<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 March 31, 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 _________________
SM&A CORPORATION
----------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0080929
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4695 MACARTHUR COURT, EIGHTH FLOOR, NEWPORT BEACH, CA 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.
Class Outstanding at
------------ March 31, 1999
Common Stock 16,389,579
1
<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 March 31, 1999 and December 31, 1998.................... 3
Consolidated Statements of Earnings for the three months ended March 31, 1999 and 1998..... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998... 5
Notes to Consolidated Financial Statements................................................. 6-11
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 12-22
PART II OTHER INFORMATION
Item 1 Legal Proceedings.......................................................................... 23
Item 2 Changes in Securities and Use of Proceeds.................................................. 23
Item 3 Defaults Upon Senior Securities............................................................ 23
Item 4 Submission of Matters to Vote of Security Holders.......................................... 23
Item 5 Other Information.......................................................................... 23
Item 6 Exhibits and Reports on Form 8-K........................................................... 23
Signatures............................................................................................ 24
</TABLE>
2
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 835 $ 454
Accounts receivable, net of allowance for doubtful accounts 17,544 15,326
Costs and estimated earnings in excess of billings
on contracts in progress, net of allowance 11,618 7,545
Prepaid income taxes 591 2,085
Prepaid expenses and other assets 952 559
------- -------
Total current assets 31,540 25,969
Property and equipment, net 2,791 2,390
Notes receivable - affiliates 2,854 2,832
Other assets 3,889 3,346
Goodwill, net 35,033 31,787
------- -------
Total assets $76,107 $66,324
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 2,949 $ 2,496
Accrued compensation and payroll taxes 7,931 6,585
Deferred income taxes 265 265
Other liabilities 75 644
------- -------
Total current liabilities 11,220 9,990
Deferred income taxes 659 725
Other liabilities 464 280
Long-term debt, excluding current portion 6,508 --
------- -------
Total liabilities 18,851 10,995
Shareholders' equity:
Common stock, no par value 164 165
Additional paid in capital 53,113 54,164
Retained earnings 3,979 1,000
------- -------
Total shareholders' equity 57,256 55,329
------- -------
Total liabilities and shareholders' equity $76,107 $66,324
======= =======
</TABLE>
The accompany notes are an integral part of the unaudited consolidated financial
statements.
3
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Net revenues $25,314 $10,659
Cost of revenues 14,737 5,988
------- -------
Gross margin 10,577 4,671
Selling, general and administrative expenses 5,223 1,746
Amortization of goodwill and other intangibles 345 --
------- -------
Operating income 5,009 2,925
Other income (expense):
Interest expense (23) (70)
Other, net 62 139
------- -------
Income before income taxes 5,048 2,994
Income tax expense 2,069 1,245
------- -------
Net income $ 2,979 $ 1,749
======= =======
Income per share from continuing operations:
Basic $ 0.18 $ 0.12
Diluted 0.18 0.12
======= =======
Weighted average common shares outstanding:
Basic 16,515 14,347
Diluted 16,927 14,431
======= =======
</TABLE>
The accompany notes are an integral part of the unaudited consolidated
financial statements.
4
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,979 $ 1,749
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts (30) 10
Depreciation and amortization 345 44
Deferred income taxes -- 161
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable, net (1,883) (1,682)
Costs and estimated earnings in excess of billings (4,073) --
Prepaid expenses and other assets (740) 161
Trade accounts payable 401 (183)
Accrued compensation and payroll taxes 1,330 1,473
Income taxes 1,531 989
Other liabilities (596) (78)
------- -------
Net cash (used in) provided by operating activities (736) 2,644
Cash flows from investing activities:
Acquisition, net of cash acquired (3,278) --
Additional expenditures related to acquisitions (645) --
Purchases of property and equipment (349) (11)
Advances to shareholder (22) 679
------- -------
Net cash (used in) provided by investing activities (4,294) 668
Cash flows from financing activities:
Proceeds from issuance of common stock 60 22,474
Advances (repayments) of long-term debt, net 6,464 (7,710)
Distributions to shareholders -- (710)
Common stock repurchases (1,113) --
------- -------
Net cash provided by financing activities 5,411 14,054
Net increase in cash and cash equivalents 381 17,366
Cash at beginning of period 454 150
------- -------
Cash at end of period $ 835 $17,516
======= =======
Supplemental information-Cash paid for:
Interest $ 8 $ 147
Income taxes 464 94
======= =======
Supplemental schedule of noncash investing activity:
Detail of business acquired and other purchase accounting adjustments as follows
(in thousands):
Cash consideration paid for acquisition $ 3,263
Plus acquisition expenses 40
Less cash acquired in acquisition (25)
-------
Cash paid for acquisition, net of cash acquired $ 3,278
=======
</TABLE>
The accompany notes are an integral part of the unaudited consolidated
financial statements.
5
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the Three Months Ended March 31, 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. 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 the respective events. SAC, DSA and SIS are collectively referred to as
"the Acquisitions". 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 SM&A
Corporation (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 ended March 31, 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 cash flows of the Company on an undiscounted basis. Should the
carrying value of goodwill exceed the fair value an impairment for the excess
would be recorded at that time. As of March 31, 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 initial public offering is
included in Form S-1 filed by the Company with the Securities and Exchange
Commission on January
6
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--(Continued)
For the Three Months Ended March 31, 1999 and 1998
28, 1998 as amended (the "S-1"). Due to the Company converting from an S
corporation to a C corporation, the information found in the S-1 filing includes
pro forma operating results. These pro formas reflect an adjustment of salaries
and bonuses paid to three principal executive officers (which have historically
been included in selling, general, and administrative expenses) in excess or
less than $2.7 million ($675,000 per quarter) in the aggregate (the maximum
salaries and bonuses payable for 1998 under the Company's Executive Compensation
Program) and adjustments for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than an S corporation during such
period.
Certain reclassifications have been made to the 1998 financial statements to
conform to the presentation going forward.
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 Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Numerator:
Numerator for basic and diluted
income per common share -- net earnings $ 2,980 $ 1,749
------- -------
Denominator:
Denominator for basic income
per share -- weighted average shares
outstanding during the period 16,515 14,347
Incremental common shares attributable
to dilutive outstanding stock options 412 84
------- -------
Denominator for diluted income per
common share 16,927 14,431
------- -------
Basic net income per common share: $ .18 $ .12
======= =======
Diluted net income per common share: $ .18 $ .12
======= =======
</TABLE>
7
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--(Continued)
For the Three Months Ended March 31, 1999 and 1998
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 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 financial statements of the Company for the three months ended
March 31, 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 August 1998, the Company issued 714,839 unregistered shares of common stock
valued at approximately $14 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
will likely be required to issue additional shares of common stock to former
shareholders of SAC depending upon the market price of the common stock at
certain defined liquidation dates.
The shareholders of common stock issued in the SAC and DSA acquisitions have
demand registration rights. The shareholders exercised such demand rights on
February 1, 1999. Subsequently, on April 29, 1999, the Company filed a
registration statement with the SEC on Form S-3 to register these common shares.
8
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--(Continued)
For the Three Months Ended March 31, 1999 and 1998
The Company recorded goodwill of approximately $35.8 million as a result of
these purchase transactions. 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 $ 49,030
Net assets acquired (14,480)
Acquisition costs 1,275
--------
Goodwill 35,825
Less accumulated amortization (792)
--------
Goodwill, net $ 35,033
========
</TABLE>
The following table presents unaudited historical results of operations for
the three months ended March 31, 1999 and unaudited pro forma results of
operations for three months ended March 31, 1998 assuming the acquisitions of
SAC and DSA occurred as of January 1, 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Net revenue $25,314 $25,001
======= =======
Income from continuing operations 2,979 1,213
Income from discontinued operations -- 27
------- -------
Net income $ 2,979 $ 1,240
======= =======
Net income per share:
Basic $ .18 $ .08
Diluted $ .18 $ .07
======= =======
Weighted average shares outstanding:
Basic 16,515 16,373
Diluted 16,927 16,758
</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.
9
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--(Continued)
For the Three Months Ended March 31, 1999 and 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 6. LONG-TERM DEBT
In September 1998, the Company entered into a credit agreement with a bank
which provides a $25.0 million revolving line of credit. The credit agreement,
which is secured by a first priority interest in substantially all of the assets
of the Company, matures in September 2001 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 a fee of .25% of the average unused portion of the facility
and contains certain covenants. The most restrictive covenant requires the
Company to maintain consolidated net worth, as defined in the credit agreement,
of at least $35.0 million plus 75% of consolidated quarterly net income. As of
March 31, 1999, the Company was in compliance with all covenants. The Company
had $6,500,000 outstanding under the credit agreement at March 31, 1999 at an
effective interest rate of 7.75%. The Company is currently in discussions with
its lenders to increase the size of the credit facility to $50.0 million, with
similar covenant restrictions and other terms.
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 ended March 31, 1998
represents historical supplemental data as described on the statements of income
(in thousands):
10
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--(Continued)
For the Three Months Ended March 31, 1999 and 1998
Information as to the net revenues of the lines of business is set forth
below. The information presented for the three months ended March 31, 1998
represents historical supplemental data as Described on the statements of
income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Net Revenues:
Proposal Management Group $10,579 $ 9,125
Systems Solutions Group 9,809 1,534
Information Technology Solutions Group 4,926 --
------- -------
Total revenues $25,314 $10,659
======= =======
Operating Income (loss):
Proposal Management Group $ 4,012 $ 3,365
Systems Solutions Group 2,656 670
Information Technology Solutions Group 1,495 --
Executive Group (3,154) (1,110)
------- -------
Total operating income $ 5,009 $ 2,925
======= =======
Income (Loss) from Continuing Operations:
Proposal Management Group $ 2,367 $ 1,985
Systems Solutions Group 1,571 366
Information Technology Solutions Group 882 --
Executive Group (1,841) (602)
------- -------
Total Income from Continuing Operations $ 2,979 $ 1,749
======= =======
</TABLE>
11
<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 our acquisition of SAC, DSA or SIS 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
12
<PAGE>
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.
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 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
our clients, or, indirectly, on us. A number of trends may contribute to such a
decline, including:
o large weapon systems being replaced with smaller, more precise high
technology systems
o multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter
o threat scenarios evolving away from global conflicts to regional conflicts
o 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.
13
<PAGE>
The are risks associated with government contracting
We are subject to risks associated with compliance with governmental
regulations, both directly and through government-contractor clients. The fines
and penalties which could result from noncompliance with appropriate standards
and regulations, or a client's suspension or debarment from the bidding process
for future government contracts could have a material adverse effect on our
business, operating results and financial condition. 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 staff. There can be no assurance that necessary security
clearances will continue to be made available by the U.S. Government.
In addition, a significant portion of our revenues are derived from
contracts or subcontracts with the U.S. Government. Our services are performed
pursuant to the following types of contracts:
o cost reimbursable
o time-and-materials
o 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.
14
<PAGE>
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. Three clients, the U.S. Government, Lockheed Martin Corporation,
and Raytheon Company accounted for approximately 57.2% and 33.3% of our total
revenues for the years ended December 31, 1998 and 1997, respectively. Lockheed
Martin Corporation is 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.
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. 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
with us, 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 than us.
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 89.6% win rate 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
15
<PAGE>
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.
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 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.
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 March
29, 1999, the closing sale price has ranged from a low of $8.75 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:
o quarterly fluctuations in results of operations
o adverse circumstances affecting the introduction or market acceptance of
new services offered by us
o announcements of new services by our competitors
o our loss of key employees
o changes in the regulatory environment or market conditions affecting the
defense and aerospace industry
o changes in earnings estimates ratings by analysts
o lack of market liquidity resulting from a relatively small amount of public
stock float
o changes in generally accepted accounting principles
o sales of common stock by existing holders
o 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
16
<PAGE>
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 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 43.9% of our outstanding common stock and will
have the ability to control or significantly influence the election of directors
and the results of other matters submitted to a vote of shareholders. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of 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.
17
<PAGE>
The number of shares available for future sale could adversely affect the price
of our publicly traded stock
As of April 23, 1999, we had 16, 364.584 shares of common stock outstanding.
As of April 23, 1999, we had outstanding options to acquire, subject to certain
vesting requirements. 1,630,300 shares of common stock pursuant to our 1997
Stock Option Plan. Additionally, in connection with our Acquisition of Space
Applications Corporation, options were granted to purchase an aggregate of
175,906 shares of our common stock. In addition, due to certain price protection
provisions relating to the shares of common stock issued in connection with the
acquisition of Space Applications Corporation, we are required to issue an
aggregate of 537,464 additional shares of common stock to former shareholders of
Space Applications Corporation. We also may be required to issue additional
shares of our common stock upon exercise of stock options by the former SAC
shareholders, depending upon the average closing price of our common stock on
the NASDAQ National Market for the twenty (20) trading days immediately before
the effective data of a registration statement on Form S-6.
We have registered on a registration statement on Form S-8 all 1,500,00
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.
We issued 819,743 unregistered shares of common stock in the acquisition of
SAC and 714,841 unregistered shares of common stock in the acquisition of DSA.
The common stock has registration demand rights, which were exercised by the
shareholders on February 1, 1999. We have filed the related Form S-3 to register
such shares, and the additional 537,464 shares being issued to the former SAC
shareholders pursuant to the price protection provisions in the SAC acquisition
agreement. In addition, 811,573 shares have also been registered on behalf of
certain other shareholders of the Company.
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.
The 1998 acquisitions of SAC and DSA, and the 1999 acquisition of SIS, which
collectively added approximately 480 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 and the armed services.
18
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Revenues. Net revenues for the three months ended March 31, 1999 were
$25.3 million compared to $10.7 million for the three months ended March 31,
1998, an increase of $14.6 million or 136.4%. Net revenues from Proposal
Management Services were $10.6 million for the three months ended March 31, 1999
compared to $9.1 million for the comparable three months of the prior year, an
increase of $1.5 million or 16.5%. This increase was attributable to an increase
in the customer base and number of proposals managed as a result of increased
marketing efforts by the Company. Net revenues from high-end contract support
services, specifically Systems Solutions and Information Technology Solutions
were $9.8 million and $4.9 million, respectively, for the three months ended
March 31, 1999 compared to $1.5 million and -0- for the same three months of
the prior year. Revenues from high-end contract support services in total
increased $13.2 million or 880% due to the Company expanding their scope of
high-end contract support services as a result of the acquisitions of SAC and
DSA in May and August 1998, respectively.
Gross Margin. Gross margin was $10.6 million for the three months ended March
31, 1999 compared to $4.7 million for the three months ended March 31, 1998, an
increase of $5.9 million or 125.5%. This increase in gross profit was primarily
attributable to the increase in high end contract support services provided as a
result of the acquisitions of SAC and DSA in May and August 1998, respectively.
As a percentage of net revenues, gross margin decreased to 41.8% compared to
43.8% 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 three months ended March 31, 1999 were $5.2
million compared to $1.7 million for the three months ended March 31, 1998, an
increase of $3.5 million or 205.9%. The increase was primarily the result of
increased overhead and facility expenses related to the SAC and DSA
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, SG&A expenses were 20.6% for the three months ended March 31,
1999, up from 15.9% for the three months ended March 31, 1998.
Goodwill Amortization. Amortization of goodwill for the three months ended
March 31, 1999 was $0.3 million due to the Acquisitions.
Operating Income. Operating income for the three months ended March 31, 1999
was $5.0 million compared to $2.9 million for the three months ended March 31,
1998, an increase of $2.1 million or 72.4%. As a percentage of total revenues,
operating income decreased to 19.8% for the three months ended March 31, 1999
from 27.1% for the three months ended March 31, 1998.
Other Income (Expense). Other income, net was $39,000 for the three months
ended March 31, 1999 compared to $69,000 for the same three months of 1998. This
decrease in income was a result of higher interest expense attributable to
increased bank borrowings in the first three months of 1999 and lower interest
income due to fewer cash equivalents in 1999 compared to the same three month
period of 1998.
Net Income. Net income was $3.0 million for the three months ended March 31,
1999 compared to $1.7 million for the three months ended March 31, 1998, an
increase of $1.3 million or 76.5%.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company's net cash used in
operating activities was approximately $736,000, compared to cash flows provided
by operating activities of $2.6 million in the same period of the prior year.
This change was mainly due to an increase in accounts receivable and costs and
estimated earnings in excess of billings on contracts in progress, and a
decrease in other liabilities.
Net cash used in investing activities was $4.3 million for the three months
ending March 31, 1999, compared to cash flows provided by investing activities
of $668,000 for the same period of the prior year. The Company's primary uses of
funds on investing activities during the three months ended March 31, 1999 were
the acquisition of SIS in March 1999 and additional costs related to the
acquisitions of DSA and SAC.
Net cash provided by financing activities was $5.4 million in the three months
ended March 31, 1999, compared to $14.1 million for the same period of the prior
year. The primary source of cash provided by investing activities for the three
months ended March 31, 1999, was advances on the bank line of credit of $7.5
million, required due to the deterioration of days sales outstanding in
receivables. The primary uses of cash on financing activities were the
repayment of $1.0 million of outstanding bank debt and the payment of $1.1
million for the repurchase of 137,000 shares of the Company's outstanding common
stock.
The Company believes that funds generated by operations will continue to
provide adequate cash to fund its anticipated operating cash needs for at least
the next twelve months. The Company has a $25 million revolving line of credit
facility with a bank. The revolving line of credit will be used, as considered
necessary, for operating cash and for future acquisitions. As of March 31,
1999, the Company had $6.5 million of borrowings outstanding on the line. The
Company is in discussions with its lenders to increase the size of the credit
facility to $50.0 million, under similar covenant restrictions and other terms.
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 is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. 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 is in the process of investigating 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 are also being reviewed. As systems are evaluated
and assessed, a detailed work plan is being developed to ensure that each area
requiring modification or replacement is 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
20
<PAGE>
were 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 potential 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.
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 $200,000. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to range from $300,000 to $1,500,000. 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
Issue odifications 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 Issue project cost and estimates to complete exclude
the estimated costs and time associated with the impact of a third party's Year
2000 Issue, 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 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 Issue 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
21
<PAGE>
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 issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of 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 Statement of Position ("SOP") which will delay for one year
the effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1 in March 1998. SOP 98-1 establishes accounting standards for
costs of internal use software and is effective for financial statements for
fiscal years beginning after December 15, 1998. Management does not anticipate
that the adoption of SOP 98-1 will have a material effect on the company's
results of operations.
22
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
On April 21, 1999 the Company amended its open market Stock Repurchase
Program to provide authority for the repurchase of up to an additional 300,000
shares of its issued and outstanding common stock, bringing the total
authorized repurchases to an amount up to 600,000 shares. As of May 10, 1999
the Company has repurchased 325,000 shares at an average purchase price of
$8.25. 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
Exhibit
-------
No.
---
10.1 * Agreement and Plan of Reorganization and Merger, dated March 30,
1999, among SM&A Corporation, Systems Integration Software, SIS
Acquisition, Inc. and the Individuals named therein.
10.2 * Escrow Agreement, dated March 30, 1999, among SM&A Corporation,
Systems Integration Software, First American Trust Company and
the individuals named therein.
27.1 * Financial Data Schedule
(b) Reports on Form 8-K
None
____________________
* filed herewith
23
<PAGE>
SIGNATURES
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: May 15, 1999 By: /s/ Michael A. Piraino
____________________________________________
Michael A. Piraino
President, Chief Operating Officer,
and Director
By: /s/ Michael A. Piraino
____________________________________________
Michael A. Piraino
Acting Chief Financial Officer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
No.
---
10.1 Agreement and Plan of Reorganization and Merger, dated March 30,
1999, among SM&A Corporation, Systems Integration Software, SIS
Acquisition, Inc. and the Individuals named therein.
10.2 Escrow Agreement, dated March 30, 1999, among SM&A Corporation,
Systems Integration Software, First American Trust Company and
the individuals named therein.
27 Financial Data Schedules (EDGAR)
25
<PAGE>
EXHIBIT 10.1
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement") is
---------
made as of the 30th day of March, 1999, among SM&A CORPORATION, a California
corporation ("SM&A"); SYSTEMS INTEGRATION SOFTWARE, a Delaware corporation (the
----
"Company"); SIS ACQUISITION, INC., a California corporation ("Newco"); and GARY
------- -----
L. AND MARYANNE MARKLE, MICHAEL G. AND LYNETTE K. HILL, EDWARD L. AND DEBBIE K.
KNOLL and CHARLES F. AND CAROLYN F. BAIRD (each a "Principal Shareholder" and
---------------------
collectively the "Principal Shareholders"); and JOHN A. AND REBECCA H. GLORIOD,
----------------------
KAREN OLSEN and DAVID OLSEN (each an "Additional Founder," and collectively the
------------------
"Additional Founders").
-------------------
WHEREAS, Newco has been duly organized and is currently existing under the
laws of the State of California, having been incorporated solely for the purpose
of completing the transactions contemplated hereby, and is a wholly-owned
subsidiary of SM&A; and
WHEREAS, the Principal Shareholders are the record owners of an aggregate
of 1,396,362 shares of common stock of the Company; and
WHEREAS, the Additional Founders are the record owners of an aggregate of
541,734 shares of common stock of the Company; and
WHEREAS, the respective Boards of Directors of SM&A, Newco and the Company
(all of which companies are hereinafter collectively referred to as the
"Constituent Corporations") deem it advisable and in the best interests of each
- -------------------------
of the Constituent Corporations and their respective stockholders that SM&A
acquire all of the issued and outstanding shares of the Company and, as soon as
practicable thereafter, that the Company merge with and into Newco (the
"Merger") pursuant to the applicable provisions of the laws of the State of
------
California and of the State of Delaware (the "Corporate Statutes"), and on the
------------------
terms and subject to the conditions set forth in this Agreement, the Agreement
of Merger attached hereto as Exhibit 0.1 and the Articles of Merger attached
-----------
hereto as Exhibit 0.2; and
-----------
WHEREAS, the Board of Directors of each of the Constituent Corporations has
approved and adopted this Agreement as a plan of reorganization within the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code");
----
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; THE MERGER.
-----------------------------------------------------
1.1 Acquisition of Outstanding Company Shares; Merger. In accordance with
-------------------------------------------------
the terms and subject to the conditions of this Agreement, the Agreement of
Merger and the Articles of Merger, and pursuant to the Corporate Statutes, 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 and,
- --- ---------
as soon as practicable thereafter, the Company shall be merged with and into
Newco (herein referred to as the "Surviving Corporation" whenever reference is
---------------------
made to it at or after the Effective Time (as defined in Section 1.2 below)),
-----------
whereby the separate existence of the Company shall cease in accordance with
Section 1.4 below.
- -----------
<PAGE>
1.2 Effective Time of Merger. As soon as practicable after the Closing
------------------------
Date (as defined in Section 3.1) but no later than April 30, 1999, Newco and the
-----------
Company shall execute an Agreement of Merger and Articles of Merger in form and
substance reasonably satisfactory to SM&A, Newco and the Company, which shall be
filed with the Secretary of State of the State of California and the Secretary
of State of the State of Delaware, respectively. The Merger shall become
effective upon the filing and recordation of the Agreement of Merger with the
Secretary of State of California and the filing and recordation of the Articles
of Merger with the Secretary of State of the State of Delaware (the "Effective
---------
Time").
- ----
1.3 Articles of Incorporation, Bylaws and Board of Directors of Surviving
---------------------------------------------------------------------
Corporation. At the Effective Time:
- -----------
(1) The Articles of Incorporation of Newco shall be amended and
restated to read as set forth in Exhibit 1.3 hereto, and such Articles of
-----------
Incorporation, as amended and restated, shall be the Articles of
Incorporation of the Surviving Corporation.
(2) The Bylaws of Newco shall be the Bylaws of the Surviving
Corporation.
(3) Michael A. Piraino, the sole director of Newco, shall be the sole
director of the Surviving Corporation. Such director shall hold office
subject to the laws of the State of California and the provisions of the
Articles of Incorporation and Bylaws of the Surviving Corporation.
(4) The officers of the Surviving Corporation shall be as follows:
President, Chief Financial Officer and Secretary - Michael A. Piraino.
1.4 Effect of Merger. The Merger shall have the effects set forth in this
----------------
Agreement, the Agreement of Merger, the Articles of Merger and the Corporate
Statutes. Except as specifically set forth to the contrary in the Corporate
Statutes, the Agreement of Merger, the Articles of Merger or in this Agreement,
the identity, existence, purposes, powers, objects, franchises, privileges,
rights and immunities of Newco shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of the Company shall
be merged into Newco, and Newco, as the Surviving Corporation, shall be fully
vested therewith; at the Effective Time, the separate existence of the Company
shall cease and, in accordance with and subject to the terms of this Agreement,
the Surviving Corporation shall possess all the rights, privileges, immunities
and franchises, of a public, as well as of a private nature; and all property
and all debts due on whatever account, including subscriptions to shares and all
and every other interest of or belonging to or due to Newco or the Company shall
be allocated to, and vested in, the Surviving Corporation without further act or
deed and without any transfer or assignment having occurred; and all property,
rights, privileges, powers, licenses and franchises and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Company and Newco; and the title to any real
estate, or interest therein, whether by deed or otherwise, under the laws of the
State of California and the State of Delaware, shall not revert or be in any way
impaired by reason of the Merger. The Surviving Corporation shall thenceforth
be responsible and liable for all the liabilities and obligations of the Company
and Newco and any claim existing, or action or proceeding pending, by or against
the Company or Newco may be prosecuted as if the Merger had not taken place, or
the Surviving Corporation may be substituted in its place. Neither the rights
of creditors nor any liens upon the property of the Company or Newco shall be
impaired by the Merger, and all debts, liabilities and duties of the Company and
Newco shall attach to the Surviving Corporation, and may be enforced against it
to the same extent as if said debts, liabilities and duties had been incurred or
contracted by the Surviving Corporation.
<PAGE>
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:
(1) each Outstanding Company Share, other than Dissenting Shares (as
hereinafter defined), shall automatically be converted into and become a
right to receive (i) cash in an amount equal to the Base Purchase Price
divided by the number of Outstanding Company Shares; and (ii) 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 13.6;
-------------
provided, however, that with respect only to the Outstanding Company Shares
held by the Principal Shareholders and the Additional Founders, the Escrow
Funds which shall be paid into the escrow pursuant to Section 2.6 shall be
-----------
deducted from the Base Purchase Price allocated to the Principal
Shareholders and the Additional Founders (which deduction shall be
allocated among the Principal Shareholders and the Additional Founders
according to the proportions specified in Schedule 3.1 to the Escrow
------------
Agreement);
(2) all shares of Company Stock held immediately prior to the Closing
Date by the Company as treasury stock or by a subsidiary of the Company
shall be canceled and no Consideration shall be paid with respect thereto;
and
(3) all Dissenting Shares shall be treated in accordance with Section
-------
2.5 below.
---
2.3 Capital Stock of Newco. At the Effective Time, each share of capital
----------------------
stock of Newco issued and outstanding as of the Effective Time shall be
unaffected by the Merger. At the Effective Time, the Outstanding Company Shares
shall be deemed converted into the shares of capital stock of Newco.
2.4 Options. Each Company Option shall be exercised or cancelled prior to
-------
the Closing (as hereinafter defined).
2.5 Dissenting Shares.
-----------------
(1) Shares of Company Stock held by a shareholder who has properly
exercised dissenters' rights with respect thereto (collectively, the
"Dissenting Shares") in accordance with Section 262 of the Delaware General
-----------------
Corporations Law, or any successor provision (the "Dissenters Law"), shall
--------------
not have a right to receive any Consideration with respect thereto. At the
Effective Time, any holder of Dissenting Shares shall cease to have any
rights with respect thereto, except the rights provided in the Dissenters
Law.
(2) The Company shall give SM&A (i) prompt notice of any written
demands under the Dissenters Law with respect to any shares of Company
Stock, any withdrawal of any such demands and any other instruments served
pursuant to the Dissenters Law and received by the Company, and (ii) the
right to participate in all negotiations and proceedings with respect to
any demands under the Dissenters Law with respect to any shares of Company
Stock. The Company shall cooperate with SM&A concerning, and shall not,
except with the prior written consent of SM&A, voluntarily make any payment
with respect to, or offer to settle or settle, any such demands; provided,
however, that SM&A shall in no
<PAGE>
way hinder or prevent the Company from complying with the Company's
obligations under the Dissenters Law.
2.6 Escrow of Cash. At the Closing, SM&A shall deposit twenty percent
--------------
(20%) of the Base Purchase Price allocated to the Principal Shareholders and
the Additional Founders (the "Escrow Funds") in escrow for a period of one (1)
------------
year (the "Escrow Period") as the source of payment for the indemnification
-------------
obligations of the Principal Shareholders and Additional Founders pursuant to
Article 10 below. The Escrow Funds shall be held and disbursed pursuant to the
- ----------
terms of this Agreement and an escrow agreement in substantially the form
attached hereto as Exhibit 2.6 (the "Escrow Agreement"). The Escrow Funds shall
----------- ----------------
be determined pro rata based on the Base Purchase Price allocable to each
Principal Shareholder and Additional Founder (as more particularly 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 the Company,
-------
411 South Tejon, Suite G, Colorado Springs, Colorado 80903, 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)
----------------
April 30, 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:
(1) 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:
(1) a duly executed copy of the Escrow Agreement;
(2) duly executed resignations from each of the Company's
directors serving in such capacity immediately prior to the Closing;
(3) such certificates of the Company, Additional Founders and/or
the Principal Shareholders as required by Article 9;
---------
(4) an opinion of counsel for the Company, substantially in the
form attached hereto as Exhibit 3.2(a)(iv);
------------------
(5) duly executed copies of Employment Agreements, including
noncompetition provisions, between the Surviving Corporation and Gary
Markle, Charles Baird, Michael Hill and Edward Knoll, substantially in
the form attached hereto as Exhibit 3.2(a)(v) (each an "Employment
----------------- ----------
Agreement");
---------
(6) [RESERVED];
(7) certificates of Good Standing and Existence of the Company
issued by the Secretary of State of the State of Delaware, Colorado
and for each other jurisdiction where the Company is qualified to do
business;
<PAGE>
(8) a power of attorney duly executed by each shareholder of the
Company who has authorized Gary L. Markle to execute agreements and
other documents on his or her behalf;
(9) Company financials for each of January and February 1999;
(10) Documents showing the termination of the Company present bank
credit facility and release of related liens;
(11) the Equity Incentive Proposal of Gary Markle attached hereto as
Exhibit 3.2(a)(xi); and
------------------
(12) such other documents that may be reasonably requested by SM&A.
(2) Documents and agreements delivered by or on behalf of SM&A and/or
Newco, as the case may be, to the Company, Additional Founders and/or the
Principal Shareholders, as the case may be:
(1) a duly executed copy of the Escrow Agreement;
(2) such certificates of SM&A and Newco as required by Article
-------
8;
-
(3) an opinion of counsel for SM&A, substantially in the form
attached hereto as Exhibit 3.2(b)(iii);
-------------------
(4) duly executed copies of the Employment Agreements;
(5) certificates of Good Standing and Existence of SM&A issued
by the Secretary of State of the State of California; and
(6) such other documents that may be reasonably requested by the
Company.
(3) Base Purchase Price Closing. 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 of
certificates representing shares of Common Stock held by each such shareholder
immediately prior to the Effective Time, along with stock powers duly executed
in blank and/or other instruments of transfer satisfactory to SM&A.
(4) Earn-Out Purchase Price Closing. On April 1, 2000, SM&A shall deliver
-------------------------------
to each shareholder of the Company the Earn-Out Purchase Price to which each
shareholder is entitled, as earned and payable according to Schedule 13.6.
-------------
<PAGE>
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 as of the date of this Agreement and shall be true on
the Closing Date; 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
and the Principal Shareholders contained in this Agreement ("Disclosure
----------
Schedule"). The Company and the Principal Shareholders have used their best
efforts to reference on the Disclosure Schedule the appropriate section and
paragraph number, however the failure to properly reference such section and
number shall not be a breach of a representation or warranty if SM&A could
reasonably ascertain the effect of the disclosure on the other representations
and warranties:
4.1 Due Organization. The Company is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the State of Delaware,
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 (a) as disclosed on Exhibit/Schedule 4.1-1
----------------------
or (b) 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
Secretary of State of the State of Delaware) and Bylaws (certified by the
Secretary of the Company), as each is amended, of the Company are attached to
Exhibit/Schedule 4.1-2. 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).
4.2 Authorization; No Conflicts. Except as set forth on Exhibit 4.2, the
--------------------------- -----------
Company has the full legal right, power and authority to enter into this
Agreement, the Agreement of Merger, the Articles of Merger and the Escrow
Agreement, and to perform the transactions contemplated herein and therein. The
execution, delivery and performance of this Agreement, the Agreement of Merger,
the Articles of Merger, 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 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 Schedule 4.10. The Company has
-------------
received, or will receive prior to the Closing, all necessary approvals from its
Board of Directors and shareholders to consummate the Merger. This Agreement
has been duly executed and delivered by the Company, and at the Closing the
Agreement of Merger, the Articles of Merger, 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 and Newco, respectively, this Agreement
constitutes, and the Agreement of Merger, the Articles of Merger, 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.
<PAGE>
4.3 Capital Stock. The authorized capital stock of the Company consists
-------------
solely of 5,000,000 shares of voting common stock, $.01 par value per share, of
which 1,963,884 shares are issued and outstanding, and of which 1,132,749 shares
are subject to exercise prior to the Effective Time pursuant to option grants
currently outstanding, and held of record by the persons and in the amounts set
forth on Schedule 4.3, free and clear of all Encumbrances (for a total of
------------
3,096,633 shares as of the Closing). 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
except as set forth on Schedule 4.3. Except as set forth on Exhibit/Schedule
------------ ----------------
4.3, shares of the Company Stock were not issued in violation of the preemptive
- ---
rights, if any, of any past or present shareholder.
4.4 Transactions in Capital Stock and Spin-offs. Except as set forth on
-------------------------------------------
Exhibit/Schedule 4.4, 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, except as set forth on Exhibit/Schedule 4.4 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 securities. Without limiting the generality
of the foregoing and except as set forth on Schedule 4.4, 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 Company Stock
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 transaction described in this Agreement, except as set
forth on Exhibit/Schedule 4.4. Except as set forth on Exhibit/Schedule 4.4,
-------------------- --------------------
since February 23, 1999 there has not been any (a) issuance, sale, repurchase,
redemption or other transfer of or transaction in the Company Stock capital
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. Except as set forth on Schedule 4.5, none of the
--------------- ------------
shares of the Company Stock was issued for other than legally valid
consideration.
4.6 Subsidiaries. Except as set forth on Exhibit/Schedule 4.6, 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.
Except as set forth on Exhibit/Schedule 4.6, the Company is not, directly or
--------------------
indirectly, a participant in any joint venture, partnership or other
noncorporate entity.
4.7 [RESERVED]
4.8 Financial Statements. Copies of the following consolidated financial
--------------------
statements (the "Financial Statements") of the Company are attached hereto as
--------------------
Schedule 4.8:
- ------------
(1) The Company's consolidated balance sheet as of December 31, 1998
and for the two (2) prior years, and consolidated statements of earnings,
cash flows and stockholders' equity for the year then ended and for the two
(2) prior years; and
<PAGE>
(2) The Company's consolidated balance sheet as of February 28, 1999
(hereinafter referred to as the "Balance Sheet Date") and consolidated
------------------
statements of earnings, cash flows and stockholders' equity for the two-
month period then ended. The Company's financial statements, as adjusted,
reflecting earnings before interest and taxes of $370,000 for the fiscal
year ended December 31, 1998 are set forth on Schedule 4.8(b)-2.
-----------------
The Financial Statements have been prepared 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, on a consolidated basis, and such statements of earnings, cash flows
and stockholders' equity present fairly and in all material respects the results
of its operations for the periods indicated thereon. SM&A acknowledges and
agrees that (i) the Financial Statements are "compiled" and do not necessarily
reflect such adjustments as may be contained in "audited" financial statements;
provided, however, that such acknowledgment by SM&A shall not affect in any
manner the representation and warranties contained herein concerning the
Financial Statements or any other matter, and (ii) any future analysis of the
Financial Statements which may form the basis for a claim for indemnification
under the Agreement shall be undertaken employing an accounting methodology
consistent with that as historically and consistently maintained by the Company.
4.9 Liabilities and Obligations. Except as set forth on Exhibit/Schedule
--------------------------- ----------------
4.4, Exhibit/Schedule 4.8 and Exhibit/Schedule 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 Schedule 4.15
-------------
hereto. For each such liability for which the amount is not fixed or is
contested, the Company has provided on Schedule 4.9 a summary description of its
------------
best estimate of the liability.
4.10 Approvals. Except as set forth on Exhibit/Schedule 4.10, 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.
4.11 Accounts and Notes Receivable. Schedule 4.11 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 Exhibit/Schedule 4.11, 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. To the Company's knowledge and except as set
---------------------
forth on Exhibit 4.12, 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"), used or
---------------------
held for use 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
<PAGE>
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 to the Company.
No claims have been made by the Company of any violation or infringement by
others of the rights of the Company with respect to any Intellectual Property or
Technology of the Company, and the Company knows of no basis for the making of
any such claim.
The Company has delivered to SM&A on Schedule 4.12 a complete and correct
-------------
list and/or summary description of all material Intellectual Property and
Technology owned by, used by or licensed by the Company.
4.13 Permits. Except as set forth on Exhibit 4.13, 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 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 Schedule 4.13 a complete and correct list
-------------
and/or summary description of all Permits held by the Company.
4.14 Real and Personal Property. Except as set forth on Exhibit 4.14:
-------------------------- ------------
(1) Schedule 4.14(a) contains an accurate list and/or description of
----------------
all real property leased by the Company. The Company does not own, nor has
it ever owned, any real property.
(2) Schedule 4.14(b) 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 were formerly or 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, (a) excepting ordinary wear and tear and equipment that is out
of service, and (b) taking into consideration the current age, use and
functionality of such items.
(3) 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
property listed on Schedule 4.14(a) and Schedule 4.14(b), free and clear of
---------------- ----------------
all Encumbrances.
4.15 Material Contracts and Commitments. Schedule 4.15 sets forth a list,
---------------------------------- -------------
complete and correct in all material respects, of the following material oral,
and an accurate list of the following material 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"):
---------
(1) agreements involving payments, individually or in the aggregate,
in excess of $50,000;
(2) joint venture or partnership agreements or limited liability
company agreements;
<PAGE>
(3) loan agreements, indemnity or guaranty agreements, bonds,
mortgages, liens, pledges or other security agreements (without regard to
dollar amount involved);
(4) leases, licenses, options to purchase real or personal property
involving future obligations on the part of the Company which aggregate in
excess of $50,000, other than as set forth on Schedule 4.14(a);
----------------
(5) 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);
(6) contracts upon which the Company is substantially dependent or
which are otherwise material to the Company;
(7) 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;
(8) 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);
(9) agreements with any labor union or association representing any
employee of the Company;
(10) 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, other than those set forth on Schedule 4.17(a) and Schedule
---------------- --------
4.17(b);
-------
(11) 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;
(12) agreements not made in the ordinary course of business; and
(13) any other agreements, whether or not made in the ordinary course
of business, that are material to the Company.
The Company has delivered or made available for review by SM&A or its
representatives true and complete copies of the written Contracts. Except as
set forth on Exhibit 4.15, the Company has complied in all 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.
4.16 Insurance. Schedule 4.16 sets forth an accurate list of all
--------- -------------
insurance policies carried by the Company, and the Company has delivered to SM&A
on Schedule 4.16 an accurate list of all insurance loss runs or worker's
-------------
compensation claims received during the past three (3) policy years.
<PAGE>
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. Except as set forth on Exhibit 4.17:
--------------------------- ------------
(1) Schedule 4.17(a) 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 the each
independent contractor and agent.
(2) Schedule 4.17(b) 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.
(3) 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 there have not been any
discrimination complaints filed against the Company pursuant to IRCA.
(4) 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.
(5) 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.
(6) 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 and state and local human rights and/or civil rights
agencies.
(7) The Company has not received written notice 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.
(8) The Company is not aware that any employee, officer or director
is in violation of any obligation of confidentiality to the Company.
4.18 Benefit Plans; ERISA Compliance. Except as set forth on Exhibit
------------------------------- -------
4.18:
- ----
(1) Schedule 4.18 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
---- -------------
<PAGE>
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 (none of
which amendments will materially increase to costs of the amended plan),
(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.
(2) 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 determination letter or application therefor in any
respect that would adversely affect its qualification or materially
increase its costs, 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 Effective Time 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.
(3) Except as set forth on Schedule 4.18, 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
<PAGE>
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.
(4) 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.
(5) 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.
(6) 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.
(7) No Pension Plan or pension plan subject to Tile 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, other than as may arise as a result of the consummation of the
Merger. 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
<PAGE>
4205 for which the Company has any liability outstanding that can be
expected to have a Material Adverse Effect on the Company.
(8) 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 Consummation Date.
(9) 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 Effective Date of the
Merger, 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 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.
(10) 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.
(11) The Company has not violated any of the health care continuation
coverage requirements of the Consolidated Omnibus Budget Reconciliation Act
of 1985 ("COBRA") applicable to its employees prior to the Effective Time
-----
of the Merger.
4.19 Conformity with Law; Pending or Threatened Claims. To the Company's
-------------------------------------------------
knowledge and except as set forth on Exhibit/Schedule 4.19, 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.
<PAGE>
4.20 Taxes. Except as set forth on Exhibit 4.20:
----- ------------
(1) The Company has timely filed all federal and other Tax Returns
which are required to be filed; and except as set forth in Schedule 4.20-1,
---------------
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 (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, 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 Schedule 4.9 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 three (3) fiscal years,
or such shorter period of time as it has existed, are attached hereto as
Schedule 4.20-2. 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, except that the term "Tax" is specifically defined to exclude
---
any Tax incurred by the Company directly or indirectly as a result of the
Merger failing to qualify as a "reorganization" within the meaning of
Section 368(a) of the Code. "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.
(2) No shareholder of the Company is a foreign person subject to
withholding under Section 1445 of the Code and the regulations promulgated
thereunder, and certification to that effect will be delivered to SM&A at
the Closing.
(3) 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.
(4) There is no pending 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.
(5) The Company has made an election under Section 341(f) of the
Code.
(6) The Company has not agreed nor is required to make any adjustment
under Section 481(a) of the Code.
<PAGE>
4.21 Government Contracts. The Company is not now and in the last two (2)
--------------------
years has not been a party to any governmental contracts subject to price
redetermination or renegotiation, except as set forth on Exhibit/Schedule 4.21.
---------------------
4.22 Absence of Changes. Except as set forth on Exhibit/Schedule 4.22,
------------------ ---------------------
since the Balance Sheet Date, there has not been:
(1) any material adverse change in the financial condition, assets,
liabilities (contingent or otherwise), income or business of the Company;
(2) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business of the
Company;
(3) 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;
(4) 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;
(5) 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;
(6) any work interruptions, labor grievances or claims filed
materially adversely affecting the business or future prospects of the
Company;
(7) 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 and their respective affiliates;
(8) 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 or
any affiliate thereof;
(9) 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;
(10) 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;
(11) 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;
(12) any breach, amendment or termination of any material contract,
agreement, license, permit or other right to which the Company is a party;
<PAGE>
(13) any transaction by the Company outside the ordinary course of its
business; or
(14) any authorization, approval, agreement or commitment to do any of
the foregoing.
4.23 Deposit Accounts; Powers of Attorney. Schedule 4.23 contains an
------------------------------------ -------------
accurate list as of the date of this Agreement, of:
(1) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(2) the names in which the accounts or boxes are held;
(3) the type of account; and
(4) the name of each person authorized to draw thereon or have access
thereto.
Schedule 4.23 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 best of 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 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. Except as disclosed in Exhibit/Schedule 4.25,
--------------------- ---------------------
during the preceding two-year period, neither (a) any past or present officer or
director of the Company, nor (b) to the best of the Company's Knowledge, any
relative of any past or present officer or director of the Company, nor (c) to
the best of 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. Except
as disclosed in Exhibit/Schedule 4.25, 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. To the best of the Company's knowledge and
---------------------
except as set forth on Exhibit 4.26, 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.
<PAGE>
4.27 Future Plans and Commitments. Schedule 4.27 contains a summary
---------------------------- -------------
description of all plans or projects involving the opening of new operations,
expansion of any existing operations or the acquisition of any real or personal
property or existing business, to which the Company has committed any material
funds in the two (2) year period prior to the date of this Agreement, which if
pursued by the Company would require additional expenditures of significant
efforts or capital.
4.28 [RESERVED]
4.29 Disclosure. This Agreement and the Schedules hereto and all other
----------
documents included on, attached to or delivered with the Schedules hereto or
which were otherwise delivered to SM&A pursuant to the provisions of this
Agreement 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 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 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), and at the sole option of
--------------
SM&A, the truth and accuracy of any and all warranties and representations of
the Company and each Principal Shareholder at the date of this Agreement and at
the Closing, subject to the Disclosure Schedule, shall be a precondition to the
consummation of this transaction.
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 Section 4, each
---------
Principal Shareholder and Additional Founder, represents and warrants to SM&A
and Newco that all of the following representations and warranties are true as
of the date of this Agreement and shall be true on the Closing Date; subject to
such exceptions as are specifically disclosed in the Disclosure Schedule:
5.1 Authorization; No Conflicts. Except as set forth on Exhibit 5.1, such
--------------------------- -----------
Principal Shareholder and Additional Founder has the full legal right, power and
authority to enter into this Agreement and the Escrow Agreement and to perform
the transactions contemplated herein and therein. The execution, delivery and
performance of this 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 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
Exhibit/Schedule 4.10. This Agreement has been duly executed and delivered by
- ---------------------
each such Principal Shareholder and Additional Founder, and at the Closing will
be duly executed and delivered by such Principal Shareholder, and Additional
Founder, and, assuming the due execution and delivery hereof and thereof by
SM&A, Newco and/or the Surviving Corporation, as the case may be, this Agreement
constitutes, and the Escrow Agreement will constitute, the legal, valid and
binding obligation of such Principal Shareholder and Additional Founder,
enforceable against such Principal Shareholder and 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 and Additional
----------------------
Founder have good and marketable title to the number of shares of Company Stock
set forth opposite such Principal Shareholder's and Additional Founder's name on
Schedule 4.3, free and clear of Encumbrances.
- ------------
<PAGE>
6. REPRESENTATIONS AND WARRANTIES OF SM&A.
--------------------------------------
SM&A and Newco, jointly and severally, represent and warrant to the Company
and the Principal Shareholders that all of the following representations and
warranties are true as of the date of this Agreement and shall be true on the
Closing Date:
6.1 Organization and Standing. SM&A and Newco are each corporations duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
California and SM&A and Newco are each duly authorized, qualified and licensed
under all applicable laws, regulations, and ordinances of 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 for where
the failure to be so authorized, qualified or licensed would not have a Material
Adverse Effect on its business. 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 each of SM&A and
Newco are attached to Schedule 6.1.
------------
6.2 Authorization and Binding Obligation. Each of SM&A and Newco has full
------------------------------------
corporate power and authority to enter into and perform this Agreement and the
Agreement of Merger, the Articles of Merger, and the Escrow Agreement, and the
transactions contemplated herein and therein. The execution, delivery and
performance of this Agreement and the Agreement of Merger, the Articles of
Merger, and the Escrow Agreement by SM&A and Newco have been duly and validly
authorized by all necessary action on their respective parts. This Agreement,
the Agreement of Merger, the Articles of Merger, and the Escrow Agreement have
been duly executed and delivered by each of SM&A and Newco and constitutes the
legal, valid and binding obligations of SM&A and Newco, enforceable against SM&A
and Newco 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 Agreement of Merger, the Articles of Merger, the Escrow
Agreement, and the agreements to be executed and delivered at the Closing, and
the consummation of the transactions contemplated hereby and thereby do not and
will not (a) violate or conflict with any provision of each of SM&A's and
Newco'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 each of SM&A and Newco pursuant to, any
material contract, mortgage, lien, lease, agreement or instrument to which SM&A
or Newco is a party or by which each of SM&A and Newco is bound, (c) violate or
conflict with any Legal Requirement applicable to each of SM&A and Newco
including but not limited to the legal requirements of the National Market
System of the National Association of Securities Dealers, 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 and Newco do not require (a)
the consent, approval or authorization of any governmental or regulatory
authority having jurisdiction over SM&A or Newco 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 governmental or regulatory authority having jurisdiction
over SM&A or Newco.
<PAGE>
6.5 Litigation and Administrative Proceedings. There is no litigation,
-----------------------------------------
proceeding or investigation pending or, to the best knowledge of SM&A,
threatened against SM&A or Newco 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 Permits. SM&A owns or possesses all Permits of any public or other
-------
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
each of SM&A and Newco is in compliance with all of its obligations with respect
thereto, and no event has occurred which permits, or upon giving the notice or
lapse of time or otherwise would permit, revocation or termination of any of the
foregoing.
6.7 Conformity with Law; Pending or Threatened Claims. Each of SM&A and
-------------------------------------------------
Newco has complied with, and each of SM&A and Newco 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 each of SM&A and Newco or any of its
assets or its business except where the failure to so comply or default
thereunder would not have a Material Adverse Effect on SM&A or Newco; and there
are no claims, actions, suits or proceedings, pending or, to the Knowledge of
SM&A or Newco threatened, against or affecting SM&A or Newco, 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 each of SM&A and Newco or its business and no notice of
any such claim, action, suit or proceeding, whether pending or threatened, has
been received. Each of SM&A and Newco has conducted and is conducting its
business in compliance with the requirements, standards, criteria and conditions
set forth in applicable federal, state and local statues, ordinances, permits,
licenses, orders, approvals, variances, rules and regulations, including,
without limitation, all such laws, rules, ordinances, decrees and orders
relating to intellectual property protection, antitrust matters, consumer
protection, currency exchange, environmental protection, equal employment
opportunity, health and occupational safety, pension and employee benefit
matters, securities and investor protection matters, labor and employment
matters, and trading-with-the-enemy matters. Neither SM&A nor Newco has
received any notification of any asserted present or past unremedied failure by
SM&A or Newco to comply with any of such laws, rules, ordinances, decrees or
orders.
6.8 SM&A Investigation. As of the Closing Date, SM&A has no Knowledge of
------------------
any fact or circumstance that would result in a claim of indemnification against
the Company or the Principal Shareholders under Section 10.
----------
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 governmental agency.
Each of the Company and SM&A will cause all information obtained in connection
with the negotiation and performance of this Agreement to be
<PAGE>
treated as confidential. The confidentiality agreement(s) heretofore signed by
the Company and SM&A listed on Schedule 7.1 shall remain in full force and
------------
effect until the Closing.
(1) Conduct of Business Pending Closing. Between the date hereof and the
-----------------------------------
Closing Date, the Company shall:
(1) 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;
(2) 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;
(3) perform all of its obligations under agreements relating to or
affecting its respective assets, properties or rights;
(4) keep in full force and effect present insurance policies or other
comparable insurance coverage;
(5) use its best 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; provided, however, subject to the representations and
warranties contained herein and the terms and conditions of the Employment
Agreements to the contrary, that (i) the Company shall not have any
liability with respect to the determination of any of their employees to
terminate their employment at any time, either before or after the Closing
Date, and neither SM&A nor Newco shall be entitled to any adjustment in the
Consideration for any such terminations; and (ii) the Company, shall not
have any liability with respect to the determination of any of their
customers or suppliers to cease doing business with the Company, either
before or after the Closing Date, and neither SM&A nor Newco shall be
entitled to any adjustment in the Consideration for any such event;
(6) maintain compliance with all permits, laws, rules and regulations,
consent orders, and similar governmental approvals;
(7) 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; and
(8) use commercially reasonable efforts (such efforts not to require a
recission offer) to correct any prior failure to comply with applicable
federal and state securities laws in connection with the prior issuance of
its securities.
7.3 Prohibited Activities. Between the date hereof and the Closing Date,
---------------------
the Company will not, without the prior written consent of SM&A:
(1) make any change in its Articles of Incorporation or Bylaws;
(2) issue any securities, options, warrants, calls, conversion rights
or commitments relating to its securities of any kind;
(3) 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;
<PAGE>
(4) 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;
(5) 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;
(6) 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;
(7) 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;
(8) negotiate for the acquisition of any business or the start-up of
any new business;
(9) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(10) waive any of its material rights or claims, other than the
ordinary course of business and consistent with past practice and for fair
value;
(11) breach or permit a breach, amend or terminate any material
agreement or any of its permits, licenses or other rights; or
(12) 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 DATE HEREOF,
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.
7.5 No Shop. Between the date of this Agreement and the earlier of (i)
-------
the Closing Date or (ii) April 30, 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 is the
recipient of such an offer, immediately notify SM&A of such event and the
details of such offer.
<PAGE>
Any provision of this Agreement to the contrary notwithstanding, the parties
hereto acknowledge that the Company and each Principal Shareholder is bound by
its fiduciary obligations and that they each must act in accordance with those
obligations.
7.6 Options. Prior to, or contemporaneous with, the Closing, the Company
-------
Options shall be exercised or cancelled.
7.7 Flow of Funds. Funds shall be transferred and disbursed by the parties
-------------
in accordance with Schedule 7.7 attached hereto.
------------
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. Upon Closing, all conditions not
satisfied are deemed to be waived:
8.1 Representations and Warranties; Performance of Obligations. The
----------------------------------------------------------
representations and warranties of SM&A and Newco 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 and Newco on or before
the Closing Date shall have been duly complied with and performed; and the
Company shall have received a certificate from a duly authorized officer of SM&A
to such effect.
8.2 Counsel Approval. All actions, proceedings, instruments and documents
----------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall have been approved by counsel to the Company.
8.3 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 acquisition by SM&A of the Company Stock or the payment by SM&A
of any Consideration; and no governmental agency or body shall have taken any
other action or made any request of the Company as a result of which the
management of the Company deems it inadvisable to proceed with the transactions
hereunder.
8.4 No Material Adverse Change. No material adverse change in the results
--------------------------
of operations, financial condition or business of each of SM&A and Newco shall
have occurred, and each of SM&A and Newco 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 each of SM&A and Newco to conduct its
business; and the Company shall have received a certificate from a duly
authorized officer of SM&A to such effect.
8.5 Opinion of Counsel. The Company shall have received an opinion from
------------------
Rutan & Tucker, LLP, counsel to SM&A, dated the Closing Date, in the form
attached hereto as Exhibit 3.2(b)(iii).
-------------------
8.6 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 Company's performance of its obligations
hereunder, and no governmental agency or body shall have taken any
<PAGE>
other action or made any request of the Company as a result of which of the
Company deems it inadvisable to proceed with the transactions hereunder.
8.7 Employment Offers. Employment offers and duly authorized stock option
-----------------
grants conditioned upon and in consideration of acceptance of each such
employment offer, where appropriate, in accordance with the Equity Incentive
Proposal of Gary L. Markle, shall have been made to all full-time employees of
the Company having terms and conditions reasonably acceptable to the Company.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SM&A AND NEWCO.
-----------------------------------------------------
The obligation of SM&A and Newco to close the transactions set forth in
this Agreement are subject to the satisfaction, on or prior to the Closing Date,
of the following conditions. Upon Closing, all conditions not satisfied are
deemed to be waived.
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 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 acquisition by SM&A of the Company Stock or the payment by SM&A
of any Consideration; and no governmental agency or body shall have taken any
other action or made any request of SM&A as a result of which the management of
SM&A deems it inadvisable to proceed with the transactions hereunder.
9.3 Examination of Financial Statements. Prior to the Closing Date, SM&A
-----------------------------------
shall have had sufficient time to review the unaudited consolidated balance
sheets of the Company as of the end of the month immediately preceding the
Closing Date, and the unaudited consolidated statements of income, cash flow and
shareholders' equity of the Company for the period then ended, disclosing no
material adverse change in the financial condition of the Company; and showing
working capital and net worth at no less than the Financial Statement
Requirements.
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 Review. SM&A, through its authorized representatives, must have
------
completed a satisfactory review of the practices and procedures of the Company
including, but not limited to, compliance with contracts and federal, state and
local laws and regulations governing the operations of the Company, disclosing
no actual or probable violations, compliance problems, required capital
expenditures, out of the ordinary course of business, or other substantive
concerns.
<PAGE>
9.6 Counsel Approval. All actions, proceedings, instruments and documents
----------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall have been approved by counsel to SM&A.
9.7 Opinion of Counsel. SM&A shall have received an opinion from Sparks
------------------
Willson Borges Brandt & Johnson, P.C., counsel to the Company, dated the Closing
Date, substantially in the form attached hereto as Exhibit 3.2(a)(iv).
------------------
9.8 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 SM&A's or Newco's performance of its
obligations hereunder, including the acquisition of the Company Stock and
payment of the Consideration, and no governmental agency or body shall have
taken any other action or made any request of SM&A or Newco as a result of which
SM&A or Newco deems it inadvisable to proceed with the transactions hereunder.
9.9 Additional Liabilities and Obligations. The Company shall have
--------------------------------------
delivered to SM&A a list, dated the Closing Date, setting forth all material
liabilities and obligations of the Company arising since the Balance Sheet Date.
9.10 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.
9.11 Good Standing Certificates. The Company shall have delivered to SM&A
--------------------------
a certificate, dated as of a date no longer than five (5) business days prior to
the Closing Date, duly issued by the Secretary of State of the State of Delaware
and the State of Colorado, respectively, showing that the Company is in good
standing and authorized to do business and 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.
9.12 Termination of the Company Stock Option Plan. The Company's Board of
--------------------------------------------
Directors shall have voted to terminate the Company's Stock Option Plan as of or
prior to the Effective Time.
9.13 Termination of Options; Resignation of Directors. All outstanding
------------------------------------------------
rights, options, warrants and convertible securities of the Company shall have
been exercised or terminated to the reasonable satisfaction of SM&A. All
existing registration rights of holders of securities in the Company shall have
been terminated, and SM&A shall have received a certificate to such effect,
signed on behalf of the Company by a duly authorized officer of the Company.
Each of the Company's directors serving in such capacity immediately prior to
the Closing shall have delivered his duly executed resignation to the Company.
9.14 Dissenters' Rights. At the Closing, the Company's shareholders
------------------
holding in the aggregate less than five percent (5%) of the Company Stock, shall
have perfected their Dissenters' Rights.
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) (i) indemnification for matters concerning the matters set forth in
Sections 4.3, 4.18, 4.20, and 4.26 shall survive until their
- ----------------------------------
<PAGE>
applicable statutes of limitation, and (ii) 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 or other
claim 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, 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 party has been given written notice prior to the Survival
Date.
10.2 Indemnification.
---------------
(1) Each of the Principal Shareholders and Additional Founders shall
indemnify, defend, protect and hold harmless SM&A and the Company, 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 ("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.
(2) 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 Founders contained in this Agreement,
and (ii) the breach by such Principal Shareholder of, or the failure by the
Principal Shareholder or Additional Founders to observe, any of such
Principal Shareholder's or Additional Founder's covenants or other
agreements contained in this Agreement.
(3) Other than a Principal Shareholder or an Additional Founder, each
holder of Outstanding Shares shall have no liability under this Section
-------
10.2. The liability of each Principal Shareholder and each Additional
----
Founder under this Section 10.2, shall be limited to the aggregate
------------
Consideration received by such Principal Shareholder and Additional
Founder. In the event SM&A is entitled to indemnification in excess of the
Escrow Funds, SM&A must proceed for such indemnification against all
Principal Shareholders and Additional Founders as a group under Section
-------
10.2, and each Principal Shareholder's and Additional Founder's liability
----
shall be limited to his or her pro rata share of any indemnified Losses.
(4) As partial security for the indemnity provided herein, the
Escrow Funds shall be held and released by the Escrow Agent as provided in
the Escrow Agreement. Provided, however, the SM&A may not receive any
Escrow Funds unless and until a Notice of Claim(s) (as defined in the
Escrow Agreement), not disputed by Company and identifying SM&A claims,
which in the aggregate exceed $35,000 (the "Basket Amount"), have been
-------------
delivered to the Escrow Agent in which cash SM&A shall be entitled to
recover all SM&A claims above the Basket Amount threshold; provided,
however that any tax payments or retirement of
<PAGE>
Company indebtedness shall not be subject to the Basket Amount and may be
deducted from the Escrow Funds if not otherwise satisfied at the Closing.
10.3 Indemnification by SM&A. SM&A covenants and agrees that it will
-----------------------
indemnify, defend, protect and hold harmless each holder of Outstanding Company
Shares, his 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 or Newco contained in this
Agreement, and (b) the breach by SM&A or Newco of, or the failure by SM&A or
Newco to observe, any of its covenants or other agreements contained in or made
pursuant to this Agreement.
10.4 Indemnification Procedures.
--------------------------
(1) 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:
-------- -------
(1) 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;
(2) 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;
(3) 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
(4) 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
<PAGE>
(ii) as long as the indemnifying party is reasonably contesting such
Third Party Action in 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.
(2) 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.
(3) If any dispute arises concerning the representations and
warranties contained in Section 4.8 either SM&A or the Principal
-----------
Shareholders 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 shall appoint a
nationally recognized accounting firm (the "Independent Arbitrator") to
----------------------
resolve all such disputed items. SM&A and the Principal Shareholders shall
each pay one-half of the Independent Arbitrator's fees and expenses. The
Independent Arbitrator shall give full consideration of all materials and
positions presented by SM&A and the Principal Shareholders and shall make a
final report concerning all such disputes within ten (10) days after being
appointed by SM&A and the Principal Shareholders. If the parties continue
to dispute the Independent Arbitrator's report, the report and the dispute
shall be sent to binding arbitration in accordance with Section 15.7.
------------
11. NONCOMPETITION.
--------------
11.1 Prohibited Activities of the Principal Shareholders. Each Principal
---------------------------------------------------
Shareholder hereby covenants and agrees as follows:
(1) For a period ending on the later of (A) three (3) years
after the date of this Agreement first set forth above, and (B) one
(1) year after the (x) termination or (y) expiration of the Employment
Term of the Employment Agreement of each Principal Shareholder (except
as set forth in the following paragraph), each Principal Shareholder
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, 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 or SM&A on the Closing
Date;
<PAGE>
Notwithstanding the foregoing provisions of this paragraph (a) each
Principal Shareholder 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 such Principal
Shareholder 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; or
(2) For a period ending on the later of (A) three (3) years
after the date of this Agreement first set forth above, and (B) one
(1) year after the (x) termination or (y) expiration of the Employment
Term of the Employment Agreement of each Principal Shareholder, each
Principal Shareholder shall not, directly or by other means with
intent, offer to employ any person who is, at that time, or who has
been within one (1) year prior to that time, an employee of SM&A, or
the Company. For the purposes of this Section 11.1 general
------------
advertising concerning available employment opportunities through
newspapers or trade journals shall not constitute solicitation.
11.2 Prohibited Activities of SM&A and Newco. In the event the Closing does
---------------------------------------
not occur for any reason, for a period of one (1) year after the date of this
Agreement, each of SM&A and Newco shall not for any reason whatsoever, solicit
the employment of any person who is, at that time, or who has been within one
(1) year prior to that date, an employee of the Company. For the purposes of
this Section 11.2 general advertising concerning available employment
------------
opportunities through newspapers or trade journals shall not constitute
solicitation.
11.3 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;
and
(1) 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 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.
11.4 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 [RESERVED]
<PAGE>
13 CERTAIN DEFINITIONS.
-------------------
13.1 "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).
13.2 "Base Purchase Price" means $3,330,000 payable at the Effective Time,
-------------------
less the Purchase Price Adjustment, if any.
13.3 "Company Options" mean all options and warrants, whether vested or
---------------
not, to purchase shares of Company Stock.
13.4 "Company Stock" means the common stock, $.01 par value per share, of
-------------
the Company.
13.5 "Dissenters' Rights" shall mean the rights of shareholders of the
------------------
Company to dissent from corporate action and receive payment of the fair value
of their shares of Company Stock under the Dissenters Law.
13.6 "Earn-Out Purchase Price" means an amount of cash up to $4,004,000
-----------------------
representing 100% of the anticipated Earn-Out Purchase Price (the "100% Level")
----------
calculated in accordance with Schedule 13.6 attached hereto payable, if earned,
-------------
on April 1, 2000. To earn the Earn-Out Purchase Price, any portion thereof, or
exceed the 100% Level, as the case may be, the Company shall attain or surpass
those milestones as set forth on Schedule 13.6 attached hereto and shall be paid
-------------
amounts commensurate with its level of performance as set forth on Schedule
--------
13.6. The parties acknowledge that the Company may exceed the 100% Level set
forth on Schedule 13.6 and that the 100% Level is not intended as a cap on the
-------------
Earn-Out Purchase Price, but rather a fulfillment of desired results. If
Company performance exceeds the 100% Level, any amount in excess of the 100%
Level shall also be calculated in accordance with the "Formula" set forth on
Schedule 13.6 attached hereto.
- -------------
13.7 "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.
13.8 "Financial Statement Requirements" shall mean working capital of
--------------------------------
$378,200 and net worth of $400,000 (each computed on a basis consistent with
that historically and consistently maintained by the Company) each as of the
Effective Time and the Company's recasted earnings before interest and taxes for
the period ended December 31, 1998 shall be no less than $370,000.
13.9 "GAAP" shall mean generally accepted accounting principles.
----
13.10 "Government Authority" shall mean any government or state (or any
--------------------
subdivision thereof), whether domestic, foreign or multinational, or any agency,
authority, bureau,
<PAGE>
commission, department or similar body or instrumentality thereof, or any
government court or tribunal.
13.11 "Knowledge" with respect to the Company shall mean all facts and
---------
conditions which are actually known by any of the executive officers or
directors of the Company or which should have been known by prudent managers
holding such positions with access to the books and records of the Company; and
"Knowledge" with respect to SM&A or Newco shall mean all facts and conditions
which are actually known by any of the executive officers or directors of SM&A
or Newco, as the case may be, or which should have been known by prudent
managers holding such positions with access to the books and records of SM&A or
Newco, as the case may be.
13.12 "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.
13.13 "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), results of operations, or prospects of the Company or
each of SM&A and Newco, as the context requires, (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.
13.14 "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.
13.15 "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.
13.16 "Purchase Price Adjustment Amount" shall mean (a) the amount by
--------------------------------
which the Company's working capital (computed on a basis consistent with that
historically and consistently maintained by the Company) is less than $378,200,
plus (b) the amount by which the Company's net worth (computed on a basis
consistent with that historically and consistently maintained by the Company) is
less than $400,000; 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
cash component of the Base Purchase Price, and (ii) that in the event that any
Aged Receivable shall later be collected by the Surviving Corporation within 180
days of the Effective Time, the proceeds thereof shall be distributed to the
former Company shareholders in the same manner 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 15.6). All such
------------
calculations pursuant to this Section 13.16 shall be made on or before April 9,
-------------
1999.
13.17 "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.
<PAGE>
14 TERMINATION.
-----------
14.1 Circumstances of Termination. This Agreement may be terminated
----------------------------
(notwithstanding approval by the shareholders of any party hereto):
(1) By the mutual consent in writing of the Boards of Directors
of the Company and SM&A;
(2) 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;
(3) By the Board of Directors of either the Company or SM&A if
the Effective Time has not occurred by April 30, 1999;
(4) By SM&A if the Company or any Principal Shareholder has
breached in any material respect any of the representations or
warranties contained in Article 4 or Article 5, respectively;
--------- ---------
(5) By SM&A if (i) the Company's Board of Directors (A) fails to
include a recommendation that the Company's shareholders vote in favor
of the adoption of this Agreement, or (B) withdraws its recommendation
that shareholders vote in favor of the Merger; or (ii) the holders of
less than a majority of the Outstanding Company Shares vote in favor
of this Agreement on or before April 30, 1999.
14.2 Effect of Termination. In the event of a termination of this
---------------------
Agreement pursuant to Section 14.1 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.
15 GENERAL.
-------
15.1 Cooperation. The Company, the Principal Shareholders 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 will cooperate and use his best
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.
15.2 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.
15.3 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
<PAGE>
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, Newco and SM&A.
15.4 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.
15.5 Brokers and Agents. Each party represents and warrants that it
------------------
employed no broker or agent in connection with this transaction, and agrees to
indemnify the other against all loss, cost, damages or expense arising out of
claims for fees or commission of brokers employed or alleged to have been
employed by such indemnifying party.
15.6 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 Company's shareholders.
15.7 Arbitration, Attorney's Fees, Prevailing Party. All disputes arising
----------------------------------------------
under this contract will be resolved by submission to binding arbitration at the
Orange County offices of Judicial Arbitration & Mediation Services, Inc.
("JAMS"). If JAMS is unable to arbitrate the dispute, then the dispute will be
arbitrated at the Orange County offices of the American Arbitration Association
("AAA"). 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, California law, including
California evidence law, shall be applied to determine all arbitrated issues.
California discovery law will apply to provide all discovery available in
California Superior Court cases. No punitive damages shall be awarded in any
arbitration proceeding or otherwise, and such damages are hereby waived.
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.
15.8 Notices. All notices or communications required or permitted
-------
hereunder shall be in writing and may be given by depositing the same in United
States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party.
15.8.1 If to SM&A or Newco, addressed to them at:
SM&A Corporation
4695 MacArthur Court, Eighth Floor
Newport Beach, California 92660
Attn: President
Telephone: (714) 975-1550
Fax: (714) 975-1342
<PAGE>
with a copy (which shall not constitute notice) to:
Rutan & Tucker
611 Anton Blvd., Suite 1400
Costa Mesa, CA 92626-1998
Attn: Thomas J. Crane, Esq.
Telephone: (714) 641-5100
Fax: (714) 546-9035
15.8.2 If to the Principal Shareholders or Additional Founders,
addressed to them:
c/o Gary Markle
411 S. Tejon Street, Suite G
Colorado Springs, CO 80903
15.8.3 If to the Company, addressed to it at:
Gary Markle
411 S. Tejon Street, Suite G
Colorado Springs, CO 80903
15.8.4 with a copy (which shall not constitute notice) to:
Sparks Willson Borges Branadt and Johnson, P.C.
1128 S. Tejon, Suite 304
Colorado Springs, CO 80903
Attention: Ben Sparks
15.9 Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of California. All disputes hereunder shall be
adjudicated in the federal and California State courts located in Orange County,
California.
15.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of 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.
15.11 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.
<PAGE>
15.12 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"SM&A" SM&A CORPORATION,
a California corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
"COMPANY": SYSTEM INTEGRATION SOFTWARE, INC.,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
"NEWCO": SIS ACQUISITION, INC.,
a California corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
(Signatures of Principal Shareholders and Additional Founders continued on
following page)
<PAGE>
"PRINCIPAL SHAREHOLDERS":
_________________________________ __________________________________
Gary L. Markle Edward L. Knoll
_________________________________ __________________________________
Maryanne Markle Debbie K. Knoll
_________________________________ __________________________________
Charles F. Baird Michael G. Hill
_________________________________ __________________________________
Carolyn F. Baird Lynette K. Hill
"ADDITIONAL FOUNDERS":
_________________________________ __________________________________
John A. Gloriod Karen Renee Olesen
_________________________________ __________________________________
Rebecca H. Gloriod David E. Olesen
__________________________________
Gary L. Markle, as attorney in fact for
the Shareholders set forth on Schedule A, attached
<PAGE>
EXHIBIT 10.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") dated as of March 30, 1999 is
---------
among SM&A CORPORATION, a California corporation ("SM&A"), SYSTEMS INTEGRATION
----
SOFTWARE, INC., a Delaware corporation ("SIS"), GARY L. AND MARYANNE MARKLE,
---
JOHN A. AND REBECCA H. GLORIOD, CHARLES F. AND CAROLYN F. BAIRD, MICHAEL G. AND
LYNETTE K. HILL, EDWARD L. AND DEBBIE K. KNOLL, KAREN RENEE OLSEN and DAVID E.
OLSEN (collectively, the "Shareholders"), GARY L. MARKLE, as the representative
------------
of the Shareholders (the "Shareholder Representative"), and FIRST AMERICAN TRUST
COMPANY, as escrow agent (the "Escrow Agent").
------------
PRELIMINARY STATEMENT
---------------------
Pursuant to an Agreement and Plan of Reorganization and Merger dated as of
March 30, 1999 (the "Merger Agreement"), by and among SM&A, SIS, SIS
----------------
Acquisition, Inc., a wholly owned subsidiary of SM&A, and the Shareholders, SM&A
will acquire all of the outstanding shares of capital stock of SIS and will
acquire SIS through the merger of SIS with and into SIS Acquisition, Inc.
Capitalized terms used herein and not otherwise defined herein have the meanings
ascribed to them in the Merger Agreement.
The Shareholders have agreed to indemnify SM&A as provided in Article 10 of
----------
the Merger Agreement through the deposit of an aggregate amount of cash equal to
$417,123.71 (the "Escrow Funds") pursuant to Section 2.7 of the Merger
------------ -----------
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:
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 PNC Temporary Fund Dollar account.
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>
Claims Against Escrow Funds.
- ---------------------------
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 Merger 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. The parties hereto acknowledge and agree that
payment of all or any portion of the Escrow Funds may not occur until the Basket
Amount of $35,000, on a threshold basis, is exceeded.
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.
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.
-----------
<PAGE>
Disputed Claims.
- ---------------
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
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 Merger 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.
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 referred to an
arbitrator chosen by agreement of the Shareholder Representative and SM&A. If
no agreement is reached regarding selection of the arbitrator within 30 days
after written request from either party to the other, SM&A or the Shareholder
Representative may submit the matter in dispute to the Judicial Arbitration and
Mediation Service, to be settled by arbitration in Orange County, California in
accordance with the commercial arbitration rules of such association. SM&A and
the Shareholder Representative agree to act in good faith to select mutually an
arbitrator. The fees and expenses of any arbitration shall be borne equally by
the Shareholders as a group and SM&A, unless and until the arbitrator determines
otherwise. Any fees or expenses attributable to the Shareholders as a group
shall be payable only out of the Escrow Funds. In no event shall the Escrow
Agent be responsible for any fees or expenses of any party to any arbitration
proceedings. The determination of the arbitrator as to the amount, if any, of
the indemnification claim that is properly allowable shall be conclusive and
binding upon the parties hereto and judgment may be entered thereon in any court
having jurisdiction thereof, including, without limitation, any Superior Court
in the State of California. The Escrow Agent shall make payments of such claim,
as and to the extent allowed, to SM&A within three business days following its
receipt of a copy of the arbitration award determination.
<PAGE>
Termination and Distribution of Escrow Funds.
- --------------------------------------------
This Agreement shall terminate one (1) year after the Effective Time (as
defined in Section 1.2 of the Merger Agreement) (the "Expiration Date");
---------------
provided that this Agreement shall continue in effect until the resolution of
all outstanding indemnification claims as to which the Escrow Agent has received
notice pursuant to Section 3 hereof on or prior to the Expiration Date.
---------
SM&A shall provide the Escrow Agent with reasonable advance notice of the
expected Expiration Date and shall confirm the occurrence of such as soon as
practicable thereafter. On the Expiration Date or as soon thereafter as is
practicable, the Escrow Agent shall distribute 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 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.
The Escrow Agent.
- ----------------
<PAGE>
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 (and with respect to each Shareholder, only to the extent of their
proportionate share of the Escrow Funds) 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 Merger 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 (payable out of the
Escrow Funds to the extent of their proportionate share of the Escrow Funds).
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 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 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.
------------
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.
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
<PAGE>
validity, binding effect, execution or sufficiency of this Agreement or of any
amendment or supplement hereto.
Shareholder Representative.
- --------------------------
Pursuant to a Shareholder Representative Agreement and Power-of-Attorney
dated of even date herewith, the Shareholders have designated Gary L. Markle, as
their authorized representative and attorney-in-fact to undertaken 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 SIS 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.
---------
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 SIS Representative's
authority includes but is not limited to:
15.12.1 receiving all notices or other documents given or to be given
pursuant to this Agreement or in connection with the transactions
contemplated hereby;
15.12.2 engaging special counsel, accountants, investment banks or
other advisors;
15.12.3 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
15.12.4 paying all expenses incurred in connection with this
Agreement and the transactions contemplated hereby out of the Escrow Funds
pursuant to Sections 7.5 and 7.8 below.
--------------------
In the event of the death, resignation, discharge or incapacity of the
Shareholder Representative, Shareholders holding a majority in interest with
respect to the Escrow Funds shall appoint a successor Shareholder
Representative. Such successor Shareholder Representative shall be appointed by
an instrument in writing signed by the requisite Shareholders, and such
appointment shall become effective as to any such successor Shareholder
Representative when such instrument shall have been delivered to such person,
and that person has consented to such appointment.
The Shareholder Representative shall keep the Shareholders reasonably
informed of his decisions of a material nature.
The reasonable expenses (including the reasonable fees and disbursements of
counsel, accountants and advisors in connection with the arbitration of a
disputed claim or otherwise) incurred by the Shareholder Representative in
connection with his duties hereunder shall be paid for out of the Escrow Funds
by the Escrow Agent as provided in Section 7.8 below and in an amount not to
-----------
exceed $25,000. The Shareholder Representative shall keep adequate and
reasonable books and records of his expenses. Such payment shall not affect the
rights of either SM&A or the Shareholders under the Merger Agreement or Section
-------
11 of this Agreement.
- --
<PAGE>
The Shareholder Representative shall diligently discharge his duties and
responsibilities under this Agreement. The Shareholder Representative shall not
be liable to the parties hereto or 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.
In no event shall the Shareholder Representative be responsible or liable for
special, indirect or consequential loss or damages of any kind, regardless of
the form of the action.
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.
The Shareholder Representative shall not be entitled to any compensation
for services hereunder. To the extent the Shareholder Representative shall
incur out-of-pocket costs (including the reasonable fees and disbursements of
counsel, accountants and advisors in connection with the arbitration of a
disputed claim or otherwise) in the performance of his duties hereunder, the
Shareholder Representative shall be authorized to direct the Escrow Agent to
reimburse the Shareholder Representative for such reasonable expenses out of the
Escrow Funds in an amount not to exceed $25,000.
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.
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.
----------
Counterparts.
- ------------
This Agreement may be executed in one or more counterparts, all of which
documents shall be considered one and the same document.
Notices.
- -------
Any notice or other communication required or permitted hereunder shall be
in writing and shall be deemed given when so delivered in person, by overnight
courier, by facsimile transmission (with receipt confirmed by telephone or by
automatic transmission report) or two business days after being sent by
registered or certified mail (postage prepaid, return receipt requested), as
follows:
To SM&A: SM&A CORPORATION.
4695 MacArthur Boulevard, Eighth Floor
Newport Beach, California 92660
Attention: Chief Operating Officer
Telephone: 949-975-1550
Fax: 949-975-1624
<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 SIS: SYSTEMS INTEGRATION SOFTWARE, INC.
411 S. Tejon Street, Suite "G"
Colorado Springs, Colorado 80903
Telephone: (719) 578-9100
Fax: (719) 578-9600
To the Shareholders: c/o Gary L. Markle
SYSTEMS INTEGRATION SOFTWARE, INC.
411 S. Tejon Street, Suite "G"
Colorado Springs, Colorado 80903
Telephone: (719) 578-9100
Fax: (719) 578-9600
To Escrow Agent: First American Trust Company
2161 San Joaquin Hills Road
Newport Beach, California 92660
Attn: Elizabeth A. Markworth
Telephone: (949) 719-4532
Fax: (714) 667-1613
Addresses may be changed by written notice given pursuant to this section. Any
notice given hereunder may be given on behalf of any party by his counsel or
other authorized representative.
Attorney's Fees.
- ---------------
In the event of any litigation among the parties hereto (including, without
limitation, any arbitration proceeding described in Section 4.2 above), the
-----------
prevailing party in such litigation or proceeding shall be entitled to recover
all costs incurred in connection therewith, including, without limitation,
reasonable attorneys fees, provided that the costs of any arbitration proceeding
shall be allocated in the manner set forth in Section 4.2.
-----------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the date first stated above.
SM&A: SM&A CORPORATION,
a California corporation
By:
--------------------------------------------
Michael A. Piraino, Chief Operating Officer
and President
SIS: SYSTEMS INTEGRATION SOFTWARE, INC.,
a Delaware corporation
By:
--------------------------------------------
Gary L. Markle, President
ESCROW AGENT: FIRST AMERICAN TRUST COMPANY
By:
--------------------------------------------
Its:
---------------------------------------
By:
--------------------------------------------
Its:
---------------------------------------
SHAREHOLDER REPRESENTATIVE:
-----------------------------------------
Gary L. Markle
[SIGNATURES OF SHAREHOLDERS CONTAINED ON FOLLOWING PAGE]
<PAGE>
SHAREHOLDERS:
___________________________________ ________________________________
Gary L. Markle Edward L. Knoll
___________________________________ ________________________________
Maryanne Markle Debbie K. Knoll
___________________________________ ________________________________
John A. Gloriod Karen Renee Olsen
___________________________________ ________________________________
Rebecca H. Gloriod David E. Olsen
__________________________________
Charles F. Baird
__________________________________
Carolyn F. Baird
__________________________________
Michael G. Hill
__________________________________
Lynette K. Hill
<PAGE>
SCHEDULE 3.1
ESCROW INTERESTS
----------------
Percentage
Name of Shareholder Interest In Escrow Funds
------------------- ------------
GARY L. AND MARYANNE MARKLE 22.66 %
JOHN A. AND REBECCA H. GLORIOD 13.84
CHARLES F. AND CAROLYN F. BAIRD 17.64
MICHAEL G. AND LYNETTE K. HILL 17.25
EDWARD L. AND DEBBIE K. KNOLL 17.17
KAREN RENEE OLSEN 5.72
DAVID E. OLSEN 5.72
------
100.00 %
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SM&A
CORPORATION UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 835
<SECURITIES> 0
<RECEIVABLES> 29,162
<ALLOWANCES> 643
<INVENTORY> 0
<CURRENT-ASSETS> 31,540
<PP&E> 3,424
<DEPRECIATION> 633
<TOTAL-ASSETS> 76,107
<CURRENT-LIABILITIES> 11,220
<BONDS> 0
0
0
<COMMON> 164
<OTHER-SE> 57,092
<TOTAL-LIABILITY-AND-EQUITY> 57,256
<SALES> 25,314
<TOTAL-REVENUES> 25,314
<CGS> 14,737
<TOTAL-COSTS> 20,305
<OTHER-EXPENSES> (39)
<LOSS-PROVISION> 643
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 5,048
<INCOME-TAX> 2,069
<INCOME-CONTINUING> 2,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,979
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
