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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23585
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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, 8th Floor, Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
(949) 975-1550
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
As of March 20, 2000, 16,257,307 shares of the Registrant's common stock,
no par value ("Common Stock"), were outstanding. The aggregate market value of
shares of Common Stock held by non-affiliates, based upon the closing sale
price of the stock on the Nasdaq National Market on March 20, 2000, was
approximately $36,339,791.(1)
Documents incorporated by reference. List hereunder the following documents
if incorporated by reference, and the part of the Form 10-K (e.g., Part I,
Part II, etc.) into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933:
Portions of the Registrant's definitive proxy statement to be issued in
conjunction with the Registrant's Annual Meeting of Shareholders to be held on
June 6, 2000, which proxy statement will be filed within 120 days after the
end of the fiscal year covered by this Form 10-K.
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1. For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliate" under Rule 405 of the Securities Act
of 1933, as amended, holders of ten percent of more of the Registrant's
Common Stock are deemed to be affiliates.
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PART I
ITEM 1--Business
Introduction
This Annual Report on Form 10-K contains certain statements which are not
historical in nature, and are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by Public Law
104-6. Such forward-looking statements are principally contained in the
sections entitled "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
statements relating to (i) the anticipated growth in the proposal management
and contract support services markets; (ii) anticipated trends in the
financial condition and results of operations of SM&A Corporation ("SM&A" or
the "Company") (including expected changes in the Company's gross margin and
general, administrative and selling expenses); (iii) the ability of the
Company to finance its working capital requirements; (iv) the Company's
business strategy for expanding its presence in the information technology
solutions services markets; and (v) the Company's ability to distinguish
itself from its current and future competitors. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. In addition to the other
risks described in the "Risk Factors" discussion contained herein, important
factors to consider in evaluating such forward-looking statements include (i)
the shortage of reliable market data regarding the information technology
solutions, high-end systems engineering, and integrated proposal management
services markets; (ii) changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations; (iii) unanticipated working capital or other
cash requirements; (iv) changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated changes in the
information technology solutions, high-end systems engineering and integrated
proposal management and contract support services markets; and (v) various
other factors that may prevent the Company from competing successfully in the
marketplace. In light of these risks and uncertainties, many of which are
described in greater detail in the "Risk Factors" discussion contained herein,
there can be no assurance that the actual results will not differ materially
from such forward-looking statements contained herein. When used in this
report, the words "anticipate," "believe," "intends," "estimate," and "expect"
and similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, and income, are subject to certain risks and uncertainties
that could cause actual results to differ materially from those indicated in
the forward-looking statements, due to several important factors herein
identified, among others, and other risks and factors identified from time to
time in the Company's reports with the Securities and Exchange Commission.
Overview
SM&A, formerly Steven Myers & Associates, Inc. was founded in 1982. After
years of consistent revenue and profit growth, the Company completed an
initial public offering in January 1998 and embarked on a strategic
acquisition program to broaden its service and product offering capabilities.
SM&A is a comprehensive provider of competitive-edge information technology
services, software products and business solutions, high-end systems
engineering services, and integrated proposal management services. The Company
is organized into three distinct operating groups: the Information Technology
Solutions Group ("ITSG"), the Systems Solutions Group ("SSG"), and the
Proposal Management Group ("PMG"). The Company's services are provided in a
variety of computing environments and leading edge technologies such as
client/server architectures, object-oriented programming languages and tools,
groupware and the latest networking, communications and modeling technologies.
SM&A delivers its services and products to a diverse group of clients in the
telecommunications, medical information management, aerospace and defense
contractors as well as to federal and state government agencies.
1
Information Technology Solutions Group ("ITSG")
The Information Technology Solutions Group provides high value information
technology solutions (services and proprietary software products) that solve
complex business problems and directly improve a client's competitive edge.
ITSG is recognized for innovative, rapid software development processes that
can dramatically reduce business cycle time while ensuring high quality
products. ITSG expertise extends across a broad spectrum of IT disciplines,
including full life cycle software engineering, telecommunications, PC
solutions and systems integration. ITSG focuses on seven areas of expertise
oriented primarily toward serving the commercial sector: (i) mission critical
solutions, (ii) enterprise security solutions, (iii) command & control
solutions, (iv) test solutions, (v) PC solutions, (vi) optimization solutions
and (vii) e-commerce enablement services and consulting. ITSG provides
services on a time and materials basis and develops, licenses and supports
complex proprietary software applications for various IT market segments, such
as network management.
ITSG's suite of proprietary software products consists of BillTamer(TM) and
NetTamer(TM), cost control and optimization tools for the telecommunications
industry; and ICCE(TM), an application which offers integrated command and
control display for data centers simultaneously operating multiple hardware,
software and display platforms.
Rapid technological change has forced companies to outsource an increasing
number of their IT functions. Corporate networks continue to grow and become
more complex. ITSG has the proven products and expertise designed to meet
these demands. In addition, ITSG has developed unique and cost saving client
solutions that it believes will drive substantial incremental growth. These
products offer innovative and mission critical solutions for managing the
complexities and costs of telecommunications and data networks.
Systems Solutions Group ("SSG")
The Systems Solutions Group provides (i) information technology, systems
engineering, and program integration services, (ii) modeling and simulation
support, (iii) advanced scientific research, and (iv) database creation,
management and technical analysis to federal and state government agencies,
major aerospace and defense contractors and commercial firms. SSG provides a
full spectrum of information technology services such as software applications
development and wargaming capabilities, significantly enhancing and expanding
a client's technical evaluation and decision making capabilities. SSG's
systems engineering services helps its clients to define the work that must be
done to meet the objectives of a program or contract. Systems engineers define
top level program objectives, perform cost studies and analyses, and then
manage the process to ensure that top level requirements are being met as the
program evolves from design through development, test and production phases.
Concurrent with systems engineering, SSG provides program integration
functions, which ensure that the program has been meticulously planned and
that the program team follows the plan.
SSG's IT and related services are largely provided on a time-and-materials
basis. Those services provided to federal and state agencies are done so
through a number of contract vehicles including, but not limited to, full and
open competitive contracts, the GSA schedules, blanket purchase agreements and
indefinite delivery and indefinite quantity agreements. Revenue growth rates
and margins in the government IT and related services sector, while not
providing the same economics as commercial activities, do provide a
predictability of revenue and profit due to the long-term structured
orientation of government IT and related services that is uncharacteristic of
the commercial market in general.
Proposal Management Group ("PMG")
The Proposal Management Group is the largest and most successful provider
of integrated proposal management services. PMG has developed and refined a
proprietary proposal management strategy and process that produces superior
results. In conjunction with this process, PMG typically assumes a leadership
role and places dedicated teams at client facilities to manage all aspects of
the competitive proposal development process. Since 1982, PMG has supported
450 proposals worth over $160 billion in value for clients with a
corresponding proposal win rate of 86.5% based on the dollar value of
contracts awarded. PMG had over $15 billion in new
2
contract awards and 28 proposal wins by its clients during 1999. The
combination of its unprecedented win rate and superior reputation has
contributed to PMG's dominant 85% market share of proposal management services
actually outsourced by government contractors.
PMG leverages its success in winning business for its clients and its
involvement in the project life cycle to extend its services beyond proposal
development to SM&A's comprehensive capabilities in the areas of information
technology services, systems engineering program integration, and other
technical areas.
Acquisition/Strategy and Integration
During 1998, the Company acquired two high-end engineering and information
technology consulting firms (the "1998 Acquisitions"): Space Applications
Corporation ("SAC") and Decision-Science Applications, Inc. ("DSA"). SAC,
founded in 1969, provides systems engineering, scientific research, program
management support and technical support to military and civilian space
programs, the intelligence community and the armed services. DSA, founded in
1977, provides systems engineering, information systems development,
scientific research and program management support to the U.S. Government,
principally the Department of Defense. The 1998 Acquisitions have increased
the scope and depth of the Company's high-end profile services, adding more
than 400 systems engineering, information technology and program integration
experts and expanding SM&A's domestic presence with offices in strategic
locations near significant market centers. In November 1998, DSA changed its
name to SM&A Corporation (East), and in December 1998, SAC merged into SM&A
Corporation (East). The Company was subsequently reorganized into its three
existing operating groups: SSG, ITSG, and PMG.
In March 1999, the Company acquired Systems Integration Software, Inc.
("SIS"). SIS develops proprietary software products and provides services
focused on improving system performance and network reliability. This
transaction was accounted for as a purchase and, accordingly, the consolidated
financial statements include the financial results of SIS from the effective
date of the acquisition. The substantial portion of operations have been
combined with ITSG.
In September 1999, the Company acquired Kapos Associates Inc. ("KAI"). KAI
provides operations research, wargaming and systems analysis to the U.S.
Government. This transaction was accounted for as a purchase and, accordingly,
the consolidated financial statements include the financial results of KAI
from the effective date of the acquisition. Its operations have been combined
with SSG. The acquisitions of SIS and KAI are collectively referred to herein
as "the 1999 Acquisitions."
In February 2000, the Company acquired System Simulation Solutions, Inc.
("S3I"). S3I specializes in the design, development and application of
powerful simulation software products for the United States Air Force
assisting them on evaluating large-scale campaign level operations. The
substantial portion of operations will be combined with SSG. This transaction
was accounted for as a purchase and, accordingly, the consolidated financial
statements will include the financial results of S3I from the effective date
of the acquisition.
Markets
The Company is actively competing in three addressable markets: (i) the
commercial IT services and proprietary software products market, (ii) the
government IT services and systems engineering market and, (iii) the proposal
management services market.
Commercial IT Services and Proprietary Software Products
The commercial information technology services and software products market
is extremely competitive and characterized by continuous changes in customer
requirements and improvements in technologies.
The Company estimates the annual market for commercial IT services and
software products to be in excess of $300 billion.
3
The Company believes that growth of the market for commercial IT services
and software products is dependent on a number of factors, including but not
limited to:
. Corporate Outsourcing. There has been a trend among large corporations
to increase efficiencies in the procurement and performance of
government and commercial projects of all sizes. As a result, major
companies are "outsourcing" more services instead of maintaining and
expanding internal groups. Through outsourcing, companies receive the
trained expertise needed without incurring the overhead expenses
associated with in-house resources.
. Increase in Commercial Projects. U.S. industry is making major
investments to explore new markets in commercial data and
telecommunications systems. Such investment is expected to result in an
increase in demand for the Company's services.
. Development of a New Economy. A strong demand for highly skilled IT
professionals and software products has developed in response to the
growth of the Internet economy. Talented professionals with skills in
leading edge technologies are in particularly high demand. To meet their
need for leading edge IT professionals, organizations are turning to
providers of technology talent such as the Company to support their
existing IT resources. To succeed in this market, providers of IT
professionals must deliver leading edge IT talent at a speed
commensurate with the demands of a rapidly changing technology
environment.
Government IT Services and Systems Engineering
Defense spending has decreased sharply since the end of the Reagan
administration. Defense spending has stabilized at around $270 billion
annually. This trend has caused a decline in the number of government workers,
which has resulted in a significant amount of work being performed by outside
service providers such as the Company.
The Company estimates the annual market for government IT services and
systems engineering to be in excess of $100 billion.
The Company believes that growth of the market for government IT services
and systems engineering is dependent on a number of factors, including but not
limited to:
. U.S. Government Outsourcing. In response to a reduced federal budget and
demands for efficiencies in government operation, many projects that
were once performed in-house by the U.S. Government are now being
outsourced to private industry.
. State and Local Governments. State and local government IT budgets are
expected to overtake federal spending during 2000.
Proposal Management Services
Companies competing for large government and commercial contracts often
seek the assistance of an outside firm of experts that can manage the proposal
process and maximize the company's prospects of winning the business.
The Company estimates the annual market including the in-house capabilities
of the Company's customers for proposal management is approximately $300
million.
The Company believes that growth of the market for proposal management is
dependent on a number of factors, including but not limited to:
. Increase in the Defense Procurement Spending Budget. The defense
procurement/spending budget is growing as a result of the need for
modernization. A good deal of that spending will be driven by
4
increased investment in IT, command and control system communications,
computers and intelligence systems. Additional funding for new weapons
should originate from additional cost savings in existing programs. The
decrease in operational overhead of the Department of Defense will
create additional opportunity to provide proposal management in
connection with such projects.
. Increasing Importance of Proposal Management Services. The Company
believes that various factors in the aerospace and defense industries
are contributing to an increased need to win projects. Recent
consolidation activity in these industries has resulted in fewer, larger
firms as well as an increased disparity between the resources of such
larger firms and the remaining "smaller" firms. The large consolidated
firms are more motivated to win programs to support their operations and
the smaller firms have an even greater need to access the resources
necessary to compete with larger firms for programs. The U.S. Government
has also conducted a number of "winner-take-all" competitions in which
the government chose a single winner from two large aerospace suppliers
that had traditionally jointly supplied a product. The winner may
receive a multi-billion dollar contract while the loser may be allocated
a program sub-contract or be required to shut down an existing
production facility and re-assign or lay off several thousand workers.
Consequently, proposal management services and a winning outcome are
becoming increasingly crucial to all competitors.
. Internal Proposal Capabilities of Existing Clients is Decreasing. The
Company believes that the internal proposal capabilities of existing
clients may be decreasing due to fiscal pressures currently being
exerted on the organizations. This trend is expected to create
additional opportunities for regional management services.
Services
Information Technology. The Company's information technology business is
focused on consulting, complex proprietary software applications development
licensing and support, systems integration and other IT outsourcing services.
Specific areas of business focus include telecommunications, enterprise
security solutions, medical informatics, software engineering and testing,
network management solutions, systems integration, and PC product solutions.
Systems Engineering. The Company's systems engineering work assists its
clients to define the work that must be done to meet a given program's
objectives. The first step is to formally define the top level program
objectives including mission requirements, annual and total budget, and the
schedule for each major program milestone and then to communicate them to each
engineering, information technology and management department. The systems
engineers perform trade studies and analyses to objectively evaluate the cost,
schedule, risk and likely performance of alternative solutions. The systems
engineers then manage the top level program requirements data base. As the
program evolves from design through development, test and production phases,
they constantly evaluate the work of the program's design and test groups to
be certain that these top level requirements are being met.
Program Integration. Concurrent with systems engineering are the Company's
program integration functions. This work is done to ensure that a given
program has been meticulously planned and that the program team follows the
plan. The SM&A program integration effort is critical to the financial success
of the client. The work has an initial phase in which the program to be
accomplished is defined in detail. This includes the detailed description of
all tasks to be done by all of the participants over the lifetime of the
program, the scheduling of these tasks, the sizing of each task and the
definition of the inter-relationship among the tasks. This information is
maintained by the program integration team in an electronic and sometimes web-
enabled format easily accessible to the management team. After the definition
work is completed, the program integration staff focuses on the execution of
the program, in which the status of each task is constantly evaluated (and
reported to management, including the government project office), the likely
attainment of future milestones is predicted, and the program risks are
constantly re-evaluated to allow proactive management decisions to mitigate
risk.
5
Proposal Management. Proposal management involves assisting clients with the
procurement of government and commercial programs. The process whereby SM&A
manages a proposal can be divided into three phases: organization and
strategy, proposal preparation, and post submittal.
Organization and Strategy. Once hired to manage a proposal, SM&A
assembles a team of proposal specialists at the client's site typically
deploying a proposal manager, volume leaders for each of the major
proposal volumes, specialists well versed in the new management
processes required by the government, and production specialists expert
in the new forms of electronic proposals often required by a government
acquisition agency. Each SM&A team manages a client team, typically 50
to 200 engineers, IT specialists and managers, providing full time,
hands-on execution of the SM&A process from strategy formulation,
through all phases of proposal preparation and review, to the post-
submittal responses to the government's questions. The proposal process
typically requires three to twelve months of intensive activity at the
client's site. The SM&A team assists the client in the creation of a
win strategy that leads to selection of sub-contractors, an investment
plan, a technical baseline, and a program implementation plan.
Proposal Preparation. The SM&A team manages a process that starts with
analysis of the government's request for proposal and results in the
creation of a series of proposal documents, each following a
proprietary SM&A template. These templates guide the team in developing
the key "facts" that will win, which typically consist of the most
cost-effective technical solution to meet the government's needs and a
low-risk program plan that will deliver the product on time and within
budget. Following SM&A's page-by-page quality review, the proposal is
submitted and, if required, an oral presentation is made. SM&A creates
the materials (technical charts, videos, models) for the oral
presentations, which are becoming more common. The IT contest of
proposals is becoming an increasingly larger component of the delivered
work product.
Post Submittal. After the proposal is submitted, the proposal team's
interaction with the U.S. Government is a critical part of the SM&A
winning process. Many teams submit their proposals and then key
personnel are reassigned on other projects. Conversely, in an SM&A-
managed proposal, the core competence is maintained to answer formal
questions from the government, and prepare the Best and Final Offer.
Another area of SM&A action during the government's proposal evaluation
period is working with the client's team in preparation for winning the
award. Many proposals include a very aggressive start-up phase that
requires the delivery of significant products within the first 30 to 60
days after the contract award. SM&A provides management support,
program planners and schedulers, systems engineers and IT specialists
to assist the client's team to meet early post-award commitments.
Clients
The Company provides its information technology services, high-end systems
engineering, and integrated proposal management services to numerous Fortune
100 clients and the U.S. Government. The Company provides contract support
services to various branches of the U.S. Government including the U.S. Air
Force, U.S. Navy, U.S. Army, NASA and government intelligence agencies
(collectively, "the U.S. Government").
Raytheon Company and Lockheed Martin Corporation accounted for
approximately 20.5% and 15.9%, respectively, of the Company's revenues for the
year ended December 31, 1999 and 15.8% and 16.6%, respectively, of the
Company's revenues in 1998. In addition, for the year ended December 31, 1999,
the U.S. Government accounted for 27.7% (24.8% in 1998) of the Company's
revenues. On a pro forma basis giving effect to the 1999 Acquisitions and 1998
Acquisitions, various branches and agencies of the U.S. Government together
would have accounted for an aggregate 39.8% of the Company's revenues for the
year ended December 31, 1999 and 37% in 1998. These revenues are a result of
various engagements by several business units of these companies and
governmental entities. Although such business units are affiliated with the
parent entities, the Company's experience has indicated that the particular
engagements are subject to the discretion of each individual business and
governmental unit.
6
Backlog
The Company's backlog represents an estimate of the remaining future
revenues from existing signed contracts and letters of intent concerning
contracts that have been awarded but in some cases not yet signed. The backlog
estimates include revenues expected under the current terms of executed
contracts and revenues from contracts in which the scope and duration of the
services required are not definite but estimable.
At December 31, 1999 the Company's backlog was approximately $114 million.
The Company's engagements are terminable at will and no assurance can be given
that the Company will receive any of the fees associated with the backlog
described above.
Sales and Marketing
The Company markets its services directly to senior executives of major
corporations. The Company employs a variety of business development and
marketing techniques to communicate directly with current and prospective
clients, including making on-site presentations, trade advertising, attending
industry seminars featuring presentations by SM&A personnel, attending trade
shows, demonstrating its software products and authoring articles and other
publications about the industry and the Company's methodologies, processes and
technologies.
A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of engagements during delivery to add
complementary activities. Also, the Company's on-site presence affords it the
opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements facilitates the Company's
ability to market additional capabilities to its clients in the future. In
addition, the SM&A senior management team is actively involved in meeting with
companies that have not yet engaged SM&A and newly appointed senior managers
in current SM&A clients who might not be thoroughly knowledgeable of SM&A's
previous assistance to the client.
Government Contracts
In 1999, 27.7% (24.8% in 1998) of the Company's revenues resulted from
contracts directly with the U.S. Government. Contracts with the U.S.
Government are subject to termination, reduction or modification as a result
of changes in the U.S. Government's requirements or budgetary restrictions, at
the convenience of the U.S. Government, or when we participate as a
subcontractor, if the primary contractor is in default. Upon termination of a
contract at the convenience of the U.S. Government, the contractor is
generally entitled to reimbursement for allowable costs incurred up to the
date of termination and a proportionate amount of the stipulated profits or
fees attributable to the work actually performed.
Competition
In each of its markets, SM&A has able competitors, which differ depending
upon the characteristics of the customer including its size, geographic
location, and computing environment. Many established competitors have greater
marketing, technical, and financial resources than the Company, and there can
be no assurance that SM&A will be able to continue to compete successfully
with existing or new competitors.
IT Services and Systems Engineering
The IT services and systems engineering markets are highly competitive and
include a large number of highly capable firms in the United States. The
market is also highly fragmented. The Company, however, has found increasing
opportunities to work with clients who have previously retained SM&A. The
Company believes that the principal competitive factors in the professional
services market include industry and program knowledge, rapidly deployable
skilled personnel, responsiveness, reputation and price.
7
Proprietary Software Products
In the proprietary software products business, the Company competes with
other providers of application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the
telecommunications market, the Company's principal competitors are Information
View and TEOCO. The integrated command and control and network operating
system markets are highly fragmented and competition varies significantly
within these markets depending upon the customers' computing platforms.
Competitive factors in all the proprietary software products markets served by
the Company include price and performance, technology, functionality,
portability, software support, and the level of market acceptance of the
competitors' products.
Proposal Management
The market for proposal management services in the procurement of
government and commercial contracts for aerospace and defense is a niche
market with a number of competitors. The Company is the largest provider of
such services and principally competes with numerous smaller proposal
management companies in this highly specialized industry. The Company also
competes with some of its client's internal proposal development resources. A
number of SM&A's clients maintain internal business acquisition teams that are
designed to handle the procurement of government contracts, although the
number of such in-house departments has been decreasing in recent years.
The Company believes that the principal competitive factors in the market
for proposal management include reputation, the level of experience and skill
of staff professionals, industry expertise, quality of service,
responsiveness, and procurement success rate. The need to provide efficient
and cost-effective service is of even greater importance where the cost of
proposal development is likely to be a larger percentage of the contract
amount than with a large program.
Employees
As of December 31, 1999, the Company had approximately 778 employees.
Approximately 93% are information technology and proposal management
professionals and 7% are administrative personnel. The Company believes that
its success depends significantly upon attracting, retaining and motivating
talented, innovative and experienced professionals. For this reason, SM&A is
comprised of highly experienced information technology specialists, program
managers, engineers and skilled technicians, tested in some of the largest and
most complex military, commercial and government programs of the past 30
years. The typical SM&A employee has more than 19 years of applicable
experience and a majority of our employees possess advanced degrees in
science, engineering or information technology fields.
The Company has instituted a training and recruitment program to help
acquire and ensure retention of high quality personnel and to enable it to
respond to expanding customer needs. The performance of each SM&A employee is
being constantly evaluated both by the SM&A team with whom the employee is
working and by the client who has engaged SM&A. SM&A executives are always on
call to discuss any and all personnel issues. SM&A has maintained the highest
standards of performance to ensure client satisfaction. The Company also
attracts and motivates its professional and administrative staff by offering
competitive packages of base and incentive compensation and benefits.
The Company's employees are not represented by any labor union and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating us and our
business and prospects.
8
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 1998 and 1999 Acquisitions, or any future acquisitions
will be realized. We cannot be sure that we will be able to successfully
integrate acquired businesses in a timely manner without substantial costs,
delays or other operational or financial problems. The difficulties of such
integration may initially be increased by our need to integrate personnel with
different business backgrounds and corporate cultures. In addition,
acquisitions may involve our spending significant funds. Our failure to
effectively integrate the acquired companies may adversely affect our ability
to bid successfully on certain engagements and otherwise grow our business.
Client dissatisfaction or performance problems at a single acquired company
could have an adverse effect on our reputation as a whole, and this could
result in increased difficulty in marketing services or acquiring companies in
the future. In addition, we cannot be certain that the acquired companies will
operate profitably or will not otherwise hurt operating results. There are
other risks with acquisitions. These include diversion of management
attention, potential loss of key clients or personnel, risks associated with
unanticipated problems, liabilities or contingencies and risks of entering
markets in which we have limited or no direct expertise The occurrence of some
or all of the events described in these risks could have a material adverse
effect on our business, operating results and financial condition.
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 information technology professionals, systems engineers
and program managers. Qualified professionals are currently in great demand
and there is significant competition for employees with the requisite skills
from other major and boutique consulting firms, research firms, government
contractors, proposal management or business acquisition departments of major
corporations and other professional services firms. There can be no assurance
that we will be able to attract and retain the qualified personnel necessary
to pursue our growth strategy. There can be no assurance that we will be able
to maintain or increase our current rate of growth, effectively manage our
expanding operations or achieve planned growth on a timely or profitable
basis. To the extent that we are unable to manage our growth effectively and
efficiently, our business, financial condition and results of operations could
be materially and adversely affected.
Our business depends substantially on the defense industry
Approximately 54.5% of our revenues were derived from Proposal Management
Group services related to government procurement contracts for the fiscal year
ended December 31, 1999. In addition, a significant portion of our revenues
are derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, we expect that the percentage of revenues attributable to
such contracts will continue to be substantial. U.S. Government expenditures
for defense products may decline in the future with such reductions having an
effect on our clients, or, indirectly, on us. A number of trends may
contribute to such a decline, including:
9
. large weapon systems being replaced with smaller, more precise high
technology systems
. multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter program
. threat scenarios evolving away from global conflicts to regional
conflicts
. the continuing draw down of U.S. military forces in response to the end
of the Cold War
In the event expenditures for products of the type manufactured by our
clients are reduced and not offset by other new programs or products, there
will be a reduction in the volume of contracts or subcontracts to be bid upon
by our clients and, as a result, a reduction in the volume of proposals
managed by us. Unless offset, such reductions could materially and adversely
affect our business, operating results and financial condition.
There are risks associated with government contracting
We are subject to 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 disbarment 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:
. cost reimbursable
. time-and-materials
. fixed-price contracts and subcontracts
Under fixed-price contracts and time-and-materials contracts, we bear any risk
of increased or unexpected costs that may reduce our profits or cause us to
sustain a loss.
Our U.S. Government contracts and subcontracts are subject to termination,
reduction or modification as a result of changes in the U.S. Government's
requirements or budgetary restrictions, or at the convenience of the U.S.
Government. When we participate as a subcontractor, we are also subject to the
risk that the primary contractor may fail or become unable to perform its
duties and responsibilities as a prime contractor. If a contract were to be
terminated for convenience, we would be reimbursed for allowable costs
incurred up to the date of termination and would be paid a proportionate
amount of the stipulated profits or fees attributable to the work actually
performed.
Contracts with the U.S. Government are generally complex in nature, and
require us to comply with numerous U.S. Government regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping
and accounting, management qualifications, drug free work place and numerous
other matters.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of us or of
our major clients could have a material adverse effect upon us. Our books and
records are subject to annual audit by the Defense Contract Audit Agency,
which can result in adjustments to contract costs and fees. If any costs are
improperly allocated to a contract, such costs are not reimbursable and, if
already reimbursed, will require us to refund such amounts to the government.
If improper or illegal activities are discovered in the
10
course of any audits or investigations, the contractor may also be subject to
various civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of payments,
fines and suspension or disqualification from doing business with the
government. If we become subject to penalties or sanctions, such penalties or
sanctions could have a material adverse effect on our business, financial
condition and results of operations.
We rely on a relatively limited number of clients
We derive a significant portion of revenues from a relatively limited
number of clients. For example, our revenues from the ten most significant
clients accounted for approximately 80.0%, 76.0%, 90.3%, 98.0% and 92.9% of
our total revenues for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, respectively. Three clients, the U.S. Government, Raytheon Company, and
Lockheed Martin Corporation accounted for approximately 64.1%, 57.2% and 33.3%
of our total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Raytheon Company is our single largest commercial client,
accounting for approximately 20.5%, 15.8% and 10.9% of our total revenues for
the years ended December 31, 1999, 1998 and 1997, respectively.
Clients typically retain our services 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Clients."
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 IT
services systems engineering and proprietary software products markets;
however, there can be no assurance that we will be successful in such efforts.
The markets for services in these sectors are 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., consulting arms of
major accounting firms, IT service and solutions firms such as American
Management Systems, Answer Think Consulting Group, Diamond Technology
Partners, Inc., and CACI International. 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 86.5% 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
11
us to protect our proprietary rights will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual
property rights.
Although we believe that our services do not infringe on the intellectual
property rights of others and that we have all rights necessary to utilize the
intellectual property employed in our business, we are subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to
the intellectual property which is the subject of asserted infringement.
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. 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 key-man life insurance policies in the
amount of $2.0 million each, for Mr. Myers and Mr. Piraino.
Our quarterly results may fluctuate significantly
We may experience significant fluctuations in future quarterly operating
results due to a number of factors, including the size, timing and duration of
client engagements and the timing of software products licensing revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 30, 2000, the closing sale price has ranged from a low of $4.88 per
share to a high of $31.13 per share. The market price of our common stock
could continue to fluctuate substantially due to a variety of factors,
including:
. quarterly fluctuations in results of operations
. adverse circumstances affecting the introduction or market acceptance of
new services offered by us
. announcements of new services by our competitors
. our loss of key employees
. changes in the regulatory environment or market conditions affecting the
defense and aerospace industry
. changes in earnings estimates ratings by analysts
. lack of market liquidity resulting from a relatively small amount of
public stock float
. changes in generally accepted accounting principles
. sales of common stock by existing holders
. the announcement and market acceptance of proposed acquisitions
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. Thus far, we have had no significant problems related to year
2000 issues associated with the computer systems,
12
software, or other property and equipment currently in use. However, we cannot
guarantee that the year 2000 problem will not adversely affect our business,
operating results, or financial condition at some point in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
We cannot be sure that we will be completely successful in our efforts to
address the year 2000 issue or that problems arising from the year 2000 issue
will not cause a material adverse effect on our operating results or financial
condition. We are limited in our efforts to address the year 2000 issue as it
relates to third parties and rely solely on the assurances of these third
parties as to their year 2000 preparedness.
Our principal shareholder has significant control over SM&A
Steven S. Myers, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 44.4% 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.
ITEM 2--Properties
Facilities
The Company occupies its principal executive and Proposal Management Group
offices adjacent to the Orange County (John Wayne) Airport in Newport Beach,
California. The Company has approximately 19,500 square feet of office space
in this location.
As of December 31, 1999, the Company's other primary offices included an
approximately 96,000 square foot facility in Vienna, Virginia and an
approximately 48,200 square foot facility in Colorado Springs, Colorado. The
Company maintains four additional offices, each consisting of 12,000 square
feet or less, throughout the Unites States, in Albuquerque, New Mexico; Largo,
Maryland; Sierra Vista, Arizona, and Rome, New York. The Company is actively
attempting to sublease its excess facility space.
The Company leases all of its facilities, several of which maintain a top
secret clearance rating.
ITEM 3--Legal Proceedings
Legal Proceedings
The Company is involved in routine litigation incidental to the conduct of
its business. There are currently no material pending litigation proceedings
to which the Company is a party or to which any of its property is subject.
ITEM 4--Submission of Matters to a Vote of Security Holders
Not applicable.
13
PART II
ITEM 5--Market for the Registrant's Common Stock and Related Stockholder
Matters
Price Range Of Common Stock
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "WINS" since January 29, 1998. The following table sets forth
for the quarters indicated the high and low closing sale prices as reported on
the Nasdaq National Market.
1999 1998
----------------- -----------------
High Low High Low
--------- ------- ------- ---------
First Quarter............................ $18 3/4 $9 $17 3/4 $10 11/16
Second Quarter........................... 10 3/4 6 1/16 21 17 1/4
Third Quarter............................ 8 7/8 7 3/8 31 1/8 17 1/4
Fourth Quarter........................... 7 15/16 4 7/8 19 8 3/4
At March 20, 2000, there were approximately 133 registered holders of the
Company's outstanding shares of Common Stock and on March 20, 2000 the closing
sale price of the Common Stock on the Nasdaq National Market was $5.06 per
share.
Dividends
On January 27, 1998, immediately prior to consummating its initial public
offering, the Company declared an S corporation dividend, in the amount of
$711,000, to its then-current shareholders, representing all undistributed
earnings of the Company from January 1, 1998 through January 28, 1998 (the "S
Corporation Dividend"). Purchasers of Common Stock in the Company's initial
public offering did not receive any portion of the S Corporation Dividend. The
Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, capital requirements, the general financial
condition of the Company and restrictions that may be contained in the
Company's financing agreements.
Recent Sales of Unregistered Securities
On May 29, 1998, the Company acquired SAC. In connection with such
acquisition and in exchange for all of the issued and outstanding SAC common
stock and options, the Company issued an aggregate of 819,743 shares of its
common stock and 175,906 options to purchase its common stock to the
shareholders and option holders of SAC, respectively, consisting mainly of SAC
employees, executives and directors. The exchange involved 35 or fewer persons
not established to the reasonable satisfaction of the Company as "accredited
investors" under Rule 501(a) of the Securities Act of 1933, as amended (the
"Act"), and was consummated in reliance upon Section 4(2) of the Act, and the
rules and regulations thereunder. Pursuant to Rule 506(b), all investors were
either accredited investors, reasonably believed by the Company to have such
knowledge and experience in financial and business matters that such investor
was capable of evaluating the merits and risks of the investment, or retained
a purchaser representative not affiliated with the Company in connection with
the transaction.
On August 20, 1998, the Company acquired DSA. In connection with such
acquisition and in exchange for all of the issued and outstanding DSA common
stock, the Company issued an aggregate of 714,839 shares of its common stock
and $14,035,419 cash to the shareholders of DSA, consisting mainly of DSA
employees, executives and directors. The exchange involved 35 or fewer persons
not established to the reasonable satisfaction of the Company as "accredited
investors" under Rule 501(a) of the Act and was consummated in reliance upon
Section 4(2) of the Act, and the rules and regulations thereunder. Pursuant to
Rule 506(a), all investors were either accredited investors, reasonably
believed by the Company to have such knowledge and
14
experience in financial and business matters that such investor was capable of
evaluating the merits and risks of the investment, or retained a purchaser
representative not affiliated with the Company in connection with the
transaction.
The shareholders of common stock issued in the SAC and DSA acquisitions had
demand registration rights. Substantially all of the shareholders exercised
such demand rights on February 1, 1999 and on April 29, 1999, the Company
filed a registration statement with the SEC on Form S-3 to register these
common shares (such registration statement was amended on May 13, 1999).
15
ITEM 6--Selected Financial Data
The statement of operations data for the years ended December 31, 1999,
1998, and 1997, and the balance sheet data as of December 1999 and 1998, have
been derived from the Company's audited Consolidated Financial Statements and
Notes thereto. The balance sheet data as of December 31, 1997, 1996, and 1995
and the statement of operations data for the fiscal years ended December 31,
1996 and 1995 have been derived from the Company's audited financial
statements, which statements are not included herein. The following
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
Fiscal Years Ended December 31,
---------------------------------------------
1999(1) 1998(1) 1997 1996 1995
-------- ------- ------- ------- -------
(in thousands, except per share data)
Statements of Operations Data:
Net revenues...................... $106,743 $68,449 $36,962 $25,699 $20,777
Cost of revenues.................. 65,087 40,483 20,529 14,512 12,313
-------- ------- ------- ------- -------
Gross margin.................... 41,656 27,966 16,433 11,187 8,464
Selling, general and
administrative expenses (2)...... 26,511 13,756 8,184 8,274 5,851
Software development costs........ 6,206 -- -- -- --
Amortization of goodwill and other
intangibles...................... 1,498 770 -- -- --
Cancelled secondary offering
costs............................ -- 361 -- -- --
-------- ------- ------- ------- -------
Operating income................ 7,441 13,079 8,249 2,913 2,613
Other income (expense)............ (702) 1,520 (292) 136 7
-------- ------- ------- ------- -------
Income before income taxes...... 6,739 14,599 7,957 3,049 2,620
Income tax expense (3)............ 2,729 6,072 3,183 1,219 1,048
-------- ------- ------- ------- -------
Income or pro forma income from
continuing Operations 4,010 8,527 4,774 1,830 1,572
Loss from operations of
discontinued business, net of
income tax benefit of $137(4).... -- (208) -- -- --
Loss from disposal of discontinued
business, net of income tax
benefit of $390(4)............... -- (607) -- -- --
-------- ------- ------- ------- -------
Net income or pro forma net
income......................... $ 4,010 $ 7,712 $ 4,774 $ 1,830 $ 1,572
======== ======= ======= ======= =======
Income or pro forma income per
share from continuing
operations(5):
Basic........................... $ .25 $ .55 $ .37 $ .12 $ .11
Diluted......................... $ .24 $ .53 $ .37 $ .12 $ .11
======== ======= ======= ======= =======
Loss per share from discontinued
operations(5):
Basic........................... -- $ (.05) -- -- --
Diluted......................... -- $ (.05) -- -- --
======== ======= ======= ======= =======
Net income or pro forma net income
per share(5):
Basic........................... $ .25 $ .50 $ .37 $ .12 $ .11
Diluted......................... $ .24 $ .48 $ .37 $ .12 $ .11
======== ======= ======= ======= =======
Weighted average shares
outstanding(5):
Basic........................... 16,257 15,645 12,948 14,893 14,893
Diluted......................... 16,431 15,984 12,948 14,893 14,893
======== ======= ======= ======= =======
Balance Sheet Data:
Cash and cash equivalents......... $ 1,226 $ 454 $ 150 $ 1,927 $ 269
Working capital................... 22,224 15,979 101 (279) 794
Total assets...................... 96,842 66,324 5,331 11,820 3,034
Long-term debt, including current
portion(6)(7).................... 29,017 -- 7,729 6,250 605
Shareholders' equity
(deficit)(6)..................... 50,456 55,329 (6,328) 755 668
16
Footnotes
(1) The statements of income and balance sheet data include the results of
operations and acquired net assets of the Company and Space Applications
Corporation beginning May 15, 1998, Decision Science Applications
beginning August 1, 1998, Systems Information Solutions, Inc. beginning
March 1, 1999, and Kapos Associates Inc. beginning September 1, 1999.
(2) Selling, general and administrative expenses for fiscal 1997, 1996 and
1995 reflect pro forma adjustments for compensation for the principal
executive officers (which have historically been included in SG&A
expenses) who are to be paid a maximum of $2.7 million in salaries and
bonuses for 1998 under the Executive Compensation Program. For additional
pro forma statement of operations data for 1997 and 1996 see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Amounts reflect pro forma adjustments for provisions for federal and state
income taxes as if the Company had been taxed as a C corporation at an
assumed statutory rate of approximately 40% for years prior to 1998.
(4) Loss from operations on discontinued business and loss from disposal of
discontinued business were computed as explained in Note 5 to the
Consolidated Financial Statements.
(5) Net income or pro forma net income (loss) per share was computed as
explained in Note 1 to the Consolidated Financial Statements.
(6) In 1999, the Company purchased 1,204,000 of its common shares for
approximately $9.3 million in cash using funds borrowed under the
Company's currently existing bank facility. In January 1998, the Company
sold 2,100,000 shares of Common Stock in the IPO for net proceeds of
approximately $22.4 million and repaid all of the Company's then existing
indebtedness of $7.4 million. In January 1997, the Company repurchased
1,995,125 shares of Common Stock from certain of its existing shareholders
for approximately $5.9 million using borrowings under its then existing
bank facility
(7) In April 1996, the Company purchased an aircraft for $5.8 million and
financed the purchase through a bank. In January 1997, the Company sold
the aircraft to a company which is owned by Steven S. Myers, the Company's
principal shareholder. See footnotes to the "Consolidated Financial
Statements."
17
ITEM 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Concerning Forward-Looking Statements
From time to time, SM&A, 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.
18
Quarterly Results of Operations (Unaudited)
The following table presents unaudited quarterly consolidated financial
information for each of the Company's last eight fiscal quarters. In the
opinion of the Company's management, this quarterly information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this Form 10-K and includes all adjustments necessary
to present fairly the unaudited quarterly results set forth herein. The
Company's quarterly results have in the past been subject to fluctuations, and
thus, the operating results for any quarter are not necessarily indicative of
results for any future period.
1999(1) 1998
-------------------------------- ---------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
Net revenues............ $28,089 $26,813 $26,527 $25,314 $24,560 $20,546 $12,684 $10,659
Cost of revenues........ 18,380 16,756 15,539 14,412 15,458 12,077 6,960 5,988
------- ------- ------- ------- ------- ------- ------- -------
Gross margin........... 9,709 10,057 10,988 10,902 9,102 8,469 5,724 4,671
Selling, general and
administrative
expenses............... 8,572 6,588 5,852 5,499 4,000 5,343 2,667 1,746
Amortization of goodwill
and other intangibles.. 441 427 285 345 382 302 86 --
Software development
costs.................. 2,405 1,660 973 1,168 -- -- -- --
Cancelled secondary
offering costs......... -- -- -- -- 361 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ (1,709) 1,382 3,878 3,890 4,359 2,824 2,971 2,925
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) or pro
forma income from
continuing
operations............ (1,257) 735 2,202 2,330 2,652 1,699 2,427 1,749
Discontinued operations:
Income (loss) from
operations of
discontinued business,
net................... -- -- -- -- (151) (86) 29 --
Loss from disposal of
discontinued business,
net................... -- -- -- -- (607) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income or pro forma
net income (loss)...... $(1,257) $ 735 $ 2,202 $ 2,330 $ 1,894 $ 1,613 $ 2,456 $ 1,749
======= ======= ======= ======= ======= ======= ======= =======
Income or pro forma
income per share from
Continuing Operations:
Basic.................. $ (.08) $ .05 $ .14 $ .14 $ .16 $ .10 $ .16 $ .12
Diluted................ $ (.08) $ .04 $ .14 $ .14 $ .16 $ .10 $ .16 $ .12
======= ======= ======= ======= ======= ======= ======= =======
Loss per share from
discontinued
Operations:
Basic.................. -- -- -- -- $ (.05) $ -- $ -- $ --
Diluted................ -- -- -- -- $ (.05) $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ======= =======
Net income or pro forma
net income per share:
Basic.................. $ (.08) $ .05 $ .14 $ .14 $ .11 $ .10 $ .16 $ .12
Diluted................ $ (.08) $ .04 $ .14 $ .14 $ .11 $ .10 $ .16 $ .12
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic.................. 16,093 16,307 16,090 16,515 16,535 16,371 15,297 14,347
Diluted................ 16,190 16,371 16,247 16,927 16,780 16,794 15,630 14,431
======= ======= ======= ======= ======= ======= ======= =======
- -------
(1) As restated for periods ended September 30, June 30 and March 31, 1999.
Capitalized software development costs were expensed in the quarters
incurred. See table below for summary of restated quarters.
Three Months Ended Three Months Ended Three Months Ended
March 31, 1999 June 30, 1999 September 30, 1999
------------------------- ------------------------- -------------------------
As Previously As Previously As Previously
Reported As Restated Reported As Restated Reported As Restated
------------- ----------- ------------- ----------- ------------- -----------
Net revenues............ $25,314 $25,314 $26,927 $26,527 $27,183 $26,813
Cost of revenues........ 14,737 14,430 15,665 15,539 17,027 16,756
------- ------- ------- ------- ------- -------
Gross margin........... 10,577 10,884 11,262 10,988 10,156 10,057
Selling, general &
administrative
expenses............... 5,223 5,481 5,630 5,852 6,182 6,588
Amortization of goodwill
and other intangibles.. 345 345 285 285 322 427
Software development
costs.................. -- 1,168 -- 973 -- 1,660
------- ------- ------- ------- ------- -------
5,568 6,994 5,915 7,110 6,504 8,675
------- ------- ------- ------- ------- -------
Operating income ...... 5,009 3,890 5,347 3,878 3,652 1,382
Other income (expense).. 39 39 (129) (129) (154) (154)
------- ------- ------- ------- ------- -------
Profit before taxes.... 5,048 3,929 5,218 3,749 3,498 1,228
Income tax expense ..... 2,069 1,599 2,164 1,547 1,447 493
------- ------- ------- ------- ------- -------
Net income.............. $ 2,979 $ 2,330 $ 3,054 $ 2,202 $ 2,051 $ 735
======= ======= ======= ======= ======= =======
Net income per share:
Basic.................. $ 0.18 $ 0.14 $ 0.19 $ 0.14 $ 0.13 $ 0.05
Diluted................ $ 0.18 $ 0.14 $ 0.19 $ 0.14 $ 0.13 $ 0.04
======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic.................. 16,515 16,515 16,090 16,090 16,307 16,307
Diluted................ 16,927 16,927 16,247 16,247 16,371 16,371
Certain amounts in prior quarters have been reclassified to conform to current
presentation.
19
RESULTS OF OPERATIONS
The following table sets forth certain historical operating results as a
percentage of net revenues for 1999 and 1998, and certain supplemental pro
forma operating results as a percentage of net revenues for 1997.
Years Ended
December 31,
--------------------
1999 1998 1997
----- ----- -----
Net revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 61.0% 59.1% 55.5%
----- ----- -----
Gross margin............................................. 39.0% 40.9% 44.5%
Selling, general and administrative expenses.............. 32.0% 21.8% 22.2%
----- ----- -----
Operating income.......................................... 7.0% 19.1% 22.3%
Income from continuing operations......................... 3.8% 12.5% 12.9%
Loss from discontinued operations......................... -- (1.2%) --
----- ----- -----
Net income................................................ 3.8% 11.3% 12.9%
===== ===== =====
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31,
1998
Net Revenues. Net revenues increased $38.3 million, or 55.9% to $106.7
million for fiscal 1999 compared to $68.4 million for fiscal 1998. The
increase resulted primarily from a combination of acquisitions (SIS and KAI
contributed 1999 revenue of $3.9 million and $1.8 million, respectively) and
internal revenue growth. The internal revenue growth rate, which excludes
revenue from the first twelve months after the closing date for each
acquisition, was approximately 18%. Factors contributing to our internal
growth rate include: (i) increased demand in the information technology and
high-end contract support services market; (ii) increased billing rates
resulting from an increase in associates' wages; and (iii) sales of internally
developed software products.
Gross Margin. Gross margin increased $13.7 million, or 48.9%, to $41.7
million, for fiscal 1999 as compared to $28.0 million for fiscal 1998. As a
percentage of net revenues, gross margin decreased to 39.0% compared to 40.9%
for the prior year period. The decrease in gross margin as a percentage of
revenues was attributed to an increase in compensation and benefits to direct
employees and a reduction in PMG's contribution as a percentage of total
revenues.
Selling, General and Administrative Expenses, Software Development Costs
and Amortization of Goodwill and Other Intangibles. Selling, general and
administrative expenses increased $19.3 million, or 129.5%, to $34.2 million
for fiscal 1999, as compared to $14.9 million for fiscal 1998. As a percentage
of revenues, selling, general and administrative expenses increased to 32.1%
for fiscal 1999, as compared to 21.7% for the prior year period. This increase
was the result of increases in administrative costs related to the increase in
number of personnel as well as facility expenses attributable to the Company's
new office facilities in Vienna, Virginia and Colorado Springs, Colorado. In
1999, the Company expensed $6.2 million of development costs for software
products being sold or to be sold to commercial customers and recognized
$1.4 million in costs related to reorganization expenses, related severance
payments and legal fees, and costs to construct the customer care center.
Amortization of goodwill and other intangibles increased from $0.8 million in
1998 to $1.5 million in 1999 reflecting a full year of amortization related to
the goodwill and intangibles recorded in conjunction with the SAC and DSA
acquisitions in 1998.
Operating Income. Operating income was $7.4 million for 1999 compared to
$13.1 million for 1998, a decrease of $5.7 million. As a percentage of net
revenues, operating income decreased to 7.0% for 1999 from 19.1% the prior
year, which is attributed to the increase in software development expense,
discussed above.
Other Income (Expense). Other expense, net was $0.7 million for 1999
compared to other income, net of $1.5 million for 1998. The net expense in
1999 results from higher interest expense of $0.9 million based on increased
bank borrowings and net other income in 1998 was due to a gain of
approximately $0.8 million on the sale of an aircraft and a higher level of
interest income earned on proceeds from the initial public offering, which
were invested in short-term marketable securities.
20
Income From Continuing Operations. Income from continuing operations was
$4.0 million for 1999 compared to $8.5 million for 1998, a decrease of $4.5
million or 52.9%.
Net Income. Net income was $4.0 million for 1999 compared to $7.7 million
for 1998, a decrease of $3.7 million or 48.1%.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Net Revenues. Net revenues increased $31.5 million, or 85.1% to $68.5
million for fiscal 1998 compared to $37.0 million for fiscal 1997. Net
revenues from the Proposal Management Group were $39.6 million for fiscal 1998
(net revenues would have been $41.6 million had certain projects not been
transferred to other operating groups) compared to $37.0 million for fiscal
1997, an increase of $2.6 million. This increase was attributable to an
increase in the Company's customer base and the number of proposals managed as
a result of increased marketing efforts. Net revenues from high-end contract
support services, provided by the Systems Solutions Group and the Information
Technology Solutions Group, were collectively $28.9 million. The Company
expanded 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 increased $11.6 million, or 70.7%, to $28.0
million, for fiscal 1998 as compared to $16.4 million for fiscal 1997. As a
percentage of net revenues, gross margin decreased to 40.9% compared to 44.5%
for the prior year period. The decrease in gross margin as a percentage of
revenues was primarily attributable to lower gross margin contributions from
the newly acquired entities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.7 million, or 81.7%, to $14.9 million for
fiscal 1998, as compared to $8.2 million for fiscal 1997. As a percentage of
revenues, selling, general and administrative expenses decreased to 21.8% for
fiscal 1998, as compared to 22.2% for the prior year period. This decrease was
the result of lower compensation for the executive group offset by an increase
in administrative costs and facility expenses related to the operations of SAC
and DSA.
Operating Income. Operating income was $13.1 million for 1998 compared to
$8.2 million for 1997, an increase of $4.9 million or 59.8%. As a percentage
of net revenues, operating income decreased to 19.1% for 1998 from 22.3% the
prior year.
Other Income (Expense). Other income, net was $1.5 million for 1998
compared to a net expense of $.3 million for 1997. This decrease in expense
was attributed to lower interest expense in the current year based on lower
bank borrowings, net other income related to a gain of approximately $0.8
million on the sale of aircraft and interest income earned in the current year
on proceeds from the initial public offering, which were invested in short-
term marketable securities.
Income From Continuing Operations. Income from continuing operations was
$8.5 million for 1998 compared to $4.8 million for 1997, an increase of $3.7
million or 77.1%.
Net Income. Net income was $7.7 million for 1998 compared to $4.8 million
for 1997, an increase of $2.9 million or 60.4%.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company's net cash used by
operating activities was $9.8 million, compared to cash flows provided by
operating activities of $2.5 million for the prior year. This change was
mainly due to increases in accounts receivable days sales outstanding to 100
days and software development expenses of $6.2 million in 1999.
Net cash used in investing activities was $9.5 million for the year ended
December 31, 1999, compared to $14.5 million for the prior year. The Company's
primary use of funds on investing activities during 1998 was the acquisition
of SIS and KAI, and purchases of property and equipment.
21
Net cash provided by financing activities was $20.1 million for the year
ended December 31, 1999, compared to net cash used of $12.3 million for the
prior year. Financing activities provided funds of $22.4 million to the
Company in 1998 as a result of the initial public offering. The primary source
of cash in 1999 was net borrowings of $29.0 million of bank debt as compared
to net repayments of $9.2 million for 1998. In 1999, repurchases of common
stock totaled $9.3 million as compared to $0.1 million in 1998.
The Company previously completed the acquisition of all the outstanding
common shares of SIS in March, 1999. The definitive agreement obligates the
Company to make an earnout payment contingent upon the achievement of certain
operating results. The earnout is payable in cash and is due in April, 2000.
The Company believes that the final earnout payment, as adjusted, should range
between $6.0 and $7.2 million. An estimate of $6.0 million was recorded in
goodwill and accrued earnout payable as of December 31, 1999. The Company
expects to pay such earnout payment from existing cash and cash equivalents,
cash flow from operations and available borrowings under the credit agreement.
The definitive agreements with KAI and S3I obligate the Company to make
earnout payments contingent upon the achievement of certain operating results.
The earnouts are payable in cash and are due within the next eighteen months.
The Company believes that the final earnout payments, as adjusted, should
range between $3.0 and $4.0 million. The Company expects to pay such earnout
payments from existing cash and cash equivalents, cash flow from operations
and available borrowings under the credit agreement.
The Company believes that funds generated by operations will provide
adequate cash to fund its anticipated operating cash needs for at least the
next twelve months. The Company has a $50.0 million revolving line of credit
facility with a bank. The revolving line of the credit will be used, as
considered necessary, for operating cash and for future acquisitions. As of
December 31, 1999, the Company had borrowings of $29.0 million outstanding
under the credit agreement.
YEAR 2000
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 rely on numerous computer systems for day-to-day
operations and may be adversely affected by the Year 2000 situation. Our costs
in connection with Year 2000 remediation and preparations totaled
approximately $0.2 million, with substantially all of such costs occurring in
1999.
Substantially all of our clients are similarly dependent on computer
systems and they also may be adversely affected by the Year 2000 situation.
Although neither we nor any client known to us have experienced any material
Year 2000 problems to date, some experts have warned of the possibility of
lingering Year 2000 problems that may not become apparent until later in the
Year 2000 or beyond. We continue to believe that the Year 2000 problem will
not pose significant operational problems for our business and operations on a
going forward basis.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD
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"), as amended by SFAS 137. SFAS 137 is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities.
Application of this accounting standard is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.
22
ITEM 7A
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates in their
financial statements. The Company's exposure to interest rate changes is
primarily related to its variable rate debt based on fluctuations in the
Bank's Prime rate or LIBOR. To assess exposure to interest rate changes, the
Company has performed a sensitivity analysis assuming a hypothetical 100 basis
point increase in interest rates in the first quarter of fiscal year 2000.
This analysis indicates that such market movements would reduce fiscal 2000
net income, based on the December 1999 debt balance, by approximately $0.3
million. Actual gains and losses in the future may differ materially from this
hypothetical amount based on changes in the timing and amount of interest rate
movements and the Company's actual debt balances.
ITEM 8--Consolidated Financial Statements and Supplemental Data
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-21. An index to such materials appears on page
F-1.
23
ITEM 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
ITEM 10--Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by this
reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement prepared pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, for the Company's 2000 Annual
Meeting of Shareholders involving, among other things, the election of
directors. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Form 10-K.
ITEM 11--Executive Compensation
The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation" in the Company's
definitive Proxy Statement prepared pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, for the Company's 2000 Annual
Meeting of Shareholders involving, among other things, the election of
directors. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Form 10-K.
ITEM 12--Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by this
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive Proxy Statement prepared
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, for the Company's 2000 Annual Meeting of Shareholders involving,
among other things, the election of directors. Such Proxy Statement will be
filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this Form 10-K.
ITEM 13--Certain Relationships and Related Transactions
The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation--Certain
Transactions" in the Company's definitive Proxy Statement prepared pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, for the
Company's 2000 Annual Meeting of Shareholders involving, among other things,
the election of directors. Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K.
24
PART IV
ITEM 14--Exhibits, Financial Statements and Reports on Form 8-K
(a)(1). Consolidated Financial Statements (included in Part II of this
Annual Report on Form 10-K).
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2). Financial Statement Schedules (included in Part II of this Annual
Report on Form 10-K).
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(a)(3). Exhibits (see Exhibit Index)
(b). Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last
quarter of the fiscal year ended December 31, 1999.
25
INDEX
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997........................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficiency) for the
Years Ended December 31, 1999, 1998 and 1997............................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-7
Notes to Consolidated Financial Statements............................... F-9
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997........................................ F-21
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
SM&A Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SM&A
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three year period ended December 31,
1999. In connection with our audits of the consolidated financial statements,
we also audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SM&A
Corporation and subsidiaries at December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth herein.
/s/ KPMG LLP
Orange County, California
March 13, 2000
F-2
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands, except share data)
1999 1998
------- -------
ASSETS
------
Current assets:
Cash and cash equivalents.................................... $ 1,226 $ 454
Accounts receivable, net of allowance of $935 and $643,
respectively................................................ 22,676 15,326
Costs and estimated earnings in excess of billings on
contracts in progress....................................... 7,851 7,545
Prepaid income taxes......................................... 4,665 2,085
Prepaid expenses and other assets............................ 440 559
Deferred income taxes........................................ 1,466 --
------- -------
Total current assets....................................... 38,324 25,969
Property and equipment, net.................................... 5,636 2,390
Notes receivable--affiliates................................... 1,744 2,832
Other assets................................................... 2,360 3,346
Goodwill....................................................... 48,778 31,787
------- -------
$96,842 $66,324
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Trade accounts payable....................................... $ 3,475 $ 2,496
Accrued compensation and payroll taxes....................... 6,093 6,585
Accrued earnout payable...................................... 6,000 --
Deferred income taxes........................................ 269 265
Other liabilities............................................ 263 644
------- -------
Total current liabilities.................................. 16,100 9,990
Deferred income taxes.......................................... 399 725
Other liabilities.............................................. 870 280
Long-term debt................................................. 29,017 --
------- -------
Total liabilities.......................................... 46,386 10,995
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; Authorized 50,000,000 shares.
Shares issued and outstanding 16,109,000 and 16,522,000,
respectively................................................ 161 165
Additional paid-in capital................................... 45,285 54,164
Retained earnings............................................ 5,010 1,000
------- -------
Total shareholders' equity................................. 50,456 55,329
------- -------
$96,842 $66,324
======= =======
See accompanying notes to consolidated financial statements.
F-3
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
-------- ------- -------
Net revenues....................................... $106,743 $68,449 $36,962
Cost of revenues................................... 65,087 40,483 20,529
-------- ------- -------
Gross margin................................... 41,656 27,966 16,433
Selling, general and administrative expenses....... 26,511 13,756 7,177
Software development costs......................... 6,206 -- --
Amortization of goodwill and other intangibles..... 1,498 770 --
Cancelled secondary offering costs................. -- 361 --
-------- ------- -------
Operating income............................... 7,441 13,079 9,256
Other income (expense):
Interest expense................................. (1,053) (148) (505)
Other, net....................................... 351 1,668 213
-------- ------- -------
Income before income taxes..................... 6,739 14,599 8,964
Income tax expense................................. 2,729 6,072 147
-------- ------- -------
Income from continuing operations.............. 4,010 8,527 8,817
Discontinued operations:
Loss from operations of discontinued business,
net of income tax benefit of $137............... -- (208) --
Loss from disposal of discontinued business, net
of income tax benefit of $390................... -- (607) --
-------- ------- -------
Net income......................................... $ 4,010 $ 7,712 $ 8,817
======== ======= =======
Income per share from continuing operations:
Basic............................................ $ .25 $ .55 *
Diluted.......................................... $ .24 $ .53 *
======== ======= =======
Loss from discontinued operations:
Basic............................................ $ -- $ (.05) *
Diluted.......................................... $ -- $ (.05) *
======== ======= =======
Net income per share:
Basic............................................ $ .25 $ .50 *
Diluted.......................................... $ .24 $ .48 *
======== ======= =======
Weighted average shares outstanding:
Basic............................................ 16,257 15,645 *
Diluted.......................................... 16,431 15,984 *
======== ======= =======
- --------
* See Pro Forma Supplemental Data on next page.
See accompanying notes to consolidated financial statements.
F-4
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME--(Continued)
(in thousands, except per share data)
1997
-------
Pro Forma Supplemental Data (Unaudited):
Historical income before income taxes........................... $ 8,964
Pro forma adjustment to selling, general and administrative
expenses....................................................... (1,007)
-------
Pro forma income before income taxes............................ 7,957
Pro forma income tax expense.................................... 3,183
-------
Pro forma net income............................................ $ 4,774
=======
The pro forma adjustments for the year ended December 31, 1997 include the
elimination of compensation for the principal executive officers (which have
historically been included in selling, general and administrative expenses)
who are to be paid a maximum of $2.7 million in salaries and bonuses under the
1998 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.
1997
------
Pro Forma net income per share:
Basic.............................................................. $ .37
Diluted............................................................ $ .37
======
Weighted average shares outstanding:
Basic.............................................................. 12,948
Diluted............................................................ 12,948
======
See accompanying notes to consolidated financial statements.
F-5
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
December 31, 1999, 1998 and 1997
(in thousands, except share data)
Common Stock Stock Retained Total
------------------- Additional subscription earnings shareholders'
Shares paid-in note Due from (accumulated equity
outstanding Amount capital receivable shareholder deficit) (deficiency)
----------- ------ ---------- ------------ ----------- ------------ -------------
Balances at
December 31, 1996...... 14,895,000 $ 5 $ 316 $(51) $(632) $ 1,117 $ 755
Net income.............. -- -- -- -- -- 8,817 8,817
Collection of stock
subscription
receivable............. -- -- -- 51 -- -- 51
Note due from
shareholder............ -- -- -- -- (47) -- (47)
Dividends declared...... -- -- -- -- -- (10,041) (10,041)
Repurchase and
retirement of common
stock.................. (1,995,000) -- -- -- -- (5,863) (5,863)
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1997...... 12,900,000 5 316 -- (679) (5,970) (6,328)
Net income.............. -- -- -- -- -- 7,712 7,712
Collection of
shareholder note....... -- -- -- -- 679 -- 679
Issuance of common
shares in initial
public offering........ 2,100,000 145 22,276 -- -- -- 22,421
Issuance of common
shares in connection
with acquisitions...... 1,535,000 15 31,717 -- -- -- 31,732
Dividends declared...... -- -- -- -- -- (717) (711)
Repurchase and
retirement of common
stock.................. (13,000) (145) -- -- (31) (176)
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1998...... 16,522,000 165 54,164 -- -- 1,000 55,329
Net income.............. -- -- -- -- -- 4,010 4,010
Repurchase and
retirement of common
stock.................. (1,204,000) (12) (9,330) -- -- -- (9,342)
Shares issued upon
exercise of options.... 77,000 1 458 -- -- -- 459
Issuance of common
shares in connection
with 1998 acquisition.. 714,000 7 (7) -- -- -- --
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1999...... 16,109,000 $161 $45,285 $-- $-- $ 5,010 $50,456
========== ==== ======= ==== ===== ======= =======
See accompanying notes to consolidated financial statements.
F-6
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 4,010 $ 7,712 $ 8,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts............... 82 18 (27)
Depreciation and amortization................. 2,260 1,432 139
Deferred income taxes......................... (1,788) 588 --
Gain on sale of property and equipment........ (5) (772) (137)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net.................... (7,953) (1,249) (581)
Costs and estimated earnings in excess of
billings................................... (2,708) (1,873) --
Prepaid expenses and other assets........... (778) 644 (171)
Trade accounts payable...................... 877 (956) (34)
Accrued compensation and payroll taxes...... (957) (1,650) (1,003)
Income taxes payable........................ (2,589) (603) --
Other liabilities........................... (296) (776) 152
------- -------- --------
Net cash (used in) provided by operating
activities............................... (9,845) 2,515 7,155
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.............. (6,198) (12,181) --
Additional consideration on prior year
acquisition.................................... (716) -- --
Payment on stock options in acquisition......... -- (2,449) --
Payment on note receivable from affiliate....... -- 92 --
Proceeds from sale of minority interest in
investment..................................... -- 200 --
Purchases of property and equipment............. (4,134) (401) (140)
Repayments from (advances to) shareholder....... 1,088 679 (47)
Other........................................... 445 (445) --
------- -------- --------
Net cash used in investing activities..... (9,515) (14,505) (187)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.......... 457 22,421 --
Borrowings under long-term credit facility...... 30,050 7,553 27,336
Repayments under long-term credit facility...... (1,033) (16,793) (20,228)
Distributions to shareholders................... -- (711) (10,041)
Repurchase of common stock...................... (9,342) (176) (5,863)
Decrease in stock subscription note receivable.. -- -- 51
------- -------- --------
Net cash provided by (used in) financing
activities............................... 20,132 12,294 (8,745)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. 772 304 (1,777)
Cash and cash equivalents at beginning of year.. 454 150 1,927
------- -------- --------
Cash and cash equivalents at end of year........ $ 1,226 $ 454 $ 150
======= ======== ========
SUPPLEMENTAL INFORMATION--CASH PAID FOR:
Interest........................................ $ 936 $ 232 $ 505
======= ======== ========
Income taxes.................................... $ 7,051 $ 5,552 $ 100
======= ======== ========
F-7
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
Supplemental schedule of noncash investing activities:
In September 1998, the Company sold its approximate 37% ownership interest
in Savant Corporation to an affiliated company. Payment included a $1.8
million note guaranteed by a principal shareholder.
In June 1998, the Company sold an aircraft to an affiliated company.
Payment included a note for $880,000.
In January 1997, the Company sold an aircraft to an affiliated company.
Payment included a note in the amount of $5.6 million.
In December 1999, the Company accrued $6.0 million to satisfy an amount
obligation related the acquisition of SIS.
Detail of businesses acquired in purchase transactions (in thousands):
1999 1998
------ -------
Total consideration....................................... $5,636 $45,767
Less stock consideration issued in acquisitions........... -- (31,732)
------ -------
Cash consideration paid for acquisitions.................. 5,636 14,035
Plus acquisition expenses................................. 661 1,215
Less cash acquired in acquisitions........................ (99) (3,069)
------ -------
Cash paid for acquisitions, net of cash acquired........ $6,198 $12,181
====== =======
See accompanying notes to consolidated financial statements.
F-8
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company's primary business is providing information technology
solutions for complex problems. In January 1998, the Company completed an
initial public offering ("IPO") of Common Stock. In May 1998 the Company
acquired Space Applications Corporation ("SAC"). SAC provides information
technology, systems engineering, scientific research, program management
support and technical services to the military, civilian space programs, the
intelligence community, and the armed services. In August 1998, the Company
acquired Decision-Science Applications, Inc. ("DSA"). DSA provides information
technology, system engineering, information systems development, scientific
research and program management support to the U.S. Government, principally
the Department of Defense. The acquisitions of SAC and DSA are collectively
referred to as the "1998 Acquisitions." In November 1998, DSA changed its name
to SM&A Corporation (East), and in December 1998, SAC merged into SM&A
Corporation (East).
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,
primarily the Department of Defense. In September 1999, the Company acquired
Kapos Associates Inc. ("KAI"). KAI provides simulation and test systems
engineering services to the U.S. Government. These transactions were accounted
for as purchases and, accordingly, the consolidated financial statements
include the financial results of the 1999 acquisitions from the effective
dates of each such acquisition. SIS and KAI are collectively referred to as
the "1999 Acquisitions."
Principles of Consolidation
The consolidated financial statements include the accounts of the SM&A
Corporation and wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original
maturity of three months or less to be cash equivalents.
Goodwill
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
evaluated by comparing the carrying value of intangible assets to the
estimated future operating income of the Company on an undiscounted cash-flow
basis. Should the carrying value of goodwill exceed the estimated operating
income for the expected period of benefit, an impairment for the excess would
be recorded at that time. As of December 31, 1999, no impairment has been
recognized.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
straight-line and accelerated methods based on the estimated useful lives of
the related assets, generally five to seven years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
F-9
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Information Technology Services and Systems Engineering--A significant
portion of the Company's professional services are performed for the
United States Government under various cost reimbursable, time and material
and fixed-price contracts and subcontracts. The Company records revenues from
cost-reimbursable contracts, including cost-plus-fixed-fee contracts, on the
basis of reimbursable costs plus a pro rata portion of the fee. Revenue from
time and materials contracts (government and commercial) are recognized based
on the contractual hourly billing rates as the services are performed. For
financial reporting purposes, the Company records revenue from fixed-price
contracts on the percentage-of-completion method. Accrued income is based on
the percentage of estimated total income that costs incurred to date bear to
estimated total costs after giving effect to the most recent estimates of cost
and estimated contract price at completion. Some contracts contain incentive
provisions based upon performance in relation to established targets to which
applicable recognition has been given in the contract revenue estimates.
Proposal Management Services--The majority of proposal management services
activities are provided under "time and expenses" billing arrangements, and
revenues are recorded as work is performed. Revenue is directly related to the
total number of hours billed to clients and the associated hourly billing
rates. A limited amount of revenues are also derived from success fees offered
to clients as a pricing option, and recorded as revenue only upon the
attainment of the specified incentive criteria. Success fees are billable by
the Company when a contract is won by the client.
As many contracts extend over a long period of time, revisions in cost and
price estimates during the progress of work are accounted for prospectively.
When the contract estimate indicates a loss, provision is made for the total
anticipated loss. In accordance with these practices, contracts in progress
are stated at cost plus estimated profit, but not in excess of realizable
value. Contract costs for services supplied to the U.S. Government, including
indirect expenses, are subject to audit by the Government's representatives.
All contract revenues are recorded in amounts that are expected to be realized
upon final settlement.
Royalty Income--The Company has a Master Development and Distribution
Agreement for licensing of several software products to a manufacturer of test
instruments. The Company receives royalties from the instrument manufacturer
as software product units are sold and distributed. The Company recognizes
royalty revenue as payments are received from the instrument manufacturer.
Software Development Costs
Costs related to research, design and development of computer software to
be sold are expensed as incurred. Software development costs subsequent to
establishment of technological feasibility, normally at the completion of a
detail program design, are insignificant.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, other accounts receivable,
trade accounts payable and other accrued liabilities are measured at cost
which approximates their fair value.
Income Taxes
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.
Prior to the initial public offering, the Company and its shareholders
elected to be treated as an S corporation under the Internal Revenue Code of
1986, as amended (the "Code"). Under the provisions of the Code, the
F-10
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's shareholders included their pro rata share of the Company's income
on their personal tax returns. Accordingly, the Company was not subject to
federal and most state income taxes.
In January 1998, the Company still operated as an S corporation; thus, the
consolidated income statement presentation for the year ended December 31,
1998 includes only applicable federal and state income taxes for the period in
which the Company was a C corporation. Upon termination of the S corporation
status on January 28, 1998, the Company recorded income tax expense resulting
from the establishment of net deferred tax liabilities of approximately
$510,000, which was based upon temporary book to tax differences existing at
the date of termination of the Company's S corporation status.
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 is a reconciliation between the number of shares used in the
basic and diluted net income per share calculations (in thousands):
1999 1998 1997
------ ------ ------
Basic net income per share:
Weighted average number of shares outstanding........ 16,257 15,645 12,948
Dilutive effect of stock options..................... 174 339 --
------ ------ ------
Diluted net income per share:
Weighted average number of shares outstanding........ 16,431 15,984 12,948
====== ====== ======
Anti-dilutive shares excluded from the reconciliation above were 1,602,500,
114,500, and 0, for 1999, 1998, and 1997, respectively.
Stock Option Plan
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting For Stock Issued To Employees, and its related
interpretations. No compensation expense has been recognized in the financial
statements for employee stock options. The Company provides pro forma net
income and pro forma earnings per share disclosures for employee stock options
grants as if the fair value-based method defined in Statement of Accounting
Standards No. 123, Accounting For Stock-Based Compensation, had been applied.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items in the prior period financial statements have been
reclassified to conform to the current period presentation.
F-11
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities, " as amended by SFAS 137. The provisions of the
statement require the recognition of all derivatives as either assets or
liabilities in the consolidated balance sheet and the measurement of those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not believe
that adoption of this pronouncement will have a material impact on the
financial statements.
Note 2. Acquisitions
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 include the financial results of SAC from May 18, 1998, the date
the definitive agreement was approved by all relevant parties, and 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 market price of the Company's stock during
1999, the Company issued 703,530 additional shares of common stock to former
shareholders of SAC based upon the market price of the common stock at certain
defined liquidation dates.
In August 1998, the Company issued 714,839 unregistered shares of common
stock valued at approximately $14.4 million, and $14.0 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 include the financial results of DSA from August 1, 1998, the
beginning of the accounting period in which the purchase transaction was
finalized.
The Company acquired SIS in March 1999, and KAI in September 1999, for an
aggregate amount of $5.5 million in cash and additional consideration
contingent upon the achievement of certain operating results. The Company has
accrued an estimated $6.0 million earnout payment due in April 2000,
contingent upon the achievement of certain operating results under the SIS
acquisition agreement. These transactions were accounted for as purchases and,
accordingly, the consolidated financial statements include the financial
results of the 1999 acquisitions from the effective dates of each such
acquisition.
The allocation of the purchase prices for both the 1999 Acquisitions and
1998 Acquisitions is as follows (in thousands):
Years Ended
December 31,
----------------
1999 1998
------ --------
Total purchase price, net..................................... $5,636 $ 45,767
Net assets acquired........................................... (837) (14,661)
Acquisition costs............................................. 661 1,215
------ --------
Excess of purchase price over net assets acquired............. $5,460 $ 32,321
====== ========
F-12
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma combined results of operations for the period ended
December 31, 1998 would have been as follows had each of the acquisitions
occurred as of the beginning of 1998 (in thousands, except per share data):
1998
-------
Pro forma net revenues.......................................... $96,442
=======
Pro forma income from continuing operations..................... $ 6,601
Pro forma loss from discontinued operations..................... (598)
-------
Net income...................................................... $ 6,003
=======
Pro forma income per share from continuing operations:
Basic......................................................... $ .40
Diluted....................................................... $ .39
=======
Pro forma loss per share from discontinued operations:
Basic......................................................... $ (.03)
Diluted....................................................... $ (.03)
=======
Pro forma net income per share:
Basic......................................................... $ .37
Diluted....................................................... $ .36
=======
Weighted average shares outstanding:
Basic......................................................... 16,373
Diluted....................................................... 16,758
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. Results of operations for 1999
and 1998 would not have been materially impacted on a pro forma basis if the
1999 Acquisitions had occurred as of the beginning of the respective periods.
Note 3. Property and Equipment
A summary of property and equipment follows (in thousands):
1999 1998
------- ------
Computer equipment....................................... $ 3,209 $1,855
Furniture and equipment.................................. 2,211 891
Leasehold improvements................................... 1,887 257
------- ------
7,307 3,003
Less accumulated depreciation and amortization........... (1,671) (613)
------- ------
$ 5,636 $2,390
======= ======
Note 4. Due From Affiliates and Related Party Transactions
In June 1998, the Company sold an aircraft to an affiliate of the Company's
principal shareholder. Terms included a promissory note for the total sales
price of $880,000, which was paid in April 1999. As the aircraft was nearly
fully depreciated at the time of sale, the majority of the proceeds were
recognized as a gain on sale.
F-13
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1998, SAC, a subsidiary of SM&A Corporation, sold its 37%
ownership interest in Savant, an equity investment, to an affiliate of the
Company's principal shareholder for its net book value of $2.0 million. The
sales proceeds were $200,000 cash and a promissory note for $1.8 million. The
note bears interest at 9% and is payable in thirty monthly installments of
$30,000 commencing on October 31, 1998 through March 31, 2001. All remaining
principal is due and payable on March 31, 2001. The note is guaranteed by the
principal shareholder of the Company. No principal payments were received in
1999. As of December 31, 1999 and 1998, $1.7 million remained outstanding on
the promissory note.
In November 1998, Savant engaged the Company to perform certain consulting
services through December 31, 1998. Included in accounts receivable as of
December 31, 1999 and 1998 is $225,000 and $300,000, respectively, due from
Savant for this consulting project. This receivable is guaranteed by the
principal shareholder of the Company. Terms of the agreement were commensurate
with market rates for similar consulting services.
The Company charters aircraft from time to time through an air service
chartering company controlled by the Company's principal shareholder. The
terms of use and charter rates paid by the Company are established by the air
service chartering company and are considered by the Company to be competitive
with charter rates and on terms as favorable as those from unaffiliated third
parties for similar aircraft. Charter fees amounted to approximately $396,000,
$300,000, and $471,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Note 5. Discontinued Operations
On December 1, 1998, the Company's Board of Directors adopted a plan to
discontinue the operations of Staminet, Inc., a subsidiary of SAC, which was
acquired in a purchase combination in May 1998. Accordingly, the operating
results of Staminet, including provisions for estimated losses during the
phase-out period, severance, facility lease costs and other shut down expenses
expected to be incurred in connection with the disposal, were accrued for as
of December 31, 1998. Estimated expenses and operating losses from the
measurement date through the anticipated date of disposal amounted to
$997,000. The operations of Staminet were fully terminated by March 31, 1999.
Note 6. Long-Term Debt
In September 1998, the Company entered into a credit agreement with a bank
which provided a $25.0 million revolving line of credit. In June 1999, the
Company renegotiated with its lenders to increase the amount provided under
the agreement to $50.0 million. The credit agreement, which is secured by a
first priority interest in substantially all of the assets of the Company,
matures in May 2004 and has two interest rate options; the Bank's Prime rate
or LIBOR plus 1.25% to 2.0%, based on the ratio of total indebtedness to
earnings before interest and taxes. The credit agreement requires payment of a
fee of 0.25% of the average unused portion of the facility and contains
certain covenants. The most restrictive covenants require the Company to
maintain minimum consolidated net worth, maximum indebtedness to EBITDA,
maximum indebtedness to consolidated net worth and minimum fixed charge
coverage ratio as defined in the credit agreement. As of December 31, 1999,
the Company was not in compliance with certain of these financial covenants;
however waivers have been obtained from the lenders contingent upon the
Company's requirement to amend the credit agreement. The Company is currently
in negotiation with the lenders to finalize terms and conditions of the
amendment. Outstanding borrowings under the credit line at December 31, 1999
were $29,017,000 bearing an effective interest rate of 7.95%. There were no
amounts outstanding under the credit agreement as of December 31, 1998.
Availability of funds was reduced by a standby letter of credit in the amount
of $1.1 million at December 31, 1999 and 1998.
F-14
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the Company renegotiated certain terms of its credit
agreement including maturity date, pricing levels, dividend and stock
repurchase limitations and mandatory prepayments. In addition, pursuant to the
amendment, the Company may not make any further acquisitions without the
consent of the lenders.
Note 7. Income Taxes
Income tax expense attributable to income from continuing operations
consists of (in thousands):
Current Deferred Total
------- -------- ------
Year ended December 31, 1999:
Federal.......................................... $3,700 $(1,508) $2,192
State............................................ 817 (280) 537
------ ------- ------
$4,517 $(1,788) $2,729
====== ======= ======
Year ended December 31, 1998:
Federal.......................................... $4,470 $ 484 $4,954
State............................................ 1,014 104 1,118
------ ------- ------
$5,484 $ 588 $6,072
====== ======= ======
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
1999 1998
---- ----
Income taxes at statutory federal rates...................... 35.0 % 34.0 %
State taxes, net of federal income tax benefit............... 5.2 5.5
Amortization of non-deductible goodwill...................... 7.1 3.7
Other, net................................................... (6.8) (1.6)
---- ----
40.5 % 41.6 %
==== ====
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income
tax purposes. The income effects of these temporary differences representing
significant portions of deferred tax assets and deferred tax liabilities are
as follows (in thousands):
1999 1998
---- -------
Accrued expenses not currently deductible for tax
purposes.................................................. $781 $ 868
Project reserves........................................... 222 140
Allowance for doubtful accounts............................ 303 248
Depreciation............................................... 54 52
Change of accounting from cash to accrual method for
acquired subsidiaries..................................... (598) (1,023)
Prepaid expenses........................................... (40) (164)
Installment sale transaction............................... 61 (439)
Capitalized software....................................... -- (664)
Other...................................................... 15 (8)
---- -------
Total net deferred income tax asset (liability).......... $798 $ (990)
==== =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
F-15
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
Note 8. Shareholders' Equity
The Company completed an initial public offering ("IPO") of common stock
during January 1998. Of the 3,150,000 shares of Common Stock sold in the IPO
at an offering price of $12.00 per share, 1,050,000 were sold by existing
shareholders and 2,100,000 were sold by the Company, generating $22.4 million
in net proceeds to the Company, net of offering expenses of $1.0 million.
The Company made cash payments of S corporation distributions (the "S
Corporation dividend") to shareholders totaling $711,000 which were accrued as
of January 28, 1998 and paid February 5, 1998. The S Corporation dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. Cash provided from the operating
activities of the Company prior to the IPO was used to fund the dividend
payment.
In December 1998, the Company repurchased and retired 13,000 shares of
common stock pursuant to a Board authorization to reacquire up to 300,000
shares of Company stock. Repurchase prices ranged from $13.31 to $14.00 per
share. During 1999, the Company repurchased and retired 1,204,000 shares of
common stock pursuant to a Board authorization at an average purchase price of
$7.76 per share.
Note 9. Stock Option Plan and Employee Benefit Plans
In 1997, the Company adopted the 1997 Stock Option Plan (the "Option Plan")
under which incentive and non-statutory stock options to acquire shares of the
Company's common stock may be granted to officers, employees, and consultants
of the Company. The Option Plan is administered by the Board of Directors and
permits the issuance of up to 2,500,000 shares of the Company's common stock.
Incentive stock options must be issued at an exercise price not less than the
fair market value of the underlying shares on the date of grant. Options
granted under the Option Plan vest over various terms up to four years and are
exercisable over a period of time, not to exceed ten years, and are subject to
other terms and conditions specified in each individual employee option
agreement. A summary of employee stock options follows:
Weighted Average
Number of Weighted Average Fair Value of
Shares Exercise Price Options Granted
--------- ---------------- ----------------
Outstanding as of December
31, 1997.................... -- --
Granted.................... 1,515,700 $12.86 $7.41
Canceled................... (58,500) 13.14
Options converted in
acquisition............... 175,906 5.67
---------
Outstanding as of December
31, 1998.................... 1,633,106 11.52
Granted.................... 1,616,629 7.06 $5.68
Exercised.................. (77,382) 6.58
Canceled................... (833,780) 10.81
---------
Outstanding as of December
31, 1999.................... 2,338,573 $ 9.19
=========
F-16
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning currently outstanding
options:
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$3.42- $8.69......... 1,289,348 9.4 $ 6.04 25,881 $ 5.29
$9.00-$14.38......... 842,950 8.8 12.02 189,094 12.23
$15.00-$19.13......... 206,275 8.8 17.30 39,969 17.46
--------- --- ------ ------- ------
$3.42-$19.13......... 2,338,573 9.1 $ 9.19 254,944 $12.34
========= === ====== ======= ======
As part of the SAC acquisition, SAC's outstanding options were converted
into SM&A options for 175,906 shares of the Company's common stock. These
options have been included in the stock option summary above, but are not part
of the Option Plan. The SFAS No. 123 calculation below does not include the
effect of these converted options as their fair value has been included in the
calculation of goodwill from acquisition.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share as if the Company
had adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option-pricing model, with the
following weighted average assumptions:
1999 1998
----- -----
Stock volatility............................................... 62.93% 51.76%
Risk-free interest rate........................................ 5.50% 6.00%
Option term in years........................................... 6.25 6.25
Stock dividend yield........................................... 0.00 0.00
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
the 1999 and 1998 awards had been amortized to expense over the vesting period
of the awards, pro forma net income would have been $2.7 million, or $0.16 per
basic share and $0.16 per diluted share in 1999; and $6.9 million, or $0.44
per basic share and $0.43 per diluted share in 1998.
Employee Stock Purchase Plan
In 1999, the Company adopted an Employee Stock Purchase Plan (the "ESP
Plan") with an initial allocation of 250,000 shares. The ESP Plan allows
employees of the Company to purchase common stock, through bi-weekly payroll
deductions, at a 15% discount. Employee contributions to the ESP Plan are
limited to 15% of the employee's annual compensation.
Defined Contribution Plans
The Steven Myers & Associates 401(k) Plan and Trust is a defined
contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan
covers all employees of the heritage entity Steven Myers & Associates.
Contributions are made to the Plan by participants only.
F-17
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SAC and DSA each maintained 401(k) and profit sharing plans for their
employees. Contributions were made to the Plan by both the employees and the
Company. The Company's expense under these plans was $110,000 and $479,000 for
the years ended December 31, 1999 and 1998, respectively. In March 1999, the
defined contribution pension plans of Steven Myers & Associates, SAC, and DSA
were merged to form a single 401(k) plan. The new plan, the SM&A Corporation
401(k) Plan and Trust, provides for employee contributions of up to 15% of
eligible compensation with Company matching, supplemental contributions for
certain classes of employees based on performance criteria and profit sharing
under certain conditions.
Note 10. Commitment and Contingencies
The Company leases office facilities and certain equipment under lease
agreements classified as operating leases. Future minimum lease payments under
noncancelable operating leases as of December 31, 1999 are summarized as
follows (in thousands):
Year ending December 31:
------------------------
2000........................................................... $ 4,744
2001........................................................... 4,606
2002........................................................... 4,617
2003........................................................... 4,715
2004........................................................... 4,396
Thereafter..................................................... 16,547
-------
Total future minimum lease payments.............................. $39,625
=======
Rent expense amounted to $3,943,000, $1,700,000 and $392,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
The Company is party to various legal actions which arose in the normal
course of business. In the opinion of management, the settlement of these
matters will not materially affect the Company's financial position or results
of operations.
F-18
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Segment Reporting Data
SM&A 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 the
primary financial measure is business segment operating income. The accounting
policies of the business segments are the same as those described in the
summary of significant accounting policies.
Information as to the operations of the lines of business is set forth
below. The information presented for the year ended December 31, 1997
represents pro forma supplemental data as described on the statements of
income.
1999 1998 1997
-------- -------- -------
Net revenues:
Proposal Management Group......................... $ 38,135 $ 39,594 $36,962
Systems Solutions Group........................... 51,779 20,327 --
Information Technology Solutions Group............ 16,829 8,528 --
-------- -------- -------
Total net revenues.............................. $106,743 $ 68,449 $36,962
======== ======== =======
Depreciation and amortization expense:
Proposal Management Group......................... $ 98 $ 115 $ 139
Systems Solutions Group........................... 1,568 935 --
Information Technology Solutions Group............ 227 108 --
Executive Group................................... 367 274 --
-------- -------- -------
Total depreciation and amortization expense..... $ 2,260 $ 1,432 $ 139
======== ======== =======
Operating income (loss):
Proposal Management Group......................... $ 12,820 $ 15,730 $ 8,249
Systems Solutions Group........................... 12,702 6,259 --
Information Technology Solutions Group............ (1,792) 3,015 --
Executive Group................................... (16,289) (11,925) --
-------- -------- -------
Total operating income.......................... $ 7,441 $ 13,079 $ 8,249
======== ======== =======
Income (loss) from continuing operations:
Proposal Management Group......................... $ 7,628 $ 8,990 $ 4,774
Systems Solutions Group........................... 7,558 3,936 --
Information Technology Solutions Group............ (1,066) 1,896 --
Executive Group................................... (10,110) (6,295) --
-------- -------- -------
Total income from continuing operations......... $ 4,010 $ 8,527 $ 4,774
======== ======== =======
Assets:
Proposal Management Group......................... $ 10,146 $ 8,906 $ 5,331
Systems Solutions Group........................... 16,184 8,654 --
Information Technology Solutions Group............ 24,403 9,492 --
Executive Group................................... 46,109 39,272 --
-------- -------- -------
Total assets.................................... $ 96,842 $ 66,324 $ 5,331
======== ======== =======
F-19
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Concentrations of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The majority of the Company's receivables are from the U.S. Government and
large companies in the aerospace and defense industries. The Company's ten
largest customers represented 80% of total revenue for fiscal 1999. The
Company controls credit risk through credit approvals and monitoring
procedures. Credit losses have historically been minimal.
The percentage of the Company's net revenues arising from major customers
is summarized as follows:
Years Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
U.S. Government......................................... 28% 25% -- %
Raytheon Systems Company................................ 20 16 11
Lockheed Martin Corporation............................. 16 17 22
The Boeing Company...................................... 9 8 10
Litton Systems, Inc..................................... 3 5 15
Motorola Corporation.................................... -- 6 13
Hughes Space & Communications Company................... -- -- 10
Note 13. Subsequent Events
In February 2000, the Company acquired substantially all of the assets and
assumption of certain liabilities of System Simulation Solutions, Inc. ("S3I")
for approximately $6.3 million in cash. S3I has the right to receive up to
approximately $1 million in additional consideration contingent upon S3I's
achievement of certain operating results for the twelve month periods ending
February 28, 2001, and February 28, 2002. The earnouts are payable in cash and
are due within 60 days after each of the first and second anniversary of the
closing date, and will be recorded as an addition to goodwill. This
transaction will be accounted for as a purchase and, accordingly, the
consolidated financial statements will include the financial results of S3I
from February 1, 2000, the beginning of the accounting period in which the
purchase transaction was finalized.
F-20
SM&A CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
---------------------
Balance at Charges to Recoveries Balance at
the Beginning Bad Debts and Deductions/ the End
of the Period Expense Other(1) Write-Offs of the Period
------------- ---------- ---------- ----------- -------------
1999
Allowance for Doubtful
Accounts............... $643 $142 $210 $(60) $935
---- ---- ---- ---- ----
1998
Allowance for Doubtful
Accounts............... $-- $ 60 $625 $(42) $643
---- ---- ---- ---- ----
1997
Allowance for Doubtful
Accounts............... $ 27 $-- $-- $(27) $--
==== ==== ==== ==== ====
- --------
(1)Represents amounts acquired in acquisitions.
F-21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
/s/ Steven S. Myers
By: _________________________________
Steven S. Myers
Chief Executive Officer
Dated: April 6, 2000
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven S. Myers and Michael A. Piraino
his attorneys-in-fact, each with the power of substitution, for him in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with Exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Steven S. Myers Chairman of the Board and April 6, 2000
____________________________________ Chief Executive Officer
Steven S. Myers (Principal Executive
Officer)
/s/ Michael A. Piraino President, Chief Operating April 6, 2000
____________________________________ Officer, Acting Chief
Michael A. Piraino Financial Officer,
Secretary and Director
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ J. Christopher Lewis Director April 6, 2000
____________________________________
J. Christopher Lewis
/s/ James R. Mellor Director April 6, 2000
____________________________________
James R. Mellor
/s/ Malcolm R. Currie Director April 6, 2000
____________________________________
Malcolm R. Currie
EXHIBIT INDEX
(3) Exhibits (numbered in accordance with item 601 of Regulation S-K).
2.1 Agreement and Plan of Reorganization and Merger dated May 18, 1998, by
and among the Registrant, Space Applications Corporation, SAC
Acquisition, Inc. and the individual shareholders named therein (filed
on June 4, 1998 as Exhibit 2 to the Registrant's Current Report on Form
8-K and incorporated herein by reference)
2.2 Agreement and Plan of Reorganization and Merger dated July 22, 1998, by
and among the Registrant, Decision-Science Applications, Inc., DSA
Acquisition, Inc. and the individual shareholders named therein (filed
on August 21 1998 as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference)
2.3 Agreement and Plan of Reorganization and Merger dated March 30, 1999,
by and among SM&A Corporation, Systems Integration Software, Inc., SIS
Acquisition, Inc. and the individuals named therein (filed on May 17,
1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein by
reference)
2.4 Stock Purchase Agreement dated as of September 20, 1999, by and among
SM&A Corporation (East), Kapos Associates Inc., Ervin Kapos and June
Kapos and Verona Oliver and Cordellia Scruggs (filed on November 15,
1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated herein by
reference)
2.5 Agreement of Merger dated November 24, 1998 between Space Applications
Corporation and SM&A Corporation (East), effective date December 31,
1998 (filed on March 31, 1999 as Exhibit 2.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference)
3.1 Articles of Incorporation, as amended and restated (filed on January
27, 1998 as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein by
reference)
3.2 Bylaws of the Registrant, as amended and restated (filed on January 5,
1998 as Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-4075) and incorporated herein by reference)
3.3 Certificate of Ownership as filed with the California Secretary of
State on August 6, 1998 (filed on August 19, 1998 as Exhibit 3.1 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.1 Amended 1997 Stock Option Plan and related form of Stock Option
Agreement*
10.2 Amended and Restated Employee Stock Purchase Plan*
10.3 Form of Indemnification Agreement (filed on November 21, 1997 as
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 3334075) and incorporated herein by reference)
10.4 Office Facilities Lease (filed on November 21, 1997 as Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference)
10.5 Hawker Aircraft Sale Agreement (filed on November 21, 1997 as Exhibit
10.4 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by reference)
10.6 Employment Agreement with Steven S. Myers (filed on November 21, 1997
as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by reference)
10.7 Employment Agreement dated December 10, 1998 between the Registrant and
Michael A. Piraino (filed on March 31, 1999 as Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference)
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A. and the
Registrant and related Aircraft Security--Chattel Mortgage, Security
Agreement and Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration Statement on
Form S-1 (Registration No. 3334075) and incorporated herein by
reference)
10.9 Executive Bonus Plan (filed on November 21, 1997 as Exhibit 10.11 to
the Registrant's Registration Statement on Form S-1 (Registration No.
3334075) and incorporated herein by reference)
10.10 Registration Rights Agreement dated May 29, 1998 by and among the
Registrant and certain shareholders of Space Applications Corporation
identified therein (filed on June 4, 1998 as Exhibit 2 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.11 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner (filed on June 4, 1998 as
Exhibit 2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.12 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee (filed on June 4, 1998 as
Exhibit 2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.13 Registration Rights Agreement dated August 20, 1998 by and among
Registrant and certain shareholders of Decision-Science Applications,
Inc. set forth therein (filed on August 21, 1998 as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.14 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Guy A. Ackerson (filed on August 21,
1998 as Exhibit 10.2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.15 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Gary L. Lucas (filed on August 21, 1998
as Exhibit 10.3 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.16 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Dana R. Raucher (filed on August 21,
1998 as Exhibit 10.4 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.17 Employment Agreement dated March 30, 1999, between Systems Integration
Software, Inc. and Gary Markle*
10.18 Employment Agreement dated September 20, 1999, by and between Kapos
Associates Inc. and Ervin Kapos*
10.19 Escrow Agreement dated September 20, 1999, among SM&A Corporation
(East), Kapos Associates Inc., Ervin Kapos and June Kapos and First
American Trust Company (filed on November 15, 1999 as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference)
10.20 Escrow Agreement dated March 30, 1999, among the Registrant, Systems
Integration Software, Inc., First American Trust Company and the
individuals names therein (filed on May 17, 1999 as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference)
10.21 Escrow Agreement dated August 20, 1998 by and between Decision-Science
Applications, Inc., First American Trust Company and certain
shareholders identified therein (filed on August 21, 1998 as Exhibit
10.5 to the Registrant's Current Report on Form 8-K and incorporated
herein by reference)
10.22 Escrow Agreement dated May 29, 1998, by and between the Registrant,
Space Applications Corporation, First American Trust Company, Stanley
Y.H. Hee and certain shareholders identified therein (filed on March
31, 1999 as Exhibit 10.16 to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1998 and incorporated herein by
reference)
10.23 Note dated June 25, 1998 for sale of Turbo Commander aircraft (filed
on March 31, 1999 as Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference)
10.24 Credit and Security Agreement dated September 11, 1998 between the
Registrant and the financial institutions listed thereon, as Lenders
and Mellon Bank, N.A., as Agent, and Amendment Number One thereto
dated December 4, 1998 (filed on March 31, 1999 as Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference)
10.25 Promissory Note dated September 11, 1998 executed by the Registrant in
favor of Mellon Bank in the principal amount of $15,000,000 (filed on
March 31, 1999 as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference)
10.26 Promissory Note dated September 11, 1998 executed by the Registrant in
favor of Imperial Bank in the principal amount of $10,000,000 (filed
on March 31, 1999 as Exhibit 10.21 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference)
10.27 General Continuing Guaranty dated September 11, 1998 of Space
Applications Corporation securing obligations of the Registrant under
promissory note in favor of Mellon Bank (filed on March 31, 1999 as
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference)
10.28 General Continuing Guaranty dated September 11, 1998 of Decision-
Science Applications, Inc. securing obligations of the Registrant
under promissory note in favor of Mellon Bank (filed on March 31, 1999
as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by reference)
10.29 Security Agreement dated September 11, 1998 between Mellon Bank, N.A.
and Space Applications Corporation (filed on March 31, 1999 as Exhibit
10.24 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference)
10.30 Security Agreement dated September 11, 1998 between Mellon Bank, N.A.
and Decision-Science Applications, Inc. (filed on March 31, 1999 as
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference)
10.31 Common Stock Purchase Agreement dated September 30, 1998 between Space
Applications Corporation and Summit Aviation (filed on March 31, 1999
as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by reference)
10.32 Office Lease between Orix Prime West Colorado Springs Venture and
Decision-Science Applications, Inc., as amended by First Amendment to
Office Lease and Second Amendment to Office Lease*
21 Subsidiaries of the Registrant*
23 Consent of KPMG LLP*
27 Financial Data Schedule*
- --------
* Filed herewith.