERONA OLIVER AND CORDELLIA SCRUGGS (each an "Additional
- ------------ ----------
Founder," and collectively the "Additional Founders").
- ------- -------------------
WHEREAS, the Principal Shareholders are the record owners of an aggregate
of 4,000 shares of common stock of the Company; and
WHEREAS, the Additional Founders are the record owners of an aggregate of
1,000 shares of common stock of the Company; and
WHEREAS, the respective Boards of Directors of SM&A and the Company deem it
advisable and in the best interests of their respective corporations and
stockholders that SM&A acquire all of the issued and outstanding shares of the
Company on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements set forth below, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. ACQUISITION OF OUTSTANDING COMPANY SHARES.
-----------------------------------------
In accordance with the terms and subject to the conditions of this
Agreement, SM&A shall acquire all of the issued and outstanding shares of
capital stock of the Company (the "Outstanding Company Shares") at the Closing
--------------------------
(as defined in Section 3.1 below) in exchange for the consideration described in
-----------
Article 2 below.
- ---------
2. CONSIDERATION.
-------------
2.1 Consideration. The aggregate consideration to be paid in connection
-------------
with the acquisition of the Outstanding Company Shares by SM&A (the
"Consideration") shall equal the (i) Base Purchase Price, plus (ii) the Earn-Out
-------------
Purchase Price.
2.2 Capital Stock of the Company. At the Closing, by virtue of the
----------------------------
acquisition of the Outstanding Company Shares by SM&A, each Outstanding Company
Share shall be exchanged for (i) cash in an amount equal to the Base Purchase
Price divided by the number of Outstanding Company Shares, subject to the
provisions of Schedule 7.6; and (ii) the right to receive cash equal to the
------------
Earn-Out Purchase Price divided by the number of Outstanding Company Shares,
subject to the Earn-Out conditions described in Schedule 12.4; provided,
------------- --------
however, the Escrow Funds (as hereinafter defined) which shall be paid into the
- -------
escrow pursuant to Section 2.3 shall be deducted
-----------
<PAGE>
from the Base Purchase Price allocated to the Principal Shareholders (which
deduction shall be allocated among the Principal Shareholders according to the
proportions specified in Schedule 3.1 to the Escrow Agreement (as hereinafter
------------
defined)).
2.3 Escrow of Cash. At the Closing, SM&A shall deposit $300,000 of the
--------------
Base Purchase Price allocated to the Principal Shareholders (the "Escrow Funds")
------------
in an interest-bearing escrow for a period of one (1) year (the "Escrow Period")
-------------
as a source of payment for the indemnification obligations of the Principal
Shareholders and Additional Founders pursuant to Article 10 below. The Escrow
----------
Funds allocable to the Principal Shareholders shall be held and disbursed
pursuant to the terms of this Agreement and an escrow agreement in substantially
the form attached hereto as Exhibit 2.3 (the "Escrow Agreement"). The Escrow
----------- ----------------
Funds allocable to each Principal Shareholder shall be described on Schedule 3.1
------------
to the Escrow Agreement.
3. CLOSING.
-------
3.1 Closing. The closing of the acquisition of the Outstanding Company
-------
Shares by SM&A (the "Closing") shall take place at the offices of Hogan &
-------
Hartson, LLP, 8300 Greensboro Drive, McLean, Virginia 22102, before the close of
business on the later of (a) the day after all of the conditions to the Closing
set forth in Articles 8 and 9 have been satisfied or waived in writing, or (b)
----------------
September 16, 1999, or at such other place, time and date as the parties hereto
mutually may agree (the "Closing Date").
------------
3.2 Closing Deliveries. At the Closing, the parties shall have delivered
------------------
to each other the following closing documents and agreements, and taken the
following actions:
(a) Documents and agreements delivered by or on behalf of each
Principal Shareholder, Additional Founder and/or the Company, as the case
may be, to SM&A:
(i) a duly executed copy of this Agreement;
(ii) a duly executed copy of the Escrow Agreement;
(iii) duly executed resignations from each of the Company's
directors and officers serving in such capacity immediately prior to
the Closing;
(iv) such certificates of the Company, Additional Founders
and/or the Principal Shareholders as required by Article 9;
---------
(v) an opinion of counsel for the Company, substantially in the
form attached hereto as Exhibit 3.2(a)(v);
-----------------
(vi) duly executed copy of the Employment Agreement, including
noncompetition provisions, between the Company and Ervin Kapos,
substantially in the form attached hereto as Exhibit 3.2(a)(vi) (the
------------------
"Employment Agreement");
--------------------
2
<PAGE>
(vii) certificates of Good Standing and Existence of the Company
issued by the Secretary of State of the State of California and the
Virginia State Corporation Commission and by the appropriate
authorities in each other jurisdiction, if any, where the Company is
qualified to do business;
(viii) Company financials for the months ended July 31, 1999 and
August 31, 1999;
(ix) Documents showing the termination of the Company present
bank credit facility and release of related liens;
(x) Documents showing the satisfaction of all of the Company's
indebtedness to the Principal Shareholders;
(xi) the Equity Incentive Proposal of Ervin Kapos attached
hereto as Exhibit 3.2(a)(xi);
------------------
(xii) stock certificates and stock powers as required by Section
-------
3.2(c);
------
(xiii) resolutions of the Board of Directors and shareholders of
the Company approving the transactions contemplated herein;
(xiv) written consents of the landlords of the Company's leased
locations in Arlington, Virginia; Norfolk, Virginia; and San Diego,
California consenting to the sale of the Outstanding Company Shares to
SM&A;
(xv) a duly executed copy of the Flow of Funds Agreement (as
defined below); and
(xvi) such other documents that may be reasonably requested by
SM&A.
(b) Documents and agreements delivered by or on behalf of SM&A to the
Company, Additional Founders and/or the Principal Shareholders, as the case
may be:
(i) a duly executed copy of this Agreement;
(ii) a duly executed copy of the Escrow Agreement;
(iii) such certificates of SM&A as required by Article 8;
---------
(iv) certificate of Good Standing and Existence of SM&A issued
by the Secretary of State of the State of California;
3
<PAGE>
(v) duly executed copy of the Employment Agreement;
(vi) resolutions of the Board of Directors of SM&A approving
the transactions contemplated herein;
(vii) an opinion of counsel for SM&A, substantially in the form
attached hereto as Exhibit 3.2(b)(vii);
-------------------
(viii) a duly executed copy of the Flow of Funds Agreement; and
(ix) such other documents that may be reasonably requested by
the Company.
(c) On the Closing Date, SM&A shall deliver to each shareholder of
the Company that portion of the Base Purchase Price to which each
shareholder is entitled pursuant to Article 2, provided that each such
---------
shareholder delivers to SM&A at the Closing a certificate or certificates
representing the Outstanding Company Shares held by each such shareholder
immediately prior to the Closing, along with stock powers duly executed in
blank and/or other instruments of transfer satisfactory to SM&A.
(d) Funds shall be transferred and disbursed by the parties in
accordance with the Flow of Funds Agreement attached hereto as Schedule 7.6
------------
(the "Flow of Funds Agreement").
-----------------------
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE ADDITIONAL FOUNDERS AND
--------------------------------------------------------------------------
THE PRINCIPAL SHAREHOLDERS.
--------------------------
The Company, the Additional Founders and the Principal Shareholders jointly
and severally represent and warrant that all of the following representations
and warranties are true, subject to such exceptions as are specifically
disclosed in the disclosure schedule (referencing the appropriate section and
paragraph numbers), which shall modify all representations and warranties of the
Company, the Additional Founders and the Principal Shareholders contained in
this Agreement ("Disclosure Schedule"). The Company, the Additional Founders and
-------------------
the Principal Shareholders have used their best efforts to reference on the
Disclosure Schedule the appropriate section and paragraph number.
4.1 Due Organization. The Company is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the Commonwealth of Virginia,
and is duly authorized, qualified and licensed under all applicable laws,
regulations, ordinances and orders of Government Authorities to own its
properties and assets and to carry on its business in the places and in the
manner as it is now conducted, except where the failure to be so authorized,
qualified or licensed would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. True and correct copies of the Articles
of Incorporation (certified by the Clerk of the Virginia State Corporation
Commission) and Bylaws (certified by the Secretary of the Company) as each is
amended, of the Company are attached to the Disclosure Schedule. The stock
records and minute books of the Company, as heretofore made available to SM&A,
are correct and complete (in the case of the minute books, in all material
respects).
4
<PAGE>
4.2 Authorization; No Conflicts. The Company has the full legal right,
---------------------------
power and authority to enter into this Agreement, the Flow of Funds Agreement,
the Employment Agreement and the Escrow Agreement, and to perform the
transactions contemplated herein and therein. The execution, delivery and
performance of this Agreement, the Flow of Funds Agreement, the Employment
Agreement and the Escrow Agreement, and the consummation of the transactions
contemplated hereby and thereby do not and will not (a) violate or conflict with
any provision of the Company's Articles of Incorporation or Bylaws, (b) violate
or conflict with any provision of, or be an event that is (or with the passage
of time will result in) a default or violation of, or result in the
modification, cancellation or acceleration of (whether after the giving of
notice or lapse of time or both) any obligation under, or result in the
imposition or creation of any Encumbrances upon any of the assets of the Company
pursuant to, any Contract (as defined in Section 4.15) to which the Company is a
------------
party or by which the Company is bound, (c) violate or conflict with any Legal
Requirement applicable to either the Company or any of its properties or assets
or any other material restriction of any kind or character to which it is
subject, or (d) require the Company to obtain any authorization, consent, order,
permit or approval of, or provide notice to, or filing, registration or
qualification with, any Government Authority, except as set forth on the
Disclosure Schedule. The Company has received, or will receive prior to the
Closing, all necessary approvals from its Board of Directors and shareholders to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Company, and at the Closing the Flow of Funds
Agreement, the Employment Agreement and the Escrow Agreement will be duly
executed and delivered by the Company, and, assuming the due execution and
delivery hereof and thereof by SM&A, this Agreement constitutes, and the Flow of
Funds Agreement, the Employment Agreement and the Escrow Agreement will
constitute, the legal, valid and binding obligation of the Company, enforceable
against it in accordance with their terms, except as enforceability hereof and
thereof may be limited by applicable bankruptcy, insolvency, moratorium or
similar laws affecting creditors' rights generally and by the exercise of
judicial discretion in accordance with equitable principles.
4.3 Capital Stock. The authorized capital stock of the Company consists
-------------
solely of 10,000 shares of voting common stock, $1.00 par value per share, of
which only 5,000 shares are issued and outstanding, and are held of record by
the persons and in the amounts set forth on the Disclosure Schedule, free and
clear of all Encumbrances. The issued and outstanding shares of Company Stock
have been duly authorized and validly issued, are fully paid and nonassessable,
and such shares were offered, issued, sold and delivered by the Company in
compliance with all applicable state and federal securities laws. Shares of the
Company Stock were not issued in violation of the preemptive rights, if any, of
any past or present shareholder, or any rights of first refusal or similar
rights in favor of the Company or any past or present shareholder of the
Company.
4.4 Transactions in Capital Stock and Spin-offs. Except as set forth on
-------------------------------------------
the Disclosure Schedule, no right of first refusal, option, warrant, call,
conversion right or commitment of any kind exists with respect to any
outstanding or authorized but unissued capital stock of the Company. In
addition, there are no (a) outstanding securities or obligations that are
convertible into or exchangeable for any shares of the capital stock or other
equity securities of the Company, or (b) contracts, arrangements or commitments,
written or otherwise, under which the Company is or may become bound to sell or
otherwise issue any shares of its capital stock or any other equity
5
<PAGE>
securities. Without limiting the generality of the foregoing, the Company has
done nothing to the Company's Knowledge which would form the basis upon which
any person (other than any shareholder identified as a record owner of
Outstanding Company Shares on the Company's stock books, or spouse of a
principal of a trust that is such a shareholder) may claim to be in any way the
record or beneficial owner of, or to be entitled to acquire (of record or
beneficially), any shares of the capital stock or other equity securities of the
Company. In addition, the Company has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect
thereof, and there has been no transaction or action taken with respect to the
equity ownership of the Company in contemplation of the transactions described
in this Agreement. Since June 20, 1997, there has not been any (a) issuance,
sale, repurchase, redemption or other transfer of or transaction in the Company
Stock or (b) any sale or spin-off of significant assets of the Company, in each
case other than in the ordinary course of business.
4.5 No Bonus Shares. None of the shares of the Company Stock was issued
---------------
for other than legally valid consideration.
4.6 Subsidiaries. The Company does not presently own, of record or
------------
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity. The Company is not, directly or indirectly, a
participant in any joint venture, partnership or other noncorporate entity.
4.7 No Options, Warrants, Related Rights. The Company has not issued and
------------------------------------
there are not outstanding, any options, warrants or other rights to acquire any
of the Company's capital stock.
4.8 Financial Statements. Copies of the following financial statements
--------------------
(the "Financial Statements") of the Company are attached to the Disclosure
--------------------
Schedule:
(a) The Company's balance sheet as of December 31, 1998 (reflecting
recasted earnings before interest and taxes of no less than $370,000) and
for the two (2) prior years, and statements of earnings, cash flows and
shareholders' equity for the year then ended and for the two (2) prior
years;
(b) The Company's balance sheet as of June 30, 1999 (hereinafter
referred to as the "Balance Sheet Date") and consolidated statements of
------------------
earnings, cash flows and shareholders' equity for the six (6)-month period
then ended;
(c) The Company's balance sheets, statements of earnings, cash flows
and shareholders' equity for the months ended January 31, February 28,
March 31, April 30, May 31, July 31 and August 31, 1999; and
(d) The Company's recasted financial statements reflecting earnings
before interest and taxes of at least $420,000 for the twelve months ended
June 30, 1999.
6
<PAGE>
The Financial Statements have been prepared in accordance with GAAP and on a
consistent basis throughout the periods indicated. Such balance sheets present
fairly and in all material respects the financial condition of the Company as of
the dates indicated thereon, and such statements of earnings, cash flows and
shareholders' equity present fairly and in all material respects the results of
its operations for the periods indicated thereon.
4.9 Liabilities and Obligations. Except as set forth on the Disclosure
---------------------------
Schedule with reference to Section 4.4, Section 4.8 and Section 4.9, the Company
----------- ----------- -----------
has no liabilities or obligations of any nature (whether known or unknown, due
or to become due, absolute, accrued, contingent or otherwise, and whether or not
determined or determinable) and there is no existing condition, situation or set
of circumstances which could result in such a liability or obligation, except
for liabilities or obligations under any Contract disclosed on the Disclosure
Schedule. For each such liability for which the amount is not fixed or is
contested, the Company has provided on the Disclosure Schedule a summary
description of its best estimate of the liability.
4.10 Approvals. No authorization, consent or approval of, or registration
---------
or filing with, any governmental authority or any other person is or was
required to be, and has not been, obtained or made by the Company in connection
with the execution, delivery or performance of this Agreement or the
transactions contemplated by this Agreement.
4.11 Accounts and Notes Receivable. The Disclosure Schedule sets forth an
-----------------------------
accurate list of the accounts and notes receivable of the Company as of the
Balance Sheet Date, including receivables from and advances to the Company's
employees and shareholders. Such list includes an aging of all accounts and
notes receivable as of the Balance Sheet Date showing amounts due in thirty (30)
day aging categories. Except as set forth on the Disclosure Schedule, all
accounts receivable, unbilled invoices and other debts due or recorded in the
records and books of account of the Company as being due to the Company (as the
case may be) as at the date of this Agreement will be good, payable and
collectible in full in the ordinary course of business within ninety (90) days
after the Closing, net of applicable reserves as recorded on the Company's books
on the date hereof; no contest with respect to the amount or validity of any
amount is pending; and none of such accounts receivable or other debts is or
will at the Closing be subject to any counterclaim or set-off. The values at
which accounts receivable are carried reflect the accounts receivable valuation
policy of the Company which is consistent with that as historically and
consistently maintained by the Company.
4.12 Intellectual Property. The Company owns or has valid, binding and
---------------------
enforceable rights to use all patents, trademarks, trade names, service marks,
service names, copyrights, applications for any of the foregoing, and licenses
or other rights in respect of any of the foregoing ("Intellectual Property")
---------------------
material in connection with its business, without any conflict with the rights
of others. The Company has not received any notice from any other person
pertaining to or challenging the right of the Company to use any Intellectual
Property or Technology owned or used by or licensed to the Company. Other than
in the ordinary course of business, the Company has not granted any outstanding
licenses or other rights, and has no obligation to grant any licenses or other
rights, under, and the shareholders of the Company and the employees of the
Company have no rights in or to, any of the Intellectual Property or Technology
owned or used by or licensed by or to the Company. No claims have been made by
the Company of any violation or infringement by others of the rights of the
7
<PAGE>
Company with respect to any Intellectual Property or Technology of the Company,
and the Company has no Knowledge of any basis for the making of any such claim.
The Company has delivered to SM&A on the Disclosure Schedule a complete and
correct list and/or summary description of all material Intellectual Property
and Technology owned by, used by or licensed by or to the Company.
4.13 Permits. Except as set forth on the Disclosure Schedule, the Company
-------
owns or possesses all franchises, licenses, permits, consents, approvals and
authorizations (collectively herein referred to as "Permits"), of any Government
-------
Authority which are necessary for the conduct of its business as currently
conducted. Each of the foregoing is in full force and effect, and the Company is
in compliance with all of its obligations with respect thereto, and to the
Company's Knowledge no event has occurred which permits, or upon the giving of
notice or lapse of time or otherwise would permit, revocation or termination of
any of the foregoing which would have a Material Adverse Effect upon the
Company.
The Company has delivered to SM&A on the Disclosure Schedule a complete and
correct list of all Permits held by the Company.
4.14 Real and Tangible Personal Property.
-----------------------------------
(a) The Disclosure Schedule contains an accurate list of all real
property leased by the Company. The Company does not own, nor has it ever
owned, any real property.
(b) The Disclosure Schedule contains an accurate list of all
material items of tangible personal property of every kind or description
owned or held by the Company, and leases or licenses or other rights to
possession thereof and includes an indication as to which assets are
currently owned by business or personal affiliates of the Company. All
tangible personal property of the Company is in good operating condition
and repair, (i) excepting ordinary wear and tear and equipment that is out
of service, and (ii) taking into consideration the current age, use and
functionality of such items.
(c) The Company has good and marketable title to, or holds by valid
lease or license (which lease or license is in full force and effect and,
to the best of the Company's Knowledge, binding upon the parties (and their
successors) thereto in accordance with their respective terms), the real
and tangible personal property listed on the Disclosure Schedule, free and
clear of all Encumbrances.
4.15 Material Contracts and Commitments. The Disclosure Schedule sets
----------------------------------
forth a list, complete and correct in all material respects, of the following
written contracts, commitments and other agreements to which the Company is a
party or by which it or any of its properties is bound (herein collectively
referred to as the "Contracts"):
---------
8
<PAGE>
(a) agreements involving payments, individually or in the aggregate,
in excess of $25,000;
(b) joint venture or partnership agreements or limited liability
company agreements;
(c) loan agreements, indemnity or guaranty agreements, bonds,
mortgages, liens, pledges or other security agreements (without regard to
dollar amount involved);
(d) leases, licenses, options to purchase real or personal property
involving future obligations on the part of the Company which aggregate in
excess of $25,000;
(e) agreements relating to the purchase or acquisition, by merger or
otherwise, of a signification portion of the business assets or securities
of the Company by any other person or of any other person by the Company
(other than as contemplated by this Agreement);
(f) agreements that limit or restrict the ability of the Company to
compete or otherwise to conduct its business in any manner or place, or
that contain covenants of any other person not to compete with the Company;
(g) any agreement with any holder of securities of the Company as
such (including, without limitation, any agreement containing an obligation
to register any of such securities under any federal or state securities
laws);
(h) agreements with or for the benefit of any affiliates,
shareholders, employees, consultants, officers or directors of the Company
providing for compensation or benefits individually in excess of $60,000
annually;
(i) agreements that require the Company to buy or sell goods or
services with respect to which there will be material losses or will be
costs and expenses materially in excess of expected receipts; and
(j) any other agreements, whether or not made in the ordinary course
of business, that are material to the Company.
The Company has complied in all material respects with all commitments and
obligations pertaining to any such Contract, and is not in material default
under any such Contract and no notice of material default has been received, nor
to the best of the Company's Knowledge is there any default on the part of any
other party to such Contract or any intent of any such party to attempt to
terminate or amend any such Contract.
9
<PAGE>
4.16 Insurance. The Disclosure Schedule sets forth an accurate list of all
---------
insurance policies carried by the Company, and the Company has delivered to SM&A
on the Disclosure Schedule an accurate list of all insurance loss runs or
worker's compensation claims received during the past three (3) policy years.
Such insurance policies are currently in full force and effect and shall remain
in full force and effect through the Closing Date.
4.17 Employees, Consultants, Etc.
---------------------------
(a) The Disclosure Schedule sets forth (i) an accurate and complete
list of (A) all officers and directors of the Company, (B) all employees of
the Company and (C) all consultants currently performing services for the
Company, and (ii) an accurate and complete list of all independent
contractors and other agents currently performing services for the Company,
setting forth in each case the rate of compensation (and the portions
thereof attributable to salary, bonus and other compensation,
respectively), the billing rate and gross margin percentage of each
independent contractor and agent.
(b) The Disclosure Schedule sets forth a schedule, accurate and
complete, showing all employment agreements and any other agreements to
which the Company is a party or by which it is bound, containing terms
providing for (i) compensation or other benefits or consequences upon the
happening of a change of control of the Company and (ii) deferred
compensation; together in each case with copies of such plans, agreements
and any trusts related thereto, and classifications of employees covered
thereby.
(c) The Company has complied with the verification requirements and
the record keeping requirements of the Immigration Reform and Control Act
of 1986 ("IRCA") in all material respects; to the best of the Company's
----
Knowledge, the information and documents on which the Company relied in
complying with IRCA are true and correct; and to the Company's Knowledge,
there have not been any discrimination complaints filed against the Company
pursuant to IRCA.
(d) No employees of the Company are represented by any labor union
or covered by any collective bargaining agreement nor, to the best of the
Company's Knowledge, is any campaign to establish such representation in
progress.
(e) The Company has not received or been notified of any
discrimination complaint filed by any employee, applicant, union, or other
party with any Government Authority.
(f) The Company has filed all required reports and information that
were due prior to the Closing Date and otherwise has complied with all
material applicable regulatory requirements within the jurisdiction of the
United States Equal Employment Opportunity Commission, United States
Department of Labor, United States Internal Revenue Service and state and
local human rights and/or civil rights agencies.
10
<PAGE>
(g) The Company has not received notice, written or otherwise, of any
intention by any of its employees to terminate his or her employment or to
seek a modification in the terms of his or her employment, individually or
collectively with other employees.
(h) To the Company's Knowledge, no employee, officer or director is
in violation of any obligation of confidentiality to the Company.
4.18 Benefit Plans; ERISA Compliance.
-------------------------------
(a) The Disclosure Schedule contains a list of all "employee pension
benefit plans" (as defined in Section 3(2) of Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) (sometimes referred to in this
-----
Section 4.18 as "Pension Plans"), "employee welfare benefit plans" (as
------------ -------------
defined in Section 3(1) of ERISA) (sometimes referred to in this Section
-------
4.18 as "Welfare Plans") and all other Benefit Plans, as defined below,
---- -------------
currently maintained in whole or in part, contributed to, or required to be
contributed to by the Company for the benefit of any present or former
officer, employee or director of the Company. For purposes of this
Agreement, the term "Benefit Plan" shall mean any collective bargaining
------------
agreement or any bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option,
phantom stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical, dependent care, cafeteria, employee assistance,
scholarship or other plan, program, arrangement or understanding (whether
or not legally binding) maintained in whole or in part, contributed to, or
required to be contributed to by the Company for the benefit of any present
or former officer, employee or director of the Company which is not a
Pension Plan or Welfare Plan. The Company has delivered to SM&A true,
complete and correct copies of (i) each Pension Plan, Welfare Plan and
Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions
thereof) and all amendments, (ii) the three annual reports on Form 5500
most recently filed with the Internal Revenue Service (the "IRS") with
---
respect to each Pension Plan or Welfare Plan (if any such report was
required), (iii) the most recent IRS determination letter request for each
Pension Plan intended to be qualified under Section 401(a) of the Code and
all rulings or determinations concerning such Pension Plan requested of the
IRS subsequent to the date of that letter, (iv) the most recent actuarial
report for each Pension Plan and Welfare Plan for which an actuarial report
is required by ERISA, (v) the most recent summary plan description for each
Pension Plan and Welfare Plan for which such summary plan description is
required by ERISA and each summary of material modifications prepared, as
required by ERISA, after the last summary plan description, (vi) each trust
agreement and/or group annuity contract relating to any Benefit Plan, and
(vii) all other information reasonably requested by SM&A.
(b) Each Pension Plan maintained and each pension plan formerly
maintained that is or was intended to be qualified under Section 401(a) of
the Code has been the subject of a determination letter from the IRS to the
effect that such plan is qualified under Section 401(a) of the Code or can
still be submitted in a timely manner to the IRS for such a letter, and no
such determination letter has been revoked nor has revocation of any such
letter been threatened, nor has any such plan been amended since the date
of its most recent
11
<PAGE>
determination letter or application therefor in any respect that would
adversely affect its qualification, and nothing has occurred or failed to
occur which would cause the loss of such qualification, and all amendments
required to be adopted before the Closing Date for any such Pension Plan to
continue to be so qualified have been or will be duly and timely adopted;
provided however, that to the extent that this representation applies to
terminated pension plans, this representation refers to the qualified
status of any such plan through the time of its termination. To the best
Knowledge of the Company, the Company has paid all premiums (including any
applicable interest, charges and penalties for late payment) due the
Pension Benefit Guaranty Corporation (the "PBGC") with respect to each such
----
Pension Plan for which premiums to the PBGC are required and no such
Pension Plan in whole or in part maintained by the Company has been
terminated or partially terminated under circumstances which would result
in liability to the PBGC.
(c) Each of the Pension Plan, Welfare Plan and Benefit Plans
sponsored by, and each of the benefit plans formerly sponsored by the
Company: (i) has been in substantial compliance with all reporting and
disclosure requirements of (x) Part 1 or Subtitle B of Title I of ERISA, if
applicable, or (y) other applicable law, (ii) has had the appropriate
required Form 5500 (or equivalent annual report) filed timely with the
appropriate governmental entity for each year of its existence, (iii) has
at all times complied with the bonding requirements of (x) Section 412 of
ERISA, if applicable, or (y) other applicable law, (iv) has no issue
pending (other than the payment of benefits in the normal course) nor any
issue resolved adversely to the Company which may subject the Company to
the payment of penalty, interest, tax or other obligation that can be
expected to have a Material Adverse Effect on the Company, nor is there any
basis for any imposition of any such liability, and (v) has been maintained
in all respects in compliance with the applicable requirements of ERISA,
the Code and other applicable law not otherwise covered hereunder so as not
to have any Material Adverse Effect on the Company.
(d) All voluntary employee benefit associations maintained by the
Company and intended to be exempt from federal income tax under Section
501(c)(9) of the Code have been submitted to and approved as exempt from
federal income tax under Section 501(c)(9) of the Code by the IRS, and, to
the best Knowledge of the Company, nothing has occurred or failed to occur
which would cause the loss of such exemption.
(e) The execution of this Agreement or the consummation of the
transactions contemplated by this Agreement will not give rise to any, or
trigger any, change of control, severance or other similar provisions in
any Pension Plan, Welfare Plan or Benefit Plan. The consummation of any
transaction contemplated by this Agreement will not result in any (i)
payment (whether of severance pay or otherwise) becoming due from the
Company to any officer, employee, former employee or director thereof or to
the trustee under any "rabbi trust" or similar arrangement; (ii) benefit
under any Benefit Plan of the Company being established or becoming
accelerated, vested or payable; or (iii) payment or series of payments by
the Company, directly or indirectly, to any person that would constitute a
"parachute payment" within the meaning of Section 280G of the Code.
12
<PAGE>
(f) The Company provides no material post-retirement medical, health,
disability or death protection coverage or contributes to or maintains any
employee welfare benefit plan which provides for medical, health,
disability or death benefit coverage following termination of employment by
any officer, director or employee except as is required by Section 4980B(f)
of the Code or other applicable statute, nor has it made any
representations, agreements, covenants or commitments to provide that
coverage.
(g) No Pension Plan or pension plan subject to Title IV of ERISA (i)
that the Company maintains or maintained, or (ii) to which the Company is
or was obligated to contribute, other than any such plan that is or was a
"multiemployer plan" (as such term is defined in Section 4001(a)(3) of
ERISA) had, as of its most recent annual valuation date, an "unfunded
benefit liability" (as such term is defined in Section 4001(a)(18) of
ERISA), based on actuarial assumptions which have been furnished to SM&A.
None of such plans subject to Section 302 of ERISA has an "accumulated
funding deficiency" (as such term is defined in Section 302 of ERISA),
whether or not waived. The Company, any officer of the Company, or any of
the Pension Plan or Welfare Plans (including the Pension Plans and prior
pension plans) which are subject to ERISA, or any trusts created
thereunder, or any trustee or administrator thereof, has engaged in a
"prohibited transaction" (as such term is defined in Section 406, 407 or
408 of ERISA or Section 4975 of the Code) or any other breach of fiduciary
responsibility that could subject the Company or any officer of the Company
to the tax or penalty on prohibited transactions imposed by such Section
4975 of the Code or to any liability under ERISA which would have a
Material Adverse Effect on the Company. To the best Knowledge of the
Company, no "reportable event" (as that term is defined in Section 4043 of
ERISA) with respect to which the thirty (30)-day notice requirement has not
been waived has occurred and is continuing with respect to any such Pension
Plan. The Company has not suffered a "complete withdrawal" or a "partial
withdrawal" (as such terms are defined in Section 4203 and Section 4205,
respectively, of ERISA) since the effective date of such Sections 4203 and
4205 for which the Company has any liability outstanding that can be
expected to have a Material Adverse Effect on the Company.
(h) With respect to any Welfare Plan, (i) each such Welfare Plan that
is a group health plan, as such term is defined in Section 5000(b)(1) of
the Code, complies in all material respects with any applicable
requirements of Part 6 of Title I of ERISA and Section 4980B(f) of the Code
and (ii) each such Welfare Plan (including any such plan covering retirees
or other former employees) may be amended or terminated with respect to
health benefits without having a Material Adverse Effect on the Company on
or at any time after the Closing Date.
(i) All contributions required by law or by a collective bargaining
or other agreement to be made under the Pension Plan, Welfare Plan or
Benefit Plans with respect to all periods through the Closing Date,
including a pro rata share of contributions due for the current plan year,
will have been made by such date or provided for by adequate reserves by
the Company. No changes in contribution rates or benefit levels have been
implemented or negotiated (but not yet implemented), with respect to any
Pension Plan, Welfare Plan or
13
<PAGE>
Benefit Plan since the date on which the information provided in the
attached schedule has been provided, and no such changes are scheduled to
occur.
(j) The Company has not and will not have any liability or obligation
for taxes, penalties, contributions, losses, claims, damages, judgments,
settlement costs, expenses, costs, or any other liability or liabilities of
any nature whatsoever arising out of or in any manner relating to any
Pension Plan, Welfare Plan or Benefit Plan (including but not limited to
employee benefit plans such as foreign plans which are not subject to
ERISA), that has been, or is, contributed to by any entity, whether or not
incorporated, which is deemed to be under common control (as defined in
Section 414 of the Code), with the Company that can be expected to have a
Material Adverse Effect on the Company, except to the extent they relate to
benefits payable in the ordinary course.
(k) The Company has complied in all material respects with all of the
health care continuation coverage requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 applicable to its employees prior to the
Closing Date.
(l) The past, present or future existence and/or operation of
provisions of Welfare Plans or Benefit Plans presently or formerly
sponsored by the Company which relate to individually-owned health
insurance policy expense reimbursement accounts have not resulted, and will
not result, in the incurrence by the Company or its affiliates or
successors of any Losses.
4.19 Conformity with Law; Pending or Threatened Claims. To the Company's
-------------------------------------------------
Knowledge, the Company has complied with, and the Company is not in material
default under, any law, rule, ordinance, ruling, directive, or regulation or
under any order, award, judgment or decree of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over the Company or any of its assets or its
business, except where the failure to so comply or the default thereunder would
not have a Material Adverse Effect on the Company. There are no claims, actions,
suits or proceedings, pending or, to the Knowledge of the Company threatened,
against or affecting the Company, at law or in equity, in any court, or before
or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
the Company or its business and no notice of any such claim, action, suit or
proceeding, whether pending or threatened, has been received.
4.20 Taxes.
-----
(a) The Company has timely filed all federal and other Tax Returns
(as hereinafter defined) which are required to be filed, and there are no
waivers or extensions of the statute of limitations, audits or examinations
in progress, judicial proceedings, or claims against the Company for Taxes
(as hereinafter defined and including penalties and interest) for any
period or periods prior to and including the Balance Sheet Date and no
notice of any claim, whether pending or threatened, for Taxes has been
received and not paid. The Company is not a party to any Tax allocation or
sharing agreement (i.e., any agreement or arrangement for the payment of
Tax liabilities or payment for Tax benefits with respect to a consolidated,
14
<PAGE>
combined or unitary Tax Return which includes the Company); there are no
requests for rulings in respect of any Tax pending by the Company with any
tax authority; and no penalty or deficiency in respect of any Taxes which
has been assessed against the Company remains unpaid. The amounts shown as
accruals for Taxes on the financial statements of the Company as of the
Balance Sheet Date delivered to SM&A as a part of the Disclosure Schedule
are sufficient for the payment of all Taxes of all kinds (including
penalties and interest) for any time or arising or incurred in connection
with periods on or before the Closing Date, and the Company has reserved an
amount sufficient to pay all such Taxes. Copies of Tax Returns and
franchise tax returns of the Company for its last two (2) fiscal years have
been made available to SM&A. For purposes of this Section 4.20, "Tax" shall
------------ ---
mean any United States or other federal, state, provincial, local or
foreign income, gross receipts, property, sales, goods and services use,
license, excise, franchise, employment, payroll, withholding, alternative
or add-on minimum, ad valorem, transfer or excise tax, or any other tax,
custom, duty, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or penalty, imposed by any
governmental authority. "Tax Return" shall mean any return, report or
----------
similar statement required to be filed with respect to any Tax (including
any attached schedules), including, without limitation, any information
return, claim for refund, amended return and declaration of estimated Tax.
(b) No shareholder of the Company is a foreign person subject to
withholding under Section 1445 of the Code and the regulations promulgated
thereunder.
(c) The Company has complied in all material respects with all
applicable laws, rules and regulations relating to information reporting
with respect to payments made to third parties and the withholding of and
payment of withheld Taxes and has timely withheld from employee wages and
other payments and paid over to the proper taxing authorities all amounts
required to be so withheld and paid over for all periods under all
applicable laws or it has finally resolved and fully satisfied any
liability for any failure to comply with any such matters.
(d) The Company has no Knowledge of any pending or threatened claim
by any taxing authority in any jurisdiction in which the Company does not
pay Taxes or file Tax Returns that the Company is required to pay Taxes or
file Tax Returns.
(e) The Company has not filed a consent under Section 341(f) of the
Code.
(f) The Company has not agreed nor is required to make any adjustment
under Section 481(a) of the Code.
4.21 Government Contracts.
--------------------
(a) The Company is not now and in the last two (2) years has not been
a party to any government contracts subject to price redetermination or
renegotiation;
15
<PAGE>
(b) All of the Company's government contracts completed on or before
December 31, 1996 have been audited, and no amounts are or will become
payable by the Company to any Government Authority in connection with such
contracts; and
(c) No amounts are or will become payable by the Company to any
Government Authority in connection with government contracts completed
during the period from January 1, 1997 through and including the Closing
Date.
4.22 Absence of Changes. Since the Balance Sheet Date, there has not been:
------------------
(a) any material adverse change in the financial condition, assets,
liabilities (contingent or otherwise), income or business of the Company;
(b) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business of the
Company;
(c) any change in the authorized capital of the Company or its
securities outstanding or any grant by the Company of any options,
warrants, calls, conversion rights or commitments;
(d) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption, purchase
or other acquisition of any of the capital stock of the Company, except as
contemplated by this Agreement;
(e) any increase in the compensation, bonus, sales commissions,
fringe benefits or fee arrangement payable or to become payable by the
Company to any of its officers, directors, shareholders, employees,
consultants or agents, other than in the ordinary course of business and
consistent with past practice, or any change in the method by which sales
commissions are calculated and paid;
(f) any work interruptions, labor grievances or claims filed
materially adversely affecting the business, results of operation or
condition (financial or otherwise) of the Company;
(g) any sale or transfer, or any agreement to sell or transfer, any
material assets, property or rights of the Company to any person, other
than in the ordinary course of business including, without limitation, the
Principal Shareholders, the Additional Founders and their respective
affiliates;
(h) any cancellation, or agreement to cancel, any material
indebtedness or other obligation owing to the Company, including without
limitation any indebtedness or obligation of the Principal Shareholders,
the Additional Founders or any affiliate thereof;
16
<PAGE>
(i) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights other than rights of
SM&A;
(j) any purchase or acquisition, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets, other than in the
ordinary course of business and consistent with past practice;
(k) any waiver of any material rights or claims of the Company, other
than in the ordinary course of business and consistent with past practice
and for fair value;
(l) any amendment or termination of any material contract, agreement,
license, permit or other right to which the Company is a party, any breach
by the Company of any such contract, agreement, license, permit or other
right or, to the Knowledge of the Company, any breach by any other party to
any such contract, agreement, license, permit or other right;
(m) any transaction by the Company outside the ordinary course of its
business; or
(n) any authorization, approval, agreement or commitment to do any of
the foregoing.
4.23 Deposit Accounts; Powers of Attorney. The Disclosure Schedule contains
------------------------------------
an accurate list, as of the date of this Agreement (which shall be accurate as
of the Closing Date unless modified in a written notice provided to SM&A at or
prior to the Closing), of:
(a) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(b) the names in which the accounts or boxes are held;
(c) the type of account; and
(d) the name of each person authorized to draw thereon or have access
thereto.
The Disclosure Schedule also sets forth the name of each person, corporation,
firm or other entity holding a general or special power of attorney from the
Company and a description of the terms of such power. Each such power, if any,
has been or will be canceled from and after the Closing Date.
4.24 Relations with Governments. To the Company's Knowledge, neither the
--------------------------
Company nor any director, officer, agent, employee or other person acting on
behalf of the Company, has used any Company funds for improper or unlawful
contributions, payments, gifts or entertainment, made
17
<PAGE>
any improper or unlawful expenditures relating to political activity to domestic
or foreign government officials or others or accepted or received any unlawful
contributions, payments, gifts or expenditures.
4.25 Conflicts of Interest. During the two (2)-year period preceding and
---------------------
including the date of this Agreement, neither (a) any past or present officer or
director of the Company, nor (b) to the Company's Knowledge, any relative of any
past or present officer or director of the Company, nor (c) to the Company's
Knowledge, any corporation, partnership, trust or other entity of which any such
past or present officer or director of the Company has a direct or indirect
interest or is a director, officer, shareholder, partner or trustee, is or has
ever been a party, directly or indirectly, to any transaction with the Company,
including without limitation any agreement or other arrangement providing for
the furnishing of services by or to the Company or the rental of any property
from or to the Company, or otherwise requiring or contemplating any payments by
or to the Company. Neither any present officer or director, nor, to the best of
the Company's Knowledge, any relative of any such officer or director, owns
directly or indirectly any interest in any corporation, firm, partnership, trust
or other entity or business which is a competitor, potential competitor,
customer, client or supplier of the Company or any related business.
4.26 Environmental Matters. The Company and all of its assets are in
---------------------
compliance with, and are not subject to any liability under, applicable federal,
state and local environmental and public or occupational health or safety laws,
regulations or codes or requirements relating to manufacture, storage,
transport, generation, use, treatment, disposal or handling of pollutants,
contaminants, hazardous or toxic wastes, substances, or materials, except where
the failure to so comply or the liability thereunder would not have a Material
Adverse Effect on the Company.
4.27 Disclosure. This Agreement and the Schedules and Exhibits hereto and
----------
all other documents included on, attached to or delivered with this Agreement,
the Schedules or the Exhibits hereto do not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein not misleading. If the Company or any Principal
Shareholder or Additional Founder becomes aware prior to the Closing of any fact
or circumstance which would change a representation or warranty of the Company
or the Principal Shareholders or Additional Founders contained in this
Agreement, such person shall immediately give written notice of such fact or
circumstance to SM&A. However, such notification shall not relieve any person of
its or his respective obligations under this Agreement (including, without
limitation, under Article 4 or 5, as the case may be).
--------------
5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDERS AND
---------------------------------------------------------------------------
ADDITIONAL FOUNDERS.
-------------------
In addition to the representations and warranties of the Company,
Additional Founders and Principal Shareholders set forth in Article 4, each
---------
Principal Shareholder and Additional Founder represents and warrants to SM&A
that all of the following representations and warranties are true, subject to
such exceptions as are specifically disclosed in the Disclosure Schedule
(referencing the appropriate section and paragraph numbers), which shall modify
the representations and warranties of the Principal Shareholders and the
Additional Founders set forth in this Article 5:
---------
18
<PAGE>
5.1 Authorization; No Conflicts. Such Principal Shareholder or Additional
---------------------------
Founder has the full legal right, power and authority to enter into this
Agreement, the Flow of Funds Agreement, the Employment Agreement (to the extent
he or she is a party thereto) and the Escrow Agreement (to the extent he or she
is a party thereto) and to perform the transactions contemplated herein and
therein. The execution, delivery and performance of this Agreement, the Flow of
Funds Agreement, the Employment Agreement (to the extent he or she is a party
thereto) and the Escrow Agreement (to the extent he or she is a party thereto),
and the consummation of the transactions contemplated hereby and thereby, do not
and will not (a) violate or conflict with any Legal Requirement applicable to
such Principal Shareholder or Additional Founder, or (b) require any
authorization, consent, order, permit or approval of, or notice to, or filing,
registration or qualification with, any Government Authority, except as set
forth on the Disclosure Schedule. This Agreement has been duly executed and
delivered by such Principal Shareholder or Additional Founder, and at the
Closing the Flow of Funds Agreement, the Employment Agreement (to the extent he
or she is a party thereto) and the Escrow Agreement (to the extent he or she is
a party thereto) will be duly executed and delivered by such Principal
Shareholder or Additional Founder, and, assuming the due execution and delivery
hereof and thereof by SM&A, this Agreement constitutes, and the Flow of Funds
Agreement, the Employment Agreement (to the extent he or she is a party thereto)
and the Escrow Agreement (to the extent he or she is a party thereto) will
constitute, the legal, valid and binding obligation of such Principal
Shareholder or Additional Founder, enforceable against such Principal
Shareholder or Additional Founder in accordance with their terms, except as
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws affecting creditors' rights generally and
by the exercise of judicial discretion in accordance with equitable principles.
5.2 Title to Company Stock. Such Principal Shareholder or Additional
----------------------
Founder has good and marketable title to the number of shares of Company Stock
set forth opposite such Principal Shareholder's or Additional Founder's name on
the Disclosure Schedule, free and clear of Encumbrances.
6. REPRESENTATIONS AND WARRANTIES OF SM&A.
--------------------------------------
SM&A represents and warrants to the Company, the Principal Shareholders and
the Additional Founders that all of the following representations and warranties
are true:
6.1 Organization and Standing. SM&A is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of California.
True and correct copies of the Articles of Incorporation (certified by the
Secretary of State of California) and Bylaws (certified by the Secretary of
SM&A), as each is amended, of SM&A are attached to Schedule 6.1.
------------
6.2 Authorization and Binding Obligation. SM&A has full corporate power
------------------------------------
and authority to enter into and perform this Agreement, the Flow of Funds
Agreement and the Escrow Agreement and the transactions contemplated herein and
therein. The execution, delivery and performance of this Agreement, the Flow of
Funds Agreement and the Escrow Agreement by SM&A have been duly and validly
authorized by all necessary corporate action on the part of SM&A. This Agreement
has been duly executed and delivered by SM&A. At the Closing, the Flow of Funds
Agreement and the Escrow Agreement will be duly executed and delivered by SM&A,
and assuming the due execution
19
<PAGE>
and delivery hereof and thereof by the other parties hereto, respectively, this
Agreement constitutes, and the Flow of Funds Agreement and the Escrow Agreement
will constitute, the legal, valid and binding obligation of SM&A, enforceable
against SM&A in accordance with their terms, except as enforceability thereof
may be limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting creditors' rights generally and by the exercise of judicial discretion
in accordance with equitable principles.
6.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Flow of Funds Agreement and the Escrow Agreement, and the
consummation of the transactions contemplated hereby and thereby do not and will
not (a) violate or conflict with any provision of SM&A's Articles of
Incorporation or Bylaws, (b) violate or conflict with any provision of, or be an
event that is (or with the passage of time will result in) a default or
violation of, or result in the modification, cancellation or acceleration of
(whether after the giving of notice or lapse of time or both) any obligation
under, or result in the imposition or creation of any Encumbrances upon any of
the assets of SM&A pursuant to any material contract, mortgage, lien, lease,
agreement or instrument to which SM&A is a party or by which SM&A is bound, (c)
violate or conflict with any Legal Requirement applicable to SM&A, or any of its
properties or assets or any other material restriction of any kind or character
to which it is subject, or (d) require any authorization, consent, order, permit
or approval of, or notice to, or filing, registration or qualification with, any
Government Authority.
6.4 Approvals. Except as set forth on Schedule 6.4, the execution,
--------- ------------
delivery and performance of this Agreement by SM&A do not require (a) the
consent, approval or authorization of any government or regulatory authority
having jurisdiction over SM&A or of any third party that have not been obtained,
or (b) the submission or filing of any notice, report or other filing with any
government or regulatory authority having jurisdiction over SM&A.
6.5 Litigation and Administrative Proceedings. There is no litigation,
-----------------------------------------
proceeding or investigation pending or, to the Knowledge of SM&A, threatened
against SM&A in any federal, state or local court, or before any administrative
agency, that seeks to enjoin or prohibit, or otherwise questions the validity
of, any action taken or to be taken pursuant to or in connection with this
Agreement.
6.6 SEC Reports and Financial Statements.
------------------------------------
(a) SM&A has made available to the Company or its counsel correct and
complete copies of each report, schedule, registration statement and
definitive proxy statement filed by SM&A Corporation, the sole shareholder
of SM&A ("Parent"), with the Securities and Exchange Commission ("SEC") on
------ ---
or after August 20, 1998 ("Parent SEC Documents"), which are all the
--------------------
documents (other than preliminary material) that Parent was required to
file with the SEC on or after that date. As of their respective dates or,
in the case of registration statements, their effective dates (or if
amended or superseded by a filing prior to the date of this Agreement, then
on the date of such filing), none of the Parent SEC Documents (including
all exhibits and schedules thereto and documents incorporated by reference
therein) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the
20
<PAGE>
circumstances under which they were made, not misleading, and the Parent
SEC Documents complied when filed in all material respects with the then
applicable requirements of the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, as the case may be, and the
rules and regulations promulgated by the SEC thereunder.
(b) The financial statements of SM&A included in the Parent SEC
Documents complied as to form in all material respects with the then
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may have been indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q
promulgated by the SEC) and fairly present the financial position of Parent
as at the respective dates thereof and the results of its operations and
cash flows for the respective periods then ended.
6.7 Ability to Perform Classified Programs. SM&A is not subject to
--------------------------------------
foreign ownership, control or influence (as such terms are defined in the
National Industrial Security Program Operating Manual) with respect to the
protection of classified information, documents and facilities.
6.8 No Registration Under the Securities Act.
----------------------------------------
SM&A understands that the Outstanding Company Shares to be purchased
by it under this Agreement have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), in reliance upon exemptions contained
in the Securities Act or interpretations thereof, and cannot be offered for
sale, sold or otherwise transferred unless such Outstanding Company Shares being
acquired hereunder subsequently are so registered or qualify for exemption from
registration under the Securities Act.
6.9 Acquisition for Investment.
--------------------------
The Outstanding Company Shares are being acquired under this
Agreement by SM&A in good faith solely for its own account, for investment and
not with a view toward resale or other distribution within the meaning of the
Securities Act. The Outstanding Company Shares will not be offered for sale,
sold or otherwise transferred by SM&A without either registration or exemption
from registration under the Securities Act.
6.10 Evaluation of Merits and Risks of Investment.
--------------------------------------------
SM&A has such knowledge and experience in financial and business
matters that SM&A is capable of evaluating the merits and risks of SM&A's
investment in the Outstanding Company Shares being acquired hereunder. SM&A
understands and is able to bear any economic risks associated with such
investment (including, without limitation, the necessity of holding the
Outstanding Company Shares for an indefinite period of time, inasmuch as the
Outstanding Company Shares have not been registered under the Securities Act).
21
<PAGE>
7. COVENANTS.
---------
7.1 Access and Cooperation. Between the date of this Agreement and the
----------------------
Closing Date, each of the Company and SM&A will afford to the officers and
authorized representatives of the other party access to all of its and its
subsidiaries' sites, properties, books and records and will furnish the other
party with such additional financial and operating data and other information as
to the business and properties of it and its subsidiaries as the other party may
from time to time reasonably request subject to regulatory requirements
concerning public reporting entities under the Securities Exchange Act of 1934,
as amended. Each of the Company and SM&A and its subsidiaries will cooperate
with the other party, its representatives, engineers, auditors and counsel in
the preparation of any documents or other material which may be required in
connection with any documents or materials required by any government agency.
The confidentiality agreement(s) heretofore signed by the Company and SM&A,
including without limitation, the confidentiality provisions of the letter of
intent dated July 16, 1999, shall remain in full force and effect until the
Closing.
7.2 Conduct of Business Pending Closing. Between the date hereof and the
-----------------------------------
Closing Date, the Company shall:
(a) carry on its business in substantially the same manner as it has
heretofore and not introduce any material new method of management,
operation or accounting;
(b) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
(c) perform all of its obligations under material agreements relating
to or affecting its respective assets, properties or rights;
(d) keep in full force and effect present insurance policies or other
comparable insurance coverage;
(e) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its present employees and maintain its
relationships with suppliers, customers and others having business
relations with it;
(f) maintain compliance with all permits, laws, rules and
regulations, consent orders, and similar governmental approvals; and
(g) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments, without the knowledge and consent
of SM&A.
7.3 Prohibited Activities. Between the date hereof and the Closing Date,
---------------------
the Company will not, without the prior written consent of SM&A:
22
<PAGE>
(a) make any change in its Articles of Incorporation or Bylaws;
(b) issue any securities, options, warrants, calls, conversion rights
or commitments relating to its securities of any kind;
(c) declare or pay any dividend, or make any distribution in respect
of its stock whether now or hereafter outstanding, or purchase, redeem or
otherwise acquire or retire for value any shares of its stock;
(d) enter into any contract or commitment or incur or agree to incur
any liability or make any capital expenditures in excess of $10,000, other
than in the ordinary course of business and consistent with past practice;
(e) increase any fringe benefit or the compensation payable or to
become payable to any officer, director, shareholder, employee or agent, or
make any bonus or management fee payment to any such person, other than in
the ordinary course of business and consistent with past practice;
(f) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired except as specifically disclosed on the Disclosure
Schedule;
(g) sell, assign, lease or otherwise transfer or dispose of any
material property or equipment, other than in the ordinary course of
business and consistent with past practice;
(h) negotiate for the acquisition of any business or the start-up of
any new business;
(i) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(j) waive any of its material rights or claims, other than the
ordinary course of business and consistent with past practice and for fair
value;
(k) breach or permit a breach, amend or terminate any material
agreement or any of its permits, licenses or other rights;
(l) enter into any transaction, including without limitation any
agreement or other arrangement providing for the furnishing of services by
or to the Company or the rental of any property from or to the Company, or
otherwise requiring or contemplating any payments by or to the Company,
with any past or present officer or director of the Company, any relative
of any past or present officer or director of the Company, or any
corporation, partnership, trust or other entity of which any past or
present officer or director of the Company has a direct or indirect
interest or is a director, officer, shareholder, partner or trustee; or
23
<PAGE>
(m) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
7.4 Release by Principal Shareholders and Additional Founders. EACH
---------------------------------------------------------
PRINCIPAL SHAREHOLDER AND ADDITIONAL FOUNDER HEREBY AGREES AND CONFIRMS THAT
EFFECTIVE AS OF THE CLOSING THE PRINCIPAL SHAREHOLDER AND ADDITIONAL FOUNDER
HEREBY FULLY RELEASES, ACQUITS AND FOREVER DISCHARGES THE COMPANY, TOGETHER WITH
ITS SUCCESSORS, ASSIGNS, AFFILIATES, ANY PARENT AND RELATED PARTIES, FROM ANY
AND ALL LIABILITY, CLAIM, DAMAGE, SUIT, COST, EXPENSE OR OBLIGATION OF ANY
NATURE WHATSOEVER WHETHER KNOWN OR UNKNOWN, ARISING IN RESPECT OF OR IN
CONNECTION WITH ANY TIME OR PERIOD OF TIME ON OR PRIOR TO THE CLOSING DATE,
EXCEPT FOR COMPENSATION PAYABLE TO SUCH PRINCIPAL SHAREHOLDER OR ADDITIONAL
FOUNDER BY THE COMPANY BASED UPON THE COMPANY'S STANDARD PRACTICES WHICH HAS NOT
BEEN PAID, PLUS THE REASONABLE REIMBURSABLE EXPENSES BASED UPON THE PAST
PRACTICES OF THE PRINCIPAL SHAREHOLDER OR ADDITIONAL FOUNDER THAT HAVE NOT BEEN
PAID, AND EXCEPT FOR ANY CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY. IN THIS REGARD, EACH PRINCIPAL SHAREHOLDER
AND ADDITIONAL FOUNDER EXPRESSLY WAIVES THE PROVISIONS OF SECTION 1542 OF THE
CALIFORNIA CIVIL CODE, WHICH STATE THAT A GENERAL RELEASE DOES NOT EXTEND TO
CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
7.5 No Shop. Between the date of this Agreement and the earlier of (i) the
-------
Closing Date or (ii) October 15, 1999, each of the Company, each of the
Additional Founders and the Principal Shareholders shall not, directly or
indirectly, in any way solicit, initiate contact with, or enter into or conduct
any discussions or negotiations, or enter into any agreements, whether written
or oral, with any other firm, entity or individual, with respect to the sale of
the stock or assets or the merger or other business combination of the Company
with any other entity (an "Acquisition Transaction"). The Company, each of the
-----------------------
Additional Founders and each Principal Shareholder, shall, if it or he or she is
the recipient of such an offer, immediately notify SM&A of such event and the
details of such offer. Any provision of this Agreement to the contrary
notwithstanding, the parties hereto acknowledge that the Company and each
Principal Shareholder and Additional Founder is bound by its fiduciary
obligations and that they each must act in accordance with those obligations.
7.6 Flow of Funds. Funds shall be transferred and disbursed by the parties
-------------
in accordance with the Flow of Funds Agreement attached as Schedule 7.6 hereto.
------------
24
<PAGE>
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY, THE ADDITIONAL FOUNDERS
---------------------------------------------------------------------------
AND THE PRINCIPAL SHAREHOLDERS.
------------------------------
The obligations of the Company, each of the Additional Founders and each of
the Principal Shareholders to close the transactions set forth in this Agreement
are subject to the following conditions, which may be waived in writing in whole
or in part; provided, however, that no such waiver of a condition shall
-------- -------
constitute a waiver of any other rights or remedies, at law or in equity, if
SM&A shall be in default of any of its representations, warranties or covenants
under this Agreement.
8.1 Representations and Warranties; Performance of Obligations. The
----------------------------------------------------------
representations and warranties of SM&A contained in Article 6 shall be accurate
---------
as of the Closing Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by SM&A on or before the Closing
Date shall have been duly complied with and performed; and the Company shall
have received a certificate dated as of the Closing Date from a duly authorized
officer of SM&A to such effect.
8.2 No Litigation. No action or proceeding before a court or any other
-------------
government agency or body shall have been instituted or threatened to restrain
or prohibit the consummation of the transactions contemplated by this Agreement.
8.3 No Material Adverse Change. No material adverse change in the results
--------------------------
of operations, financial condition or business of SM&A shall have occurred, and
SM&A shall not have suffered any material loss or damage to any of its
properties or assets, whether or not covered by insurance, since the date
hereof, which change, loss or damage materially affects or impairs the ability
of SM&A to conduct its business; and the Company shall have received a
certificate from a duly authorized officer of SM&A to such effect.
8.4 Consents and Approvals. All necessary consents of and filings with any
----------------------
government authority or agency or any third party relating to the consummation
of the transactions contemplated herein shall have been obtained or made, as
applicable, and no action or proceeding shall have been instituted or threatened
to restrain or prohibit the Company's performance of its obligations hereunder.
8.5 Opinion of Counsel. The Company shall have received an opinion from
------------------
Rutan & Tucker, LLP, counsel to the Company, dated the Closing Date,
substantially in the form attached hereto as Exhibit 3.2(b)(vii).
-------------------
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SM&A.
-------------------------------------------
The obligation of SM&A to close the transactions set forth in this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
the following conditions, which may be waived in writing in whole or in part;
provided, however, that no such waiver of a condition shall constitute a waiver
- -------- -------
of any other rights or remedies, at law or in equity, if the Company, a
Principal Shareholder or an Additional Founder shall be in default of any of its
representations, warranties or covenants under this Agreement.
25
<PAGE>
9.1 Representations and Warranties; Performance of Obligations. The
----------------------------------------------------------
representations and warranties of the Company, the Additional Founders and the
Principal Shareholders contained in Article 4 and Article 5, respectively, shall
--------- ---------
be accurate as of the Closing Date as though such representations and warranties
had been made as of that time; all of the terms, covenants and conditions of
this Agreement to be complied with and performed by the Company, the Additional
Founders and the Principal Shareholders on or before the Closing Date shall have
been duly complied with and performed; and a certificate to the foregoing effect
dated as of the Closing Date and signed by each Principal Shareholder and each
Additional Founder with respect to such Principal Shareholder's and Additional
Founder's representations, warranties and obligations and a certificate to the
foregoing effect dated as of the Closing Date and signed by a duly authorized
officer of the Company with respect to the Company's representations, warranties
and obligations, shall have been delivered to SM&A.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the consummation of the transactions contemplated by this Agreement.
9.3 Examination of Financial Statements. Prior to the Closing Date, SM&A
-----------------------------------
shall have had sufficient time to review the unaudited balance sheets of the
Company as of the end of the month immediately preceding the Closing Date, and
the unaudited statements of income, cash flow and shareholders' equity of the
Company for the period then ended shall disclose no material adverse change in
the financial condition of the Company.
9.4 No Material Adverse Change. No material adverse change in the results
--------------------------
of operations, financial condition or business of the Company shall have
occurred, and the Company shall not have suffered any material loss or damage to
any of its properties or assets, whether or not covered by insurance, since the
Balance Sheet Date, which change, loss or damage materially affects or impairs
the ability of the Company to conduct its business; and SM&A shall have received
a certificate signed by a duly authorized officer of the Company dated the
Closing Date to such effect.
9.5 Opinion of Counsel. SM&A shall have received an opinion from Hogan &
------------------
Hartson, LLP, counsel to the Company, dated the Closing Date, substantially in
the form attached hereto as Exhibit 3.2(a)(v).
-----------------
9.6 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency or any third party relating to the consummation
of the transactions contemplated herein shall have been obtained or made, as
applicable, and no action or proceeding shall have been instituted or threatened
to restrain or prohibit the consummation of the transactions contemplated by
this Agreement.
9.7 Additional Liabilities and Obligations. The Company shall have
--------------------------------------
delivered to SM&A a list, dated the Closing Date, setting forth all liabilities
and obligations of the Company exceeding $5,000 individually or $25,000 in the
aggregate arising since the Balance Sheet Date.
26
<PAGE>
9.8 Additional Contracts. The Company shall have delivered to SM&A a
--------------------
list, dated the Closing Date, showing all material contracts and agreements,
together with copies thereof, entered into by the Company since the date of this
Agreement, if any.
9.9 Good Standing Certificates. The Company shall have delivered to SM&A
--------------------------
certificates, dated as of a date no longer than ten (10) days prior to the
Closing Date, duly issued by the Secretary of State of the State California and
the Virginia State Corporation Commission and the appropriate authorities in
each other jurisdiction where the Company is qualified to do business as a
foreign corporation, showing that the Company is in good standing and authorized
to do business in each such state and, where such information is generally made
available by the appropriate authorities, that all state franchise and/or income
tax returns have been filed and taxes paid for the Company for all periods prior
to the Closing.
9.10 Resignation of Directors and Officers. Each of the Company's
-------------------------------------
directors and officers serving in such capacity immediately prior to the Closing
shall have delivered his duly executed resignation to the Company.
10. INDEMNIFICATION.
---------------
10.1 Survival. The representations, warranties, covenants and agreements
--------
of the parties made in this Agreement shall survive (and not be affected in any
respect by) the Closing and any examination or investigation conducted by or on
behalf of the parties hereto and any information which any party may receive
pursuant to the Schedules hereto or otherwise. Notwithstanding the foregoing,
the right of indemnification with respect to each representation and warranty
contained in this Agreement shall terminate on the date (the "Survival Date")
-------------
occurring on the second anniversary of the Closing Date; provided, however, (i)
-------- -------
the right of indemnification concerning the matters set forth in Sections 4.3,
-------------
4.4, 4.18, 4.20 and 4.26 shall survive until their applicable statutes of
- ------------------------
limitation, (ii) the right of indemnification concerning the matters set forth
in Section 4.21 shall survive until the fifth anniversary of the Closing Date,
------------
and (iii) the right to indemnification with respect to such representations and
warranties, and the liability of any party with respect thereto, shall not
terminate with respect to any claim, whether or not fixed as to liability or
liquidated as to amount, with respect to which such indemnifying party has been
given written notice prior to the Survival Date. The parties acknowledge and
agree that indemnification under this Article 10 shall be the sole remedy for
----------
any breach of this Agreement.
10.2 Indemnification.
---------------
(a) Each of the Principal Shareholders and Additional Founders
shall, jointly and severally, indemnify, defend, protect and hold harmless
SM&A and the Company and each of their respective successors and assigns
and each of their directors, officers, employees, agents and affiliates
(each an "SM&A Indemnified Person"), at all times from and after the date
-----------------------
of this Agreement (subject to any limitation on the survival of
representations and warranties set forth in Section 10.1), against all
------------
losses, claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses ("Losses") (including specifically, but
------
without limitation, reasonable attorneys' fees and expenses of
investigation
27
<PAGE>
("Legal Expenses")) based upon, resulting from or arising out of (i) any
--------------
inaccuracy or breach of any representation or warranty of the Company
contained in this Agreement, and (ii) the breach by the Company of, or the
failure by the Company to observe, any of its covenants or other agreements
contained in this Agreement.
(b) Each of the Principal Shareholders and Additional Founders shall
indemnify, defend, protect and hold harmless each SM&A Indemnified Person,
at all times from and after the date of this Agreement (subject to any
limitation on the survival of representations and warranties set forth in
Section 10.1) against all Losses (including specifically, but without
------------
limitation, Legal Expenses) based upon, resulting from or arising out of
(i) any inaccuracy or breach of any representation or warranty of such
Principal Shareholder or Additional Founder contained in this Agreement,
and (ii) the breach by such Principal Shareholder or Additional Founder of,
or the failure by the Principal Shareholder or Additional Founder to
observe, any of such Principal Shareholder's or Additional Founder's
covenants or other agreements contained in this Agreement.
(c) As security for the indemnity provided herein, the Escrow Funds
shall be held and released by the Escrow Agent as provided in the Escrow
Agreement. The parties acknowledge and agree that indemnity obligations of
the Principal Shareholders or Additional Founders other than indemnity
obligations arising with respect to representations and warranties
contained in Article 5 will be satisfied (i) first, from the Escrow Funds,
---------
(ii) second, from a cash payment by the Principal Shareholders equally or
in such proportions as the Principal Shareholders may otherwise agree
between themselves and (iii) third, from a cash payment by the Additional
Founders, equally or in such proportions as the Additional Founders may
otherwise agree between themselves. The parties further acknowledge and
agree that indemnity obligations of the Principal Shareholders or
Additional Founders arising with respect to representations and warranties
contained in Article 5 will not be subject to the limitation set forth in
---------
the preceding sentence.
(d) Notwithstanding anything to the contrary contained in this
Section 10.2, the aggregate amount to be paid by any Principal Shareholder
------------
or Additional Founder with respect to a breach of this Agreement shall not
exceed such Principal Shareholder's or Additional Founder's pro rata share
of the Consideration.
10.3 Indemnification by SM&A.
-----------------------
(a) SM&A shall indemnify, defend, protect and hold harmless each
Principal Shareholder and Additional Founder and his or her respective
successors and heirs (each a "Shareholder Indemnified Person") at all times
------------------------------
from and after the date of this Agreement (subject to any limitation on the
survival of representations and warranties set forth in Section 10.1)
------------
against all Losses (including specifically, but without limitation, Legal
Expenses) based upon, resulting from or arising out of (a) any inaccuracy
or breach of any representation or warranty of SM&A contained in this
Agreement, and (b) the breach by SM&A of, or the failure by SM&A to
observe, any of its covenants or other agreements contained in or made
pursuant to this Agreement.
28
<PAGE>
(b) Notwithstanding anything to the contrary contained in this
Section 10.3, the aggregate amount to be paid by SM&A with respect to a
------------
breach of this Agreement shall not exceed the Consideration.
10.4 Indemnification Procedures.
--------------------------
(a) Promptly after receipt by any person entitled to indemnification
under Section 10.2 or 10.3 (an "indemnified party") of notice of the
-------------------- -----------------
commencement of any action, suit or proceeding by a person not a party to
this Agreement in respect of which the indemnified party will seek
indemnification hereunder (a "Third Party Action"), the indemnified party
------------------
shall notify the person that is obligated to provide such indemnification
(the "indemnifying party") thereof in writing, but any failure to so notify
------------------
the indemnifying party shall not relieve it from any liability that it may
have to the indemnified party under Section 10.2 or 10.3, except to the
--------------------
extent that the indemnifying party is prejudiced by the failure to give
such notice. The indemnifying party shall be entitled to participate in the
defense of such Third Party Action and to assume control of such defense
(including settlement of such Third Party Action) with counsel reasonably
satisfactory to such indemnified party; provided, however, that:
-------- -------
(i) the indemnified party shall be entitled to participate in
the defense of such Third Party Action and to employ counsel at its
own expense (which shall not constitute Legal Expenses for purposes
of this Agreement) to assist in the handling of such Third Party
Action;
(ii) the indemnifying party shall obtain the prior written
approval of the indemnified party before entering into any settlement
of such Third Party Action or ceasing to defend against such Third
Party Action, if pursuant to or as a result of such settlement or
cessation, injunctive or other equitable relief would be imposed
against the indemnified party or the indemnified party would be
adversely affected thereby;
(iii) no indemnifying party shall consent to the entry of any
judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by each claimant or plaintiff
to each indemnified party of a release from all liability in respect
of such Third Party Action; and
(iv) the indemnifying party shall not be entitled to control
the defense of any Third Party Action unless the indemnifying party
confirms in writing its assumption of such defense and continues to
pursue the defense reasonably and in good faith. After written notice
by the indemnifying party to the indemnified party of its election to
assume control of the defense of any such Third Party Action in
accordance with the foregoing, (i) the indemnifying party shall not
be liable to such indemnified party hereunder for any Legal Expenses
subsequently incurred by such indemnified party attributable to
defending against such Third Party Action, and (ii) as long as the
indemnifying party is reasonably contesting such Third Party Action
in
29
<PAGE>
good faith, the indemnified party shall not admit any liability with
respect to, or settle, compromise or discharge the claim underlying,
such Third Party Action without the indemnifying party's prior
written consent. If the indemnifying party does not assume control of
the defense of such Third Party Action in accordance with this
Section 10.4, the indemnified party shall have the right to defend
------------
and/or settle such Third Party Action in such manner as it may deem
appropriate at the cost and expense of the indemnifying party, and
the indemnifying party will promptly reimburse the indemnified party
therefor in accordance with this Section 10.4. The reimbursement of
------------
fees, costs and expenses required by this Section 10.4 shall be made
------------
by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred.
(b) If an indemnified party has actual knowledge of any facts or
circumstances other than the commencement of a Third Party Action which
cause in good faith it to believe that it is entitled to indemnification
under this Article 10, then such indemnified party shall promptly give the
----------
indemnifying party notice thereof in writing, but any failure to so notify
the indemnifying party shall not relieve it from any liability that it may
have to the indemnified party under Section 10.2 or 10.3, as the case may
--------------------
be, except to the extent that the indemnifying party is prejudiced by the
failure to give such notice.
(c) If any dispute arises concerning the representations and
warranties contained in Section 4.8, either SM&A or the Principal
-----------
Shareholders or Additional Founders shall, as the case may be, send a
notice to the other party concerning such dispute and the parties shall
attempt to resolve all of the objecting party's objections within twenty
(20) days of delivery of such notice. If any objections remain unresolved
after the end of such twenty (20) day period, SM&A and the Principal
Shareholders or Additional Founders shall appoint a nationally recognized
accounting firm (the "Independent Accountant") to resolve all such disputed
----------------------
items. SM&A on the one-hand and the Principal Shareholders or Additional
Founders on the other hand shall each pay one-half of the Independent
Accountant's fees and expenses. The Independent Accountant shall give full
consideration of all materials and positions presented by SM&A and the
Principal Shareholders or Additional Founders and shall make a final report
concerning all such disputes within ten (10) days after being appointed by
SM&A and the Principal Shareholders or Additional Founders. If the parties
continue to dispute the Independent Accountant's report, the report and the
dispute shall be sent to binding arbitration in accordance with
Section 14.7.
------------
11. NONCOMPETITION.
--------------
11.1 Prohibited Activities.
---------------------
(a) Ervin Kapos hereby covenants and agrees that for a period ending
on the later of (A) three (3) years after the Closing Date and (B) one (1)
year after the (x) termination or (y) expiration of the Employment
Agreement (except as set forth in the following paragraph), Mr. Kapos shall
not for any reason whatsoever, directly or by other means with intent, for
himself or on behalf of or in conjunction with any other Person, engage, as
an officer,
30
<PAGE>
director, shareholder, owner, partner, joint venturer, lender or in any
capacity, whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business selling any products
or services in direct or indirect competition with the Company, SM&A or any
of their Affiliates or successors, in the geographic areas where the
Company, SM&A or their Affiliates or successors are conducting business
during such period, including without limitation, the United States and
each state, county, city and other political subdivision thereof.
Notwithstanding the foregoing provisions of this paragraph (a),
Mr. Kapos may (i) be a passive investor owning no more than five percent
(5%) of the outstanding equity securities of any corporation the equity
securities of which are listed on a national securities exchange or traded
on the NASDAQ National Market and with which Mr. Kapos has no other
connection whatsoever or (ii) invest in or act as an employee, consultant
or other position for SM&A or any of its Affiliates.
(b) Each Principal Shareholder and Additional Founder hereby
covenants and agrees that for a period ending on the later of (A) three (3)
years after the Closing Date and (B) one (1) year after the (x) termination
or (y) expiration of such Principal Shareholder's or Additional
Shareholder's Employment Agreement, if any, each Principal Shareholder and
Additional Founder shall not, either directly or by other means with
intent, either alone or in concert with others, (A) solicit or entice any
person who is, at that time, or who has been within one (1) year prior to
that time, an employee of or consultant to the Company, SM&A or their
respective Affiliates or successors, to leave the Company, SM&A or their
respective Affiliates or successors or to work for anyone other than the
Company, SM&A or their respective Affiliates or successors, or (B) solicit,
entice or in any way divert any customer or supplier with whom such
Principal Shareholder or Additional Founder has conducted business or
assisted the Company, SM&A or their respective Affiliates or successors in
providing business, to do business with any business entity in competition
with the Company, SM&A or their respective Affiliates or successors. For
the purposes of this Section 11.1(b), general advertising concerning
---------------
available employment opportunities through newspapers or trade journals
shall not constitute solicitation.
11.2 Acknowledgments. The parties hereto agree and acknowledge that the
---------------
damages that would be suffered by a nonbreaching party as a result of any breach
of the provisions of this Article 11 may not be calculable and that an award of
----------
a monetary judgment for such a breach would be an inadequate remedy.
Consequently, a nonbreaching party shall have the right, in addition to any
other rights it may have, to obtain, in any court of competent jurisdiction,
injunctive relief to restrain any breach or threatened breach of any provision
of this Article 11 or otherwise to specifically enforce any of the provisions
----------
hereof, and a nonbreaching party shall not be obligated to post a bond or other
security in seeking such relief. This remedy is in addition to damages directly
or indirectly suffered by a nonbreaching party and reasonable attorneys' fees.
The parties hereto agree that the restraint, duration and area for which the
covenants in this Article 11 are to be effective are reasonable in light of the
----------
business and activities of the parties hereto. In the event that any court
finally determines that the time period or the geographic scope of any such
covenant is unreasonable or excessive and any covenant is to that extent made
unenforceable, the parties agree that the restrictions in this
31
<PAGE>
Article 11 shall remain in full force and effect for the greatest time period
- ----------
and within--the greatest geographic area that would not render it unenforceable.
The parties intend that each of the covenants in Article 11 shall be deemed
----------
to be a separate covenant.
11.3 Independent Covenant. All of the covenants in this Article 11 shall
-------------------- ----------
be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of a nonbreaching
party against a breaching party, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by any party of
such covenants.
12. CERTAIN DEFINITIONS.
-------------------
12.1 "Affiliate" (whether or not capitalized) shall mean, with respect to
---------
any person, any other person that directly, or through one or more
intermediaries, controls or is controlled by or is under common control with
such first person. As used in this definition, "control" shall mean possession,
-------
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of securities or other ownership
interest, by contract or otherwise).
12.2 "Base Purchase Price" means $2,500,000 for all of the Outstanding
-------------------
Company Shares plus $150,000 for the covenants contained in Article 11, less the
----------
Purchase Price Adjustment Amount, if any. The Base Purchase Price shall be
payable in the amounts, at the times and in the manner provided in Schedule 7.6.
------------
12.3 "Company Stock" means the common stock, $1.00 par value per share,
-------------
of the Company.
12.4 "Earn-Out Purchase Price" means an amount of cash up to $660,000
-----------------------
representing 100% of the anticipated Earn-Out Purchase Price which may be
earned, and shall be payable if earned, in accordance with Schedule 12.4. To
-------------
earn the Earn-Out Purchase Price, or any portion thereof, Ervin Kapos must
remain active as President of the Company for two years (unless his service is
terminated due to his death or disability, is terminated by the Company without
Cause or is terminated by Mr. Kapos through his resignation with Good Reason,
all as described in the Employment Agreement), and the Company must earn at
least the minimum revenues described on Schedule 12.4.
-------------
12.5 "Encumbrances" shall mean mortgages, liens, pledges, encumbrances
------------
(legal or equitable), claims, charges, security interests, covenants,
conditions, voting and other restrictions, rights-of-way, easements, options,
encroachments, rights of others and any other matters affecting title, except,
in the case of the Company Stock, for restrictions on the sale or other
disposition thereof imposed by federal or state securities laws.
12.6 "GAAP" shall mean generally accepted accounting principles.
----
32
<PAGE>
12.7 "Government Authority" shall mean any government or state (or any
--------------------
subdivision thereof), whether domestic, foreign or multinational, or any agency,
authority, bureau, commission, department or similar body or instrumentality
thereof, or any government court or tribunal.
12.8 "Knowledge" with respect to the Company shall mean all facts and
---------
conditions which are actually known by any of the Principal Shareholders,
Additional Founders, executive officers or directors of the Company or which
should have been known by prudent persons holding such positions with access to
the books and records of the Company; and "Knowledge" with respect to SM&A shall
mean all facts and conditions which are actually known by any of the executive
officers or directors of SM&A, or which should have been known by prudent
persons holding such positions with access to the books and records of SM&A.
12.9 "Legal Requirement" shall mean any law, statute, ordinance, code,
-----------------
rule, regulation, standard, judgment, decree, writ, ruling, arbitration award,
injunction, order or other requirement of any Government Authority.
12.10 "Material Adverse Effect" shall mean any material adverse change in
-----------------------
or effect on, or any change that may reasonably be expected to have a material
adverse effect on, (i) the business, operations, assets, liabilities, condition
(financial or otherwise), or results of operations of the Company or SM&A, as
the context requires or (ii) the ability of any of the parties hereto to
consummate the transactions contemplated by this Agreement or any related
agreement to which any such party is a party.
12.11 "Outstanding Company Shares" shall mean the number of shares of
--------------------------
Company Stock outstanding immediately prior to the Closing, and any of such
shares. For the avoidance of doubt, Outstanding Company Shares do not include
shares held by the Company, whether as treasury stock or otherwise, or held by a
subsidiary of the Company.
12.12 "Person" (whether or not capitalized) shall mean and include an
------
individual, corporation, company, limited liability company, limited liability
partnership, partnership, joint venture, association, trust, and other
unincorporated organization or entity and a governmental entity or any
department or agency thereof.
12.13 "Purchase Price Adjustment Amount" shall mean (a) the amount by
--------------------------------
which the Company's working capital as of the Closing Date (computed on a basis
consistent with that historically and consistently maintained by the Company) is
less than $750,000; plus (b) the amount by which the Company's net worth as of
the Closing Date (computed on a basis consistent with that historically and
consistently maintained by the Company) is less than $1,050,000; plus (c) the
amount of any accounts receivable of the Company aged in excess of 90 days on
the Closing Date ("Aged Receivables"); provided, however, (i) Aged Receivables
---------------- -------- -------
shall only cause an adjustment to the Base Purchase Price, and (ii) that in the
event that any Aged Receivable shall later be collected by the Company on or
before December 31, 2000, the proceeds thereof shall be distributed to the
Principal Shareholders and Additional Founders in the same proportions as the
Base Purchase Price; plus (d) the amount of any expenses incurred by the Company
as a result of this Agreement and the transactions contemplated hereby (see
Section 14.6) and not paid directly by the Principal
- ------------
33
<PAGE>
Shareholders or Additional Founders prior to the Closing; plus (e) the amount of
any debts payable by the Company as of the Closing Date; plus (f) the excess of
the amount of any deferred taxes of the Company as of the Closing Date over the
amount of any prepaid taxes of the Company as of the Closing Date.
12.14 "Technology" shall mean all trade secrets, proprietary information,
----------
software and computer programs and source code data relating thereto (including
all current and historical data bases) research records, test information,
market surveys, marketing know-how, inventories, know-how, processes and
procedures owned, used by or licensed to the Company.
13. TERMINATION.
-----------
13.1 Circumstances of Termination. This Agreement may be terminated prior
----------------------------
to the Closing (notwithstanding approval by the shareholders of any party
hereto):
(a) By the mutual consent in writing of the Boards of Directors of
the Company and SM&A;
(b) By the Board of Directors of SM&A if any condition provided in
Article 9 hereof has not been satisfied or waived on or before the Closing
---------
Date;
(c) By the Board of Directors of the Company if any condition
provided in Article 8 hereof has not been satisfied or waived on or before
---------
the Closing Date;
(d) By the Board of Directors of either the Company or SM&A if the
Closing Date has not occurred by October 15, 1999;
(e) By SM&A if the Company or any Principal Shareholder or
Additional Founder has breached in any material respect any of the
representations, warranties or covenants contained in Article 4, Article 5
--------- ---------
or Article 7, respectively; or
---------
(f) By the Company if SM&A has breached in any material respect any
of the representations, warranties or covenants contained in Article 6 or
---------
Article 7, respectively.
---------
13.2 Effect of Termination. In the event of a termination of this
---------------------
Agreement pursuant to Section 13.1 hereof, each party shall pay the costs and
expenses incurred by it in connection with this Agreement, and no party (or any
of its officers, directors and shareholders) shall be liable to any other party
for any costs, expenses, damages or loss of anticipated profits hereunder;
provided, however, that termination pursuant to Section 13.1(e) or Section
- -------- ------- --------------- -------
13.1(f) shall not relieve the defaulting or breaching party from any liability
- -------
to the other parties hereto.
34
<PAGE>
14. GENERAL.
-------
14.1 Cooperation. The Company, the Principal Shareholders, the Additional
-----------
Founders and SM&A shall each deliver or cause to be delivered to the other on
the Closing Date, and at such other times and places as shall be reasonably
agreed to, such additional instruments as the other may reasonably request for
the purpose of carrying out this Agreement. Each Principal Shareholder and
Additional Founder will cooperate and use commercially reasonable efforts to
have the present officers, directors and employees of the Company cooperate with
SM&A on and after the Closing Date in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing Date.
14.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned except by operation of law or the prior written
consent of the other parties, and shall be binding upon and shall inure to the
benefit of the parties hereto, the successors of the Company and SM&A, and the
heirs and legal representatives of the Principal Shareholders and Additional
Founders.
14.3 Entire Agreement. This Agreement (including the Exhibits attached
----------------
hereto and the Schedules delivered pursuant hereto) and the other writings
specifically identified herein or contemplated hereby contain the entire
agreement and understanding between the parties hereto with respect to the
transactions contemplated herein and supersede any prior agreement and
understanding relating to the subject matter of this Agreement. This Agreement
may be modified or amended only by a written instrument executed by the Company,
the Principal Shareholders, the Additional Founders and SM&A.
14.4 Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
14.5 Brokers and Agents. Each of the Company, the Principal Shareholders
------------------
and the Additional Founders represents and warrants that it employed no broker
or agent in connection with this transaction. Each of the parties hereto agrees
to indemnify the other parties hereto against all loss, cost, damage or expense
arising out of claims for fees or commissions of brokers employed or alleged to
have been employed by such indemnifying party.
14.6 Payment of Expenses. Each of the parties hereto shall pay all its
-------------------
own costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that all such expenses of
-------- -------
the Company shall be the responsibility of the Principal Shareholders and
Additional Founders.
14.7 Arbitration; Attorneys' Fees, Prevailing Party. Except as set forth
----------------------------------------------
in Section 10.4(c) and Section 11.2, all disputes arising under this contract
--------------- ------------
will be resolved by submission to binding arbitration at the Washington D.C.
offices of Judicial Arbitration & Mediation Services, Inc. ("JAMS"). If JAMS is
----
unable to arbitrate the dispute, then the dispute will be arbitrated at the
35
<PAGE>
Washington D.C. offices of the American Arbitration Association ("AAA"). No
---
party shall commence an arbitration proceeding unless such party shall first
give a written notice ("Dispute Notice") to the other parties setting forth the
nature of the dispute. If the parties cannot agree on the selection of an
arbitrator within twenty (20) days after delivery of the Dispute Notice, the
arbitrator will be selected by JAMS or AAA, as the case may be. Except as
specifically modified by this clause, the Commercial Arbitration Rules of the
AAA will apply to all arbitrations before JAMS and the AAA. Except as
specifically modified by this clause, Virginia law, including Virginia evidence
law, shall be applied to determine all arbitrated issues. Virginia discovery law
will apply to provide all discovery available in Virginia Circuit Court cases.
Judgment upon an arbitration award may be entered in any court having competent
jurisdiction and shall be binding, final and nonappealable. Should any
proceeding be commenced between the parties to this Agreement seeking to enforce
any of its provisions, the prevailing party in such proceeding shall be
entitled, in addition to such other relief as may be granted, to a reasonable
sum for attorneys' fees and all legal expenses and fees incurred on appeal and
all interest thereon. For the purposes of this provision, "prevailing party"
----------------
shall include a party which dismisses an action for recovery hereunder in
exchange for payment of the sum allegedly due, performance of covenants
allegedly breached, or consideration substantially equal to the relief sought in
the action or proceeding.
14.8 Notices. All notices or communications required or permitted
-------
hereunder shall be in writing and shall be deemed given two (2) days after
depositing the same in United States mail, addressed to the party to be
notified, postage prepaid and registered or certified with return receipt
requested, when delivered by a nationally-recognized overnight delivery service
or in person to an officer or agent of such party.
(a) If to SM&A, addressed to them at:
SM&A Corporation (East)
4695 MacArthur Court, Eighth Floor
Newport Beach, California 92660
Attn: President
Telephone: (949) 975-1550
Fax: (949) 975-1342
with a copy (which shall not constitute notice) to:
Rutan & Tucker, LLP
611 Anton Blvd., 14/th/ Floor
Costa Mesa, CA 92626-1998
Attn: Thomas J. Crane, Esq.
Telephone: (714) 641-5100
Fax: (714) 546-9035
36
<PAGE>
(b) If to the Principal Shareholders or Additional Founders,
addressed to them:
c/o Ervin Kapos
908 Turkey Run Road
McLean, VA 22101
Telephone: (703) 356-4239
(c) If to the Company, addressed to it at:
Kapos Associates Inc.
1101 Wilson Blvd, Suite 1900
Arlington, VA 22209-2248
(d) with a copy (which shall not constitute notice) to:
Hogan & Hartson, LLP
8300 Greensboro Drive
McLean, VA 22102
Attn: Richard K. A. Becker, Esq.
Telephone: (703) 610-6123
Fax: (703) 610-6200
14.9 Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the Commonwealth of Virginia (but not including the choice of law
provisions thereof). All disputes hereunder shall, subject to Section 14.7, be
------------
adjudicated in the federal and Virginia State courts with jurisdiction over
Arlington County, Virginia.
14.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
14.11 Reformation and Severability. In case any provision of this
----------------------------
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such a manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
37
<PAGE>
14.12 General Terms. As used in this Agreement, the terms "herein,"
-------------
"herewith," and "hereof" are references to this Agreement, taken as a whole; the
term "includes" or "including" shall mean "including, without limitations," and
references to a "Section," "subsection," "clause," "Article," "Exhibit,"
"Appendix," or "Schedule" shall mean a Section, subsection, clause, Article,
Exhibit, Appendix or Schedule of this Agreement, as the case may be, unless in
any such case the context requires otherwise. All references to a given
agreement, instrument or other document shall be a reference to that agreement,
instrument or other document as modified, amended, supplemented and restated
through the date as of which such reference is made, and reference to a law
includes any amendment or modification thereof. The singular shall include the
plural, and the masculine shall include the feminine and neuter, and vice versa.
15. CERTAIN POST-CLOSING MATTERS.
----------------------------
15.1 Appointment of President and Deputy General Manager.
---------------------------------------------------
(a) Immediately following the closing, SM&A will ensure that Ervin
Kapos is appointed as President of the Company.
(b) Within six (6) months following the Closing Date, SM&A and Ervin
Kapos will mutually agree upon the appointment of a Deputy General Manager
designated by SM&A who will report to Ervin Kapos as President of the
Company and will be co-located with Ervin Kapos at the Company's
headquarters.
15.2 Payment of Earn-Out Purchase Price. Within ninety (90) days after
----------------------------------
each of June 30, 2000 and June 30, 2001, SM&A shall deliver to each Principal
Shareholder and Additional Founder the Earn-Out Purchase Price to which each is
entitled, as earned and payable according to Schedule 12.4.
-------------
15.3 Confidentiality and Intellectual Property.
-----------------------------------------
(a) Each Principal Shareholder and Additional Founder (each a
"Shareholder") acknowledges that, by reason of such person's employment or other
- ------------
association with the Company, such Shareholder has learned, and may hereafter
learn, trade secrets and obtain other confidential and proprietary information
concerning the business, operations, technology, financial condition, policies,
procedures and processes of the Company, SM&A and their respective affiliates
(collectively, "Confidential Information"). Each Shareholder agrees that such
------------------------
Shareholder will not divulge or otherwise disclose, directly or indirectly, any
Confidential Information which such Shareholder may learn or may have learned
prior hereto as a result of such Shareholder's employment or other association
with the Company, except to the extent such information is lawfully obtainable
from public sources or such use or disclosure (i) is required by applicable
laws; (ii) is authorized by the Board of Directors of the Company; (iii) is or
becomes available to the general public through no fault of such Shareholder; or
(iv) was disclosed to such Shareholder without restriction on disclosure by a
third party who had the lawful right to disclose such Confidential Information
and was not under any restriction of non-disclosure with respect to such
information.
38
<PAGE>
(b) Each Shareholder expressly acknowledges and agrees that all work
and services, if any, provided or to be provided to the Company and/or SM&A by
such Shareholder has been and shall be under the direction, control and
supervision of the Company and SM&A, that such work and services and every part
and element thereof is, shall be and shall remain the sole and exclusive
property of the Company and/or SM&A, who shall have all ownership rights
therein. In the event, or to the extent, any such work or services are not held
or considered to be owned by the Company and/or SM&A under applicable laws for
any reason, then such Shareholder agrees to and does hereby irrevocably and
perpetually transfer, assign and convey to the Company and/or SM&A, as the case
may be, all right, title and interest in and to all such work and services. The
Company or SM&A in its sole discretion shall have the right to register, patent
and/or copyright rights and to obtain and hold patent and copyright
registrations or such other protections as the Company or SM&A may deem
appropriate to the subject matter, in and to the work and services, if any, of
such Shareholder in the Company's or SM&A's own name, or in the name of such
Shareholder, to the extent the Company or SM&A believes appropriate. If
requested by the Company or SM&A, each Shareholder agrees to sign any additional
document of assignment or other documents that the Company or SM&A deems
necessary or desirable, and otherwise cooperate with and assist the Company and
SM&A to separately confirm or more completely vest in the Company and/or SM&A
exclusive right and title to such work and services, and any and all elements
thereof, including, but not limited to, patent, copyright and trade secret and
other intellectual property rights. In the event a Shareholder should fail to
have any such documents signed, then the Company and SM&A are each hereby
irrevocably appointed such Shareholder's attorney-in-fact (which agency shall be
deemed coupled with an interest) with full right, power and authority to
execute, verify, acknowledge and deliver the same in the name and on behalf of
such Shareholder. The provisions of this Section 14.13 shall survive the Closing
-------------
and shall continue forever.
[signature page follows]
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"SM&A" SM&A CORPORATION (EAST),
a California corporation
By: /s/ Michael A. Piraino
-----------------------------
Name: Michael A. Piraino
Title: President
"COMPANY": KAPOS ASSOCIATES INC.,
a Virginia corporation
By:_____________________________
Name:___________________________
Title:__________________________
"PRINCIPAL SHAREHOLDERS": ________________________________
ERVIN KAPOS
________________________________
JUNE KAPOS
"ADDITIONAL FOUNDERS": ________________________________
VERONA OLIVER
________________________________
CORDELLIA SCRUGGS
40
<PAGE>
EXHIBIT 10.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") dated as of September 20, 1999 is
---------
among SM&A CORPORATION (EAST), a California corporation ("SM&A"), KAPOS
----
ASSOCIATES INC., a Virginia corporation ("KAI"), ERVIN KAPOS and JUNE KAPOS
---
(collectively, the "Shareholders"), ERVIN KAPOS, as the representative of the
------------
Shareholders (the "Shareholder Representative"), and FIRST AMERICAN TRUST
COMPANY, as escrow agent (the "Escrow Agent").
------------
PRELIMINARY STATEMENT
---------------------
Pursuant to a Stock Purchase Agreement dated as of September 20, 1999 (the
"Purchase Agreement"), by and among SM&A, KAI, the Shareholders and the
------------------
Additional Founders named therein, SM&A will acquire all of the outstanding
shares of capital stock of KAI. Capitalized terms used herein and not otherwise
defined herein have the meanings ascribed to them in the Purchase Agreement.
The Shareholders have agreed to indemnify SM&A as provided in Article 10 of
----------
the Purchase Agreement through the deposit of an aggregate amount of cash equal
to $300,000.00 (the "Escrow Funds") pursuant to Section 2.3 of the Purchase
------------ -----------
Agreement. A list of the Shareholders and their pro rata interest in the Escrow
Funds is attached hereto as Schedule 3.1.
------------
The parties hereto agree as follows:
1. Establishment of Escrow.
-----------------------
SM&A has delivered to the Escrow Agent and the Escrow Agent acknowledges
receipt of the Escrow Funds by wire transfer of immediately available funds. The
Escrow Funds shall be held in escrow in the name of the Escrow Agent or its
nominee, subject to the terms and conditions set forth herein.
The Escrow Agent shall invest the Escrow Funds held by it pursuant to this
Agreement in a money market account.
2. Amounts Earned on Escrow Funds; Tax Matters.
-------------------------------------------
All interest earned on the Escrow Funds shall be distributed pro rata to
the Shareholders on a quarterly basis. The parties agree that to the extent
required by applicable law, including Section 468B(g) of the Internal Revenue
Code of 1986, as amended (the "Code"), the Shareholders will include all
----
interest earned on the Escrow Funds in their gross income for federal, state and
local income tax (collectively, "income tax") purposes and pay any income tax
----------
resulting therefrom.
<PAGE>
3. Claims Against Escrow Funds.
---------------------------
3.1 At any time or times prior to the Expiration Date (as defined in
Section 5), SM&A may make claims against the Escrow Funds for amounts due for
- ---------
indemnification under Article 10 of the Purchase Agreement. SM&A shall notify
----------
the Shareholder Representative and the Escrow Agent in writing of each such
claim ("Notice of Claim"), including a brief description of the amount and
---------------
nature of such claim. If the amount subject to the claim is unliquidated, SM&A
shall make a good faith estimate as to the amount of the claim for purposes of
determining the amount to be withheld from the Escrow Funds by the Escrow Agent
if such claim is not resolved or otherwise adjudicated by the Expiration Date.
Such good faith estimate shall be included in the Notice of Claim. If the
Shareholder Representative shall dispute a claim or SM&A's estimate as to the
amount of the claim, the Shareholder Representative shall give written notice
thereof to SM&A and to the Escrow Agent within 30 days after the date SM&A's
Notice of Claim was received by the Shareholder Representative, in which case
the Escrow Agent shall continue to hold the Escrow Funds in accordance with the
terms of this Agreement; otherwise, such liquidated claim ("Liquidated Claim")
----------------
shall be deemed to have been acknowledged to be payable out of the Escrow Funds
in the full amount thereof as set forth in the Notice of Claim, and the Escrow
Agent shall use its best efforts to pay such Liquidated Claim from the Escrow
Funds to SM&A within three business days after expiration of said 30-day period.
Unliquidated claims shall not be paid until liquidated. Disputes as to SM&A's
good faith estimate of a claim shall be resolved as provided in Section 4.1. The
-----------
value of Escrow Funds paid to satisfy a claim under this Agreement shall be
allocated pro rata among the Shareholders based on their proportionate interests
in the aggregate Escrow Funds, as indicated in Schedule 3.1 hereto. With respect
------------
to each Shareholder, the amount paid to satisfy a claim under this Agreement
shall be deducted from the Escrow Funds allocable to such Shareholder. If the
amount of the claim exceeds the aggregate value of the Escrow Funds subject
thereto, the Escrow Agent shall have no liability or responsibility for any
deficiency.
3.2 The Escrow Agent shall effect the payment of the Liquidated Claim to
SM&A by wire transfer in immediately available funds to an account designed by
SM&A in writing to the Escrow Agent in the Notice of Claim.
3.3 If the Shareholder Representative shall give notice to SM&A and the
Escrow Agent pursuant to Section 3.1 disputing an SM&A claim, no distribution of
-----------
the Escrow Funds shall be made by the Escrow Agent to SM&A or to the
Shareholders of the Set Aside Amount (as defined in Section 4.1) with respect to
-----------
such claim until either: (i) such disputed claim has been resolved as evidenced
by a written notice executed by SM&A and the Shareholder Representative
instructing the Escrow Agent as to the distribution of such Set Aside Amount or
a portion thereof; or (ii) such dispute shall have been adjudicated in
accordance with the arbitration procedures described in Section 4.2.
-----------
4. Disputed Claims.
---------------
4.1 If the Shareholder Representative shall dispute an indemnification
claim of SM&A as provided in Section 3, the Escrow Agent shall set aside a
---------
portion of the Escrow Funds equal to the amount of the claim as set forth in the
Notice of Claim (the "Set Aside Amount"), which amount may subsequently be
----------------
modified by arbitration. If the Shareholder Representative shall dispute the Set
Aside
-2-
<PAGE>
Amount as provided in Section 3, the Escrow Funds constituting the Set Aside
---------
Amount shall be withheld pursuant to the immediately preceding sentence until
otherwise determined by arbitration. The Set Aside Amount shall be allocated pro
rata among the Shareholders based upon their percentage interests in the
aggregate Escrow Funds, as indicated in Schedule 3.1 hereto. With respect to
------------
each Shareholder, the amount constituting the Set Aside Amount shall be
deducted, to the extent necessary, from the Escrow Funds allocable to such
Shareholder. In the event SM&A notifies the Escrow Agent in writing that it has
made out-of-pocket expenditures or anticipates that it will incur legal expenses
in connection with any such disputed claim with respect to which it is entitled
to be indemnified under the Purchase Agreement, a portion of the Escrow Funds
equal to such reasonable incurred or anticipated expenditures shall also be set
aside and added to and become a part of the Set Aside Amount; provided, that in
the event that it shall be agreed (as evidenced by a written notice executed by
SM&A and the Shareholder Representative as described in Section 3.3) or
-----------
determined through an arbitration proceeding described in Section 4.2 that SM&A
-----------
is not entitled to indemnification with respect to such claim or such expenses,
SM&A shall not be entitled to the portion of the Escrow Funds set aside for such
expenses.
4.2 If, within 60 days after the Shareholder Representative sends a notice
of a dispute, the Escrow Agent has not received written notice executed by SM&A
and the Shareholder Representative to the effect that the disputed
indemnification claim has been resolved, the indemnification claim shall be
arbitrated pursuant to Article 14 of the Purchase Agreement, which is
----------
incorporated herein by this reference. In no event shall the Escrow Agent be
responsible for any fees or expenses of any party to any arbitration
proceedings. The Escrow Agent shall make payments of such claim, as and to the
extent allowed, to SM&A within three business days following its receipt of a
copy of the arbitration award determination.
5. Termination and Distribution of Escrow Funds.
--------------------------------------------
5.1 This Agreement shall terminate one (1) year after the Closing Date (as
defined in Section 3.1 of the Purchase Agreement) (the "Expiration Date");
----------- ---------------
provided that this Agreement shall continue in effect until the resolution of
all outstanding indemnification claims as to which the Escrow Agent has received
notice pursuant to Section 3 hereof on or prior to the Expiration Date.
---------
5.2 SM&A shall provide the Escrow Agent with reasonable advance notice of
the expected Expiration Date and shall confirm the occurrence of such as soon as
practicable thereafter. Immediately following the Expiration Date, the Escrow
Agent shall distribute to the Shareholders based on their relative percentage
interest in the Escrow Funds as indicated in Schedule 3.1 hereto the remaining
------------
Escrow Funds less (i) an amount of Escrow Funds equal to any then existing Set
Aside Amounts, and (ii) an amount of Escrow Funds equal to the amount specified
in any Notice of Claim delivered to the Escrow Agent prior to the Expiration
Date with respect to which no Set Aside Amount has yet been established and the
Escrow Agent has not otherwise been instructed by SM&A and the Shareholder
Representative. At such time thereafter as any remaining indemnification claim
hereunder has been resolved and the Escrow Agent has received a written notice
executed by SM&A and the Shareholder Representative to that effect (or a copy of
an arbitration award pursuant to Section 4.2 to that effect) and any amounts to
-----------
be distributed to SM&A in connection therewith have been so distributed, the
Escrow Agent shall distribute any portion of the remaining Escrow Funds withheld
in respect of such claim to the Shareholders based on their relative percentage
interest in
-3-
<PAGE>
such Escrow Funds, as indicated in Schedule 3.1 hereto. Upon the resolution
------------
of all outstanding indemnification claims hereunder, the Escrow Agent shall
distribute the remaining amount, if any, of the Escrow Funds to the Shareholders
based on their relative percentage interest in the Escrow Funds as indicated in
Schedule 3.1 hereto and this Agreement shall terminate. The Escrow Agent shall
- ------------
effect such distributions of Escrow Funds in accordance with the written
instructions of the Shareholder Representative.
6. The Escrow Agent.
----------------
6.1 Notwithstanding anything herein to the contrary, the Escrow Agent
shall promptly dispose of all or any part of the Escrow Funds as directed by a
writing jointly signed by SM&A and the Shareholder Representative. The
reasonable fees and expenses of the Escrow Agent (as set forth on the fee
schedule attached hereto as Schedule 6.1) in connection with its performance of
------------
this Agreement shall be borne by SM&A. The Escrow Agent shall not be liable for
any act or omission to act under this Agreement, including any and all claims
made against the Escrow Agent as a result of its holding the Escrow Funds in its
own name, except for its own negligence or willful misconduct, and SM&A and the
Shareholders shall jointly and severally indemnify, defend and hold harmless
Escrow Agent and its affiliates, agents, employees, contractors, successors and
assigns from and against any and all claims, damages, demands, liens, claims of
lien, losses, actions or liability of any kind or nature whatsoever, which
Escrow Agent may sustain, incur or be subjected to or which may be imposed on
Escrow Agent including, without limitation, reasonable attorneys' fees and
litigation costs, to the extent they arise out of or are connected with this
Escrow Agreement, unless arising from the negligence or willful misconduct of
Escrow Agent. The provisions of this indemnification shall survive the
termination of this Escrow Agreement. The Escrow Agent may decline to act and
shall not be liable for failure to act if in doubt as to its duties under this
Agreement. The Escrow Agent may act upon any instrument or signature believed by
it to be genuine and may assume that any person purporting to give any notice or
instruction hereunder, reasonably believed by it to be authorized, has been duly
authorized to do so. The Escrow Agent's duties shall be determined only with
reference to this Agreement and applicable laws, and the Escrow Agent is not
charged with knowledge of or any duties or responsibilities in connection with
any other document or agreement, including, but not limited to, the Purchase
Agreement. In the event of a dispute arising out of or in connection with this
Escrow Agreement involving the Escrow Agent, all legal representation required
to defend the Escrow Agent shall be provided at the joint and several expense of
SM&A and the Shareholders.
6.2 The Escrow Agent shall have the right at any time to resign hereunder
by giving written notice of its resignation to the parties hereto, at the
addresses set forth herein or at such other address as the parties shall
provide, at least 30 days prior to the date specified for such resignation to
take effect. In addition, the Escrow Agent shall have the right to resign
hereunder immediately by written notice to the parties hereto if the fees of
Escrow Agent are not paid when due. In such event, SM&A and the Shareholder
Representative shall by agreement appoint a successor escrow agent within said
30 days; if SM&A and the Shareholder Representative do not agree upon the
selection of a successor escrow agent within such period, the Escrow Agent may
appoint a successor escrow agent. Upon the effective date of such resignation,
the Escrow Funds together with all other property, if any, then held by the
Escrow Agent hereunder, shall be deposited with such successor escrow agent or
as otherwise shall be designated in writing by SM&A and the Shareholder
Representative. In
-4-
<PAGE>
addition, the Escrow Agent shall have the right to resign hereunder immediately
by written notice to the parties hereto if the fees and expenses of Escrow Agent
(as set forth on the fee schedule attached hereto as Schedule 6.1) are not paid
------------
when due. The other parties hereto reserve the right to remove the Escrow Agent
by joint written notice at any time; provided that such notice is given to the
Escrow Agent at least thirty (30) days prior to the effectiveness of such
removal.
6.3 In the event that the Escrow Agent should at any time be confronted
with inconsistent or conflicting claims or demands by the parties hereto, the
Escrow Agent shall have the right to interplead said parties in any court of
competent jurisdiction and request that such court determine the respective
rights of such parties with respect to this Agreement and, upon doing so, the
Escrow Agent shall be released from any obligations or liability to either party
as a consequence of any such claims or demands. The reasonable fees and costs
incurred by the Escrow Agent in interpleading said parties shall be borne
equally by SM&A and the Shareholders as a group.
6.4 The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or through
its agents or attorneys. The Escrow Agent shall not be responsible for and shall
not be under a duty to examine, inquire into or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any amendment or
supplement hereto.
7. Shareholder Representative.
--------------------------
7.1 The Shareholders hereby designate Ervin Kapos as their authorized
representative and attorney-in-fact to undertake and perform in their name and
on their behalf the duties and responsibilities of the Shareholder
Representative set forth in this Agreement. The Shareholder Representative
accepts and agrees to discharge diligently the duties and responsibilities of
the Shareholder Representative set forth in this Agreement. SM&A and the Escrow
Agent shall be entitled to rely upon the authorization and designation of the
Shareholder Representative under this Section 7.
---------
7.2 The Shareholder Representative is authorized to take any action he
deems appropriate or necessary to carry out the provisions of, and to determine
the rights of the Shareholders under, this Agreement, including without
limitation, taking any action required or permitted under this Agreement to
protect or enforce the Shareholders' rights to the Escrow Funds. The Shareholder
Representative's authority includes but is not limited to:
(a) receiving all notices or other documents given or to be given
pursuant to this Agreement or in connection with the transactions
contemplated hereby;
(b) engaging special counsel, accountants, investment banks or other
advisors;
(c) prosecuting and settling any dispute in connection with this
Agreement, including without limitation the resolution of any disputes
related to disbursements of the Escrow Funds; and
-5-
<PAGE>
(d) paying all expenses of the Shareholders incurred in connection
with this Agreement and the transactions contemplated hereby.
7.3 In the event of the death, resignation, discharge or incapacity of the
Shareholder Representative, June Kapos shall be treated as the successor
Shareholder Representative.
7.4 The Shareholder Representative shall keep the Shareholders reasonably
informed of his decisions of a material nature.
7.5 The Shareholder Representative shall diligently discharge his duties
and responsibilities under this Agreement. The Shareholder Representative shall
not be liable to any Shareholder for any action taken or omitted by the
Shareholder Representative in good faith, or for any mistake of fact or law,
unless caused by his own gross negligence or willful misconduct.
7.6 The Shareholder Representative shall be entitled to treat as genuine
any letter or other document furnished to him by SM&A or the Escrow Agent and
reasonably believed by him to be genuine and have been signed and presented by
the proper party or parties.
7.7 The Shareholder Representative shall not be entitled to any
compensation for services hereunder.
7.8 SM&A shall be entitled to treat as genuine any letter or other
document furnished to it by the Shareholder Representative or the Escrow Agent
and reasonably believed by it to be genuine and have been signed and presented
by the proper party or parties.
8. Governing Law.
-------------
This Agreement is governed by the laws of the State of California without
regard to its conflict of laws provisions, and shall inure to the benefit of and
be binding upon the successors, assigns, heirs and personal representatives of
the parties hereto. Service of process in any proceeding arising under this
Agreement (including service of process for the institution of such proceeding)
may be made by certified mail, return receipt requested, directed to the
respective party in accordance with Section 10 below.
----------
9. Counterparts.
------------
This Agreement may be executed in one or more counterparts, all of which
documents shall be considered one and the same instrument.
-6-
<PAGE>
10. Benefit and Assignment. This Agreement shall be binding upon and shall
----------------------
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. No person or entity other than the parties hereto or their
respective successors and permitted assigns is or shall be entitled to bring any
action to enforce any provision of this Agreement against any of the parties
hereto or their respective successors or permitted assigns, and the covenants
and agreements set forth in this Agreement shall be solely for the benefit of,
and shall be enforceable only by, the parties hereto or their respective
successors or permitted assigns. No party to this Agreement may assign this
Agreement or any rights hereunder without the prior written consent of the other
parties hereto.
11. Entire Agreement; Amendment. This Agreement, together with the Purchase
---------------------------
Agreement and the exhibits and schedules hereto and thereto, contain all the
terms agreed upon by the parties with respect to the escrow arrangement that is
the subject matter hereof and supersede all prior oral or written agreements,
commitments or understandings with respect to such matters. This Agreement may
be amended only by a written instrument signed by each of the parties hereto.
12. Additional Actions and Documents. Each of the parties hereto agrees to take
--------------------------------
or cause to be taken such further actions, to execute, deliver and file or cause
to be executed, delivered and filed such further documents and instruments, and
to use best efforts to obtain such consents, as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
13. Headings. The headings of the sections and subsections of this Agreement
--------
are for purposes of reference only and do not evidence the intentions of the
parties.
14. Severability. In the event that a court or arbitrator of competent
------------
jurisdiction holds that a particular provision or requirement of this Agreement
is in violation of any applicable law, each such provision or requirement shall
be enforced only to the extent it is not in violation of such law or is not
otherwise unenforceable, and all other provisions and requirements of this
Agreement shall remain in full force and effect.
15. Notices.
-------
Any notice or other communication required or permitted hereunder shall be
in writing and shall be deemed given when so delivered in person, by nationally-
recognized overnight delivery service, or two business days after being sent by
registered or certified mail (postage prepaid, return receipt requested), as
follows:
To SM&A: SM&A Corporation (East)
4695 MacArthur Boulevard, Eighth Floor
Newport Beach, California 92660
Attention: President
Telephone: 949-975-1550
Fax: 949-975-1624
-7-
<PAGE>
With a copy to: Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
Attn: Thomas J. Crane, Esq.
Telephone: 714-641-5100
Fax: 714-546-9035
To KAI: Kapos Associates Inc.
c/o SM&A Corporation (East)
4695 MacArthur Boulevard, Eighth Floor
Newport Beach, California 92660
Attention: President
Telephone: 949-975-1550
Fax: 949-975-1624
To the Shareholders: c/o Ervin Kapos
908 Turkey Run Road
McLean, Virginia 22101
Telephone: 703-356-4239
To Escrow Agent: First American Trust Company
2161 San Joaquin Hills Road
Newport Beach, California 92660
Attn: Elizabeth A. Markworth
Telephone: 949-719-4532
Fax: 949-667-1613
Addresses may be changed by written notice given pursuant to this section. Any
notice given hereunder may be given on behalf of any party by his counsel or
other authorized representative.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the date first stated above.
SM&A: SM&A CORPORATION (EAST),
a California corporation
By:__________________________________
Michael A. Piraino, President
KAI: KAPOS ASSOCIATES INC.,
a Virginia corporation
By:__________________________________
Its:_____________________________
ESCROW AGENT: FIRST AMERICAN TRUST COMPANY
By:__________________________________
Its:_____________________________
By:__________________________________
Its:_____________________________
SHAREHOLDER REPRESENTATIVE:
_________________________________________
Ervin Kapos
SHAREHOLDERS:
_____________________________ _________________________________________
Ervin Kapos June Kapos
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SM&A CORPORATION UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 442
<SECURITIES> 0
<RECEIVABLES> 29,173
<ALLOWANCES> 755
<INVENTORY> 0
<CURRENT-ASSETS> 36,645
<PP&E> 5,836
<DEPRECIATION> 1,473
<TOTAL-ASSETS> 86,415
<CURRENT-LIABILITIES> 9,142
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 54,377
<TOTAL-LIABILITY-AND-EQUITY> 86,415
<SALES> 79,424
<TOTAL-REVENUES> 79,424
<CGS> 47,429
<TOTAL-COSTS> 65,341
<OTHER-EXPENSES> (278)
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 522
<INCOME-PRETAX> 13,764
<INCOME-TAX> 5,681
<INCOME-CONTINUING> 8,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,083
<EPS-BASIC> .50
<EPS-DILUTED> .49
</TABLE>
