Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23585
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)
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)
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 (ss.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 29, 1999, 16,539,584 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 29, 1999, was approximately
$46,059,030.(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 May 18, 1999, which
proxy statement is being filed concurrently with this Form 10-K.
- --------
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.
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 proposal management and contract support services markets; and (v) the
Company's ability to distinguish itself from its current and future competitors.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described 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
proposal management and contract support 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 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 is the largest provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform on such contracts. The Company's
clients include leading firms in the aerospace, defense and communications
industries.
The Company's proposal management expertise has resulted in a proposal
win rate of 89.6% of all dollars awarded on SM&A engagements since its
incorporation in 1982. The Company has worked on or is currently engaged on 409
major proposals for $158 billion of government and commercial procurements. The
Company 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 contract support such as systems engineering, information
technology services, and program integration.
In 1998, SM&A acquired (the "Acquisitions") two high-end engineering
and information technology consulting firms: 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 Acquisitions have increased the scope and depth of the Company's
high-end contract support 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. On December 31, 1998, SAC merged into DSA. In connection with the
merger, the surviving corporation changed its name to SM&A Corporation (East).
MARKET
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.
After a company wins a government or commercial contract, it often requires
contract support services including high-level systems engineering and program
integration in order to fulfill the contract. Outside firms that have assisted
in the preparation of the proposal are uniquely qualified to provide such
contract support services.
The Company estimates the annual market for proposal management and
high-end contract support services is approximately $10 billion. In 1998, the
Department of Defense estimated that it alone would award contracts totalling
approximately $80 billion for thousands of military and civilian projects.
Competitions for procurement of parts and subassemblies conducted by private
industry represent another significant portion of the market.
The Company believes that growth of the market for proposal management
and high-end contract support services is dependent on a number of factors,
including but not limited to:
o 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 an in-house team.
o GOVERNMENT OUTSOURCING. In response to a reduced federal budget and demands
for efficiencies in government operations, many projects that were once
performed in-house by the U.S. Government are now being outsourced to
private industry. The increase in the number of these projects creates a
corresponding opportunity to provide proposal management and contract
support services in connection with such projects.
o INCREASE IN THE DEFENSE PROCUREMENT BUDGET. The defense procurement budget
is growing as a result of the need for modernization. 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 and
contract support services in connection with such projects.
o INCREASE IN COMMERICIAL 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 increae in programs requiring
expertise in proposal management.
o INCREASING IMPORTANCE OF PROPOSAL MANAGEMENT SERVICES. The Company believes
that various factors in the aerospace, communications 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 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.
SERVICES
PROPOSAL MANAGEMENT
Proposal management involves assisting clients with the procurement of
government and commercial programs. The Company manages both large proposals
(more than $100 million) and smaller proposals (less than $100 million). In the
case of smaller proposals, the Company may manage a number of concurrent
proposals in a Proposal Development Center ("PDC") located at the client's site.
For large proposals, the Company is engaged on a project specific basis. The
process whereby SM&A manages a large proposal can be divided into three phases:
organization and strategy, proposal preparation, and post submittal.
ORGANIZATION AND STRATEGY. Once hired to manage a large proposal, SM&A
assembles a team of proposal specialists at the client's site--typically
deploying a proposal manager, volume leaders for each of the major proposal
volumes, specialists well versed in the new management processes required by the
government, and production specialists expert in the new forms of electronic
proposals often required by a government acquisition agency. Each SM&A team
manages a client team, typically 50 to 200 engineers and managers, providing
full time, hands-on execution of the SM&A process from strategy formulation,
through all phases of proposal preparation and review, to the post-submittal
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 (charts, videos, models) for the oral presentations, which
are becoming more common. SM&A also trains the presenters to clearly convey the
needed information and to stick rigorously to the presentation plan and
schedule.
POST SUBMITTAL. 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 and systems engineers to assist the client's team to meet early
post-award commitments.
PROPOSAL DEVELOPMENT CENTERS ("PDC"). Another innovative SM&A response
to its clients' changing needs is the creation of Proposal Development Centers.
In contrast to the work done for large proposals in which a dedicated team is
specifically created for the proposal, PDCs are established for clients who
expect to produce a number of smaller proposals over a given period of time. The
Company believes installation of a PDC at a client site allows the Company to
realize a recurring annual income stream. Each PDC has an SM&A team permanently
located at a client's facility, managing the resources needed to produce 10 to
50 proposals per year. The number of SM&A employees located at a PDC ranges from
three to ten. As of December 31, 1998, SM&A was managing six PDCs at clients'
sites. Firms lacking the resources to have a dedicated PDC can employ the PDC
maintained at SM&A headquarters to provide an instantly available turnkey
proposal creation resource.
HIGH-END CONTRACT SUPPORT SERVICES
Whether the contract support services are performed in connection with
a proposal won by SM&A or to support an independent project, the Company has
focused on three areas: (i) systems engineering, (ii) program integration, and
(iii) information technology. The systems engineering and program integration
services are provided through the Company's Systems Solutions Group, while
information technology services are provided through the Information Technology
Solutions Group.
SYSTEMS ENGINEERING. The Company's systems engineering work helps its
clients to define the work that must be done to meet the program's objectives.
The first step is to formally define the top level program objectives including
mission requirements, annual and total budget, and the schedule for each major
program milestone and then to communicate them to each engineering 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 the
program has been meticulously planned and that the program team follows the
plan. In many aerospace procurements, the government insists that (i) the
program plan be submitted with the proposal, (ii) it become a binding
contractual document upon award, and (iii) there be significant financial
incentives for meeting plan milestones on time and financial penalties in case
of failure to adhere to the plan. The SM&A program integration effort is
therefore critical to the financial success of the client. The work has an
initial phase in which the program to be accomplished is defined in detail. This
includes the detailed description of all tasks to be done by all of the
participants over the lifetime of the program (usually involving work by
thousands of individuals in many companies across the nation), the scheduling of
these tasks, the sizing of each task (how many person hours and how much
equipment is needed) and the definition of the inter-relationship among the
tasks (what task depends on what other task). This information is maintained by
the program integration team in an electronic format easily accessible to the
management team. After the definition work is completed, the program integration
staff focuses on the execution of the program, in which the status of each task
is constantly evaluated (and reported to management, including the government
project office), the likely attainment of future milestones is predicted, and
the program risks are constantly re-evaluated to allow proactive management
decisions to mitigate risk.
INFORMATION TECHNOLOGY. The Company's information technology business
is focused on consulting, software development, systems integration and
outsourcing services. The business includes both federal government and
commercial services and commercial software. These efforts include commercial
off-the-shelf solutions to hardware/software needs and development of custom
database applications. A few specific areas of business focus include;
telecommunications, enterprise security solutions, medical informatics, software
engineering, system integration, and PC product solutions.
CLIENTS
The Company provides its proposal management and contract support
services to the U.S. Government and numerous Fortune 100 clients. 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").
Lockheed Martin Corporation and Raytheon Company accounted for
approximately 16.6% and 15.8%, respectively, of the Company's revenues for the
year ended December 31, 1998 and 22.5% and 10.9%, respectively, of the Company's
revenues in 1997. In addition, for the year ended December 31, 1998, the U.S.
Government accounted for 24.8% of the Company's revenues. On a pro forma basis
giving effect to the Acquisitions, various branches and agencies of the U.S.
Government together would have accounted for an aggregate 37% of the Company's
revenues for the year ended December 31, 1998. These revenues are a result of
various engagements by several business units of these companies. Although such
business units are affiliated with the parent entities, the Company's experience
has indicated that the particular engagements are subject to the discretion of
each individual business unit.
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, 1998 the Company's backlog was approximately $139.5
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, attending industry seminars
featuring presentations by SM&A personnel, and authoring articles and other
publications about the industry and the Company's methodologies and processes.
A significant portion of new business arises from prior client
engagements. Clients frequently expand the scope of engagements during delivery
to add complementary activities. Also, the Company's on-site presence affords it
the opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements facilitates the Company's ability
to market additional capabilities to its clients in the future. In addition, the
SM&A senior management team is actively involved in meeting with companies that
have not yet engaged SM&A and newly appointed senior managers in current SM&A
clients who might not be thoroughly knowledgeable of SM&A's previous assistance
to the client.
In the past four years, SM&A has also increased its marketing efforts
through participation in major industrial trade shows and paid advertising. SM&A
regularly runs full page ads in the national trade journals such as AVIATION
WEEK, SPACE NEWS and DEFENSE NEWS.
GOVERNMENT CONTRACTS
In 1998, 24.8% 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
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 in PDCs where the cost of
proposal development is likely to be a larger percentage of the contract amount
than with a large program.
HIGH-END CONTRACT SUPPORT SERVICES
The contract support services market is highly competitive and includes
a large number of highly capable contract support services firms in the United
States. For this reason, the focus of SM&A has been on providing contract
support services for programs which it has won together with its clients. This
significantly enhances the competitive position of the Company because the
contract support to be provided by SM&A is often included in the proposal that
was won. Upon the win, SM&A is awarded its contract and work begins thereafter.
Should there be additional opportunities for SM&A to contribute to the team, the
client often adds scope (and funds) to the SM&A contract. This permits the
growth of the SM&A role over the lifetime of the program.
In the case of contract support services for projects in which the
Company did not provide proposal management services, the market is highly
fragmented and competitive. Many of the Company's competitors are larger and
have greater resources than the Company. See "Risk Factors--"The markets in
which we compete are highly competitive." The Company, however, has found
increasing opportunities to work with clients who have previously retained SM&A.
The Company believes that the principal competitive factors in the contract
support services market include program knowledge, rapidly deployable skilled
personnel, responsiveness, reputation and price.
EMPLOYEES
As of December 31, 1998, the Company had approximately 650 employees.
Approximately 90% are proposal and engineering professionals and 10% 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 program managers, engineers, skilled technicians, and computer
programmers, 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 18 years of applicable experience and a majority of them possess advanced
degrees in science or engineering fields.
The Company has instituted a training and recruitment program to help
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. An
indication of the effectiveness of the recruitment, hiring and training process
to pick the best people and to maintain their skills over the long term is that
the 89.6% win rate for SM&A-managed proposals is being accomplished by a
professional staff that is rapidly growing with only a 4.3% annual employee
turnover rate from January 1, 1995 through December 31, 1998 (exclusive of the
turnover rates experienced by SAC and DSA prior to the Acquisitions).
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, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
EVALUATING US AND OUR BUSINESS BEFORE PURCHASING ANY SHARES OF OUR COMMON STOCK.
RISK FACTORS
THERE ARE RISKS ASSOCIATED OUR ACQUISITION STRATEGY
An element of our growth strategy is to expand our operations through
the acquisition of complementary businesses. We cannot be sure that we will be
able to identify suitable acquisition candidates. If identified, we are not sure
we will be able to acquire such companies on suitable terms. Also, other
companies which may have greater resources than us may compete for acquisition
candidates. Such competition could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition by us.
There can be no assurance that the anticipated economic, operational
and other benefits of our acquisition of Space Applications Corporation or
Decision-Science Applications, Inc., 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. See "Business--Growth Strategy."
WE MAY FAIL TO MANAGE OUR FUTURE GROWTH EFFECTIVELY
We are currently experiencing significant growth and we intend to
pursue further growth as part of our business strategy. Our ability to manage
the growth of our operations will require us to continue to improve our
operational, financial and other internal systems and to attract, develop,
motivate and retain our employees. Our rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation of
financial reporting systems and increased pressure on our senior management and
will increase the demands on our systems and internal controls. In addition, our
success depends in large part upon our ability to attract, develop, motivate and
retain highly-skilled professionals and administrative employees. Our growth
strategy will require an increase in our personnel, particularly skilled systems
engineers and program managers. Qualified professionals are currently in great
demand and there is significant competition for employees with the requisite
skills from other major and boutique consulting firms, research firms,
government contractors, proposal management or business acquisition departments
of major corporations and other professional services firms. There can be no
assurance that we will be able to attract and retain the qualified personnel
necessary to pursue our growth strategy. There can be no assurance that we will
be able to maintain or increase our current rate of growth, effectively manage
our expanding operations or achieve planned growth on a timely or profitable
basis. To the extent that we unable to manage our growth effectively and
efficiently, our business, financial condition and results of operations could
be materially and adversely affected. See "Business--Growth Strategy."
OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE DEFENSE INDUSTRY
Approximately 56.3% of our revenues were derived from Proposal
Management Group services related to government procurement contracts for the
fiscal year ended December 31, 1998. In addition, a significant portion of our
revenues are derived from contracts or subcontracts with the U.S. Government.
For the foreseeable future, we expect that the percentage of revenues
attributable to such contracts will continue to be substantial. U.S. Government
expenditures for defense products may decline in the future with such reductions
having an effect our clients, or, indirectly, on us. A number of trends may
contribute to such a decline, including:
o large weapon systems being replaced with smaller, more precise high
technology systems
o multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter
o threat scenarios evolving away from global conflicts to regional conflicts
o the continuing draw down of U.S. military forces in response to the end of
the Cold War
In the event expenditures for products of the type manufactured by our
clients are reduced and not offset by other new programs or products, there will
be a reduction in the volume of contracts or subcontracts to be bid upon by our
clients and, as a result, a reduction in the volume of proposals managed by us.
Unless offset, such reductions could materially and adversely affect our
business, operating results and financial condition.
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 debarment from the bidding process
for future government contracts could have a material adverse effect on our
business, operating results and financial condition. We rely for the continuance
and expansion of our business on a facility security clearance from the U.S.
Government, and individual security clearances, at various levels, for nearly
all members of staff. There can be no assurance that necessary security
clearances will continue to be made available by the U.S. Government.
In addition, a significant portion of our revenues are derived from
contracts or subcontracts with the U.S. Government. Our services are performed
pursuant to the following types of contracts:
o cost reimbursable
o time-and-materials
o fixed-price contracts and subcontracts
Under fixed-price contracts and time-and-materials contracts, we bear any risk
of increased or unexpected costs that may reduce our profits or cause us to
sustain a loss.
Our U.S. Government contracts and subcontracts are subject to
termination, reduction or modification as a result of changes in the U.S.
Government's requirements or budgetary restrictions, or at the convenience of
the U.S. Government. When we participate as a subcontractor, we are also subject
to the risk that the primary contractor may fail or become unable to perform its
duties and responsibilities as a prime contractor. If a contract were to be
terminated for convenience, we would be reimbursed for allowable costs incurred
up to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed.
Contracts with the U.S. Government are generally complex in nature, and
require us to comply with numerous U.S. Government regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for U.S. Government
property, fire prevention, equipment maintenance, record keeping and accounting,
management qualifications, drug free work place and numerous other matters.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of us or of our
major clients could have a material adverse effect upon us. Our books and
records are subject to annual audit by the Defense Contract Audit Agency, which
can result in adjustments to contract costs and fees. If any costs are
improperly allocated to a contract, such costs are not reimbursable and, if
already reimbursed, will require us to refund such amounts to the government. If
improper or illegal activities are discovered in the course of any audits or
investigations, the contractor may also be subject to various civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
disqualification from doing business with the government. If we become subject
to penalties or sanctions, such penalties or sanctions could have a material
adverse effect on our business, financial condition and results of operations.
WE RELY ON A RELATIVELY LIMITED NUMBER OF CLIENTS
We derive a significant portion of revenues from a relatively limited
number of clients. For example, our revenues from the ten most significant
clients accounted for approximately 76.0%, 90.3%, 98.0%, 92.9% and 91.2% of our
total revenues for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. Three clients, the U.S. Government, Lockheed Martin Corporation,
and Raytheon Company accounted for approximately 57.2% and 33.3% of our total
revenues for the years ended December 31, 1998 and 1997, respectively. Lockheed
Martin Corporation is our single largest commercial client, accounting for
approximately 16.6%, 22.5% and 22.9% of our total revenues for the years ended
December 31, 1998, 1997 and 1996, respectively.
Clients typically retain us for major proposals as needed on an
engagement basis rather than pursuant to long-term contracts, and a client can
usually terminate our engagement at any time without a significant penalty.
Moreover, there can be no assurance that our existing clients will continue to
engage us for additional assignments or do so at the same revenue levels. The
loss of any significant client could materially and adversely affect our
business, financial condition and results of operations. In addition, the level
of our services required by an individual client may diminish over the life of
our relationship with us, and there can be no assurance that we will be
successful in establishing relationships with new clients as this occurs. 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
contract support services market, however, there can be no assurance that we
will be successful in such efforts. The market for services in the contract
support industry is highly competitive, highly fragmented and subject to rapid
change. Such competition is likely to increase in the future. Many of our
competitors have greater personnel, financial, technical and marketing resources
than us. Such competitors include many larger management consulting firms such
as McKinsey & Company, Booz Allen & Hamilton, and Science Applications
International Corp., as well as the consulting arms of major accounting firms.
We also compete with our clients' in-house resources. This source of competition
may increase as consolidation of the aerospace and defense industry creates
larger organizations. In addition, there can be no assurance that we will be
successful in such efforts. In addition, significant further expense for sales
and marketing may require us to promote a major expansion of our services in
such area. If we are unsuccessful in our efforts to penetrate further the market
for such services, or our current 89.6% win rate in the proposal management
business drops significantly, our growth prospects could be materially and
adversely affected.
BECAUSE WE BELIEVE OUR PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF SUCH RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, patent, copyright and trademark laws to protect
our proprietary rights. There can be no assurance that the steps taken by us to
protect our proprietary rights will be adequate to deter misappropriation of
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights.
Although we believe that our services do not infringe on the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property employed in our business, we are subject to
the risk of claims alleging infringement of third-party intellectual property
rights. Any such claims could require us to spend significant sums in
litigation, pay damages, develop non-infringing intellectual property or acquire
licenses to the intellectual property which is the subject of asserted
infringement.
WE RELY HEAVILY UPON OUR KEY EMPLOYEES
Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution of our executive officers, in
particular those of Steven S. Myers, our Chief Executive Officer and Chairman of
the Board and Michael A. Piraino, our President and Chief Operating Officer. We
entered into a two-year employment agreement with Mr. Myers in November 1997,
and a three-year employment agreement with Mr. Piraino in December 1998. The
loss of the services of either of these individuals for any reason could
materially and adversely affect our business, operating results and financial
condition, including our ability to secure and complete engagements. We
currently maintain a key-man life insurance policy in the amount of $2.0 million
on Mr. Myers and we are in the process of obtaining such a policy on Mr.
Piraino. See "Management."
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. 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 29, 1999, the closing sale price has ranged from a low of $8.75 per share
to a high of $31.13 per share. The market price of our common stock could
continue to fluctuate substantially due to a variety of factors, including:
o quarterly fluctuations in results of operations
o adverse circumstances affecting the introduction or market acceptance of
new services offered by us
o announcements of new services by our competitors
o our loss of key employees
o changes in the regulatory environment or market conditions affecting the
defense and aerospace industry
o changes in earnings estimates ratings by analysts
o lack of market liquidity resulting from a relatively small amount of public
stock float
o changes in generally accepted accounting principles
o sales of common stock by existing holders
o the announcement and market acceptance of proposed acquisitions
The market price for our common stock may also be affected by our
ability to meet analysts' expectations, and any failure to meet such
expectations, even if minor, could have a material adverse effect on the market
price of our common stock. In addition, the stock market is subject to extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
to the operating performance of these companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation instigated against us could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on our business, operating results and financial condition.
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. We have performed a review of our internal systems
to identify and resolve the effect of Year 2000 software issues on the integrity
and reliability of our financial and operational systems.
Based on this review, our management believes that our internal systems
are substantially compliant with Year 2000 issues. In addition, we are also
communicating with our principal service providers to ensure Year 2000 issues
will not have an adverse impact on us. If we, and third parties upon which we
rely, are unable to address this issue in a timely manner, it could result in a
material financial risk. In order to assure that this does not occur, we plan to
devote all resources required to resolve any significant Year 2000 issues in a
timely manner.
Additionally, we noted some risk with legacy products marketed and
maintained by us, the vast majority of which have been delivered to the U.S.
Government. Information which we have collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most of our products have been heavily modified by the licensee or by
a third party integrator with whom we have no obligatory agreement.
Consequently, management believes the exposure has been reduced. However, we
will continue to evaluate these products and implement remediation plans, as
deemed appropriate. These products do not affect our internal operations.
OUR PRINCIPAL SHAREHOLDER HAS SIGNIFICANT CONTROL OVER SM&A
Steven S. Myers, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 43.4% 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.
IF WE ISSUE PREFERRED STOCK, THE RIGHTS OF HOLDERS OF COMMON STOCK WILL BE
SUBJECT TO THE RIGHTS OF HOLDERS OF PREFERRED STOCK
Our board of directors has the authority to issue up to ten million
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any vote or action by the shareholders. The rights of the holders of the common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
the preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock. We have no present plan to issue any shares of
preferred stock.
THE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE PRICE
OF OUR PUBLICLY TRADED STOCK
As of March 29, 1999, we had 16,539,584 shares of common stock
outstanding. As of March 29, 1999, we had outstanding options to acquire,
subject to certain vesting requirements, 1,436,293 shares of common stock
pursuant to the 1997 Stock Option Plan. Additionally, in connection with our
acquisition of Space Applications Corporation, options were granted to purchase
an aggregate of 175,906 shares of common stock. In addition, due to certain
price protection provisions relating to the shares of common stock issued in
connection with the acquisition of Space Applications Corporation, we may be
required to issue additional shares of common stock to former shareholders of
Space Applications Corporation depending upon the market price of the common
stock at certain defined "liquidation dates." As of March 29, 1999, we would
have been required to issue 336,817 such additional shares based on the closing
price of common stock on that date and an incremental 72,276 shares for options
converted in the SAC acquisition.
We have registered on a registration statement on Form S-8 all
1,500,000 shares of common stock underlying the options outstanding or issuable
under our 1997 Stock Option Plan. The possibility that substantial amounts of
common stock may be sold in the public market would likely have a material
adverse effect on prevailing market prices of our common stock and could impair
our ability to raise capital through the sale of our equity securities.
We issued 819,743 unregistered shares of common stock in the
acquisition of SAC and 714,839 unregistered share of common stock in the
acquisition of DSA. The common stock has registration demand rights, which were
exercised by the shareholders on February 1, 1999. We expect to file the related
Form S-3 to register such shares in May 1999.
ITEM 2 - PROPERTIES
FACILITIES
The Company occupies its principal executive offices adjacent to the
Orange County (John Wayne) International Airport in Newport Beach, California.
The Company has approximately 19,500 square feet of total office space, divided
into approximately 3,900 square feet for the Company's executive management,
5,800 square feet for administration, 7,800 square feet for the in-house PDC,
and 2,000 square feet is available for growth.
As of March 29, 1999, the Company's other primary offices included an
approximately 59,000 square foot facility in Arlington, Virginia and an
approximately 27,800 square foot facility in Colorado Springs, Colorado. The
lease for the Arlington facility expired on January 31, 1999, and the Company
entered into a new lease for an approximately 96,000 square foot facility in
Vienna, Virginia to replace that office. The Company expects that it will
terminate its month-to-month tenancy of the Arlington office by April 30, 1999.
The Company maintains 4 additional offices, each consisting of 12,000 square
feet or less, throughout the United 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.
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.
HIGH LOW
-------------- ----------------
FISCAL 1998:
First Quarter (commencing January 29, 1998) $ 17 3/4 $ 10 11/16
Second Quarter 21 17 1/4
Third Quarter 31 1/8 17 1/4
Fourth Quarter 19 8 3/4
At March 17, 1999, there were approximately 1700 holders of the
Company's outstanding shares of Common Stock and on March 29, 1999 the closing
sale price of the Common Stock on the Nasdaq National Market was $9.875 per
share.
DIVIDENDS
In 1997, the Company paid "S" corporation dividends of $1.2 million,
$1.9 million, $2.5 million and $4.4 million on April 11, July 1, October 1, and
December 29, respectively. 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 a stock-for-stock reverse
triangular merger. 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 a stock-for-stock and
cash forward triangular merger. 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 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(a), 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.
ITEM 6 - SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1998,
1997, and 1996, and the balance sheet data as of December 1998 and 1997, have
been derived from the Company's audited Consolidated Financial Statements and
Notes thereto. The balance sheet data as of December 31, 1996, 1995, and 1994
and the statement of operations data for the fiscal years ended December 31,
1995 and 1994 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,
1998 (1) 1997 1996 1995 1994 (4)
-------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues $ 68,449 $ 36,962 $ 25,699 $ 20,777 $ 15,220
Cost of revenues 40,483 20,529 14,512 12,313 9,449
-------------------------------------------------------------------
Gross margin 27,966 16,433 11,187 8,464 5,771
Selling, general and administrative
expenses (2) 14,887 8,184 8,274 5,851 4,856
-------------------------------------------------------------------
Operating income 13,079 8,249 2,913 2,613 915
Other income (expense) 1,520 (292) 136 7 (1,701)
-------------------------------------------------------------------
Income (loss) before income 14,599 7,957 3,049 2,620 (786)
taxes
Income tax expense (benefit) (3) 6,072 3,183 1,219 1,048 (314)
-------------------------------------------------------------------
Income or pro forma income (loss)
from continuing operations $ 8,527 $ 4,774 $ 1,830 $ 1,572 $ (472)
Loss from operations of
discontinued business, net of
income tax benefit of $137 (5) (208) - - - -
Loss from disposal of
discontinued business, net of
income tax benefit of $390 (5) (607) - - - -
-------------------------------------------------------------------
Net income or pro forma $ 7,712 $ 4,774 $ 1,830 $ 1,572 $ (472)
net income (loss)
===================================================================
Income or pro forma income (loss)
per share from continuing
operations (6):
Basic $ .55 $ .37 $ .12 $ .11 $ (.03)
Diluted $ .53 $ .37 $ .12 $ .11 $ (.03)
===================================================================
Loss per share from discontinued
operations (6):
Basic $ (.05) - - - -
Diluted $ (.05) - - - -
===================================================================
Net income or pro forma net
income (loss) per share (6):
Basic $ .50 $ .37 $ .12 $ .11 $ (.03)
Diluted $ .48 $ .37 $ .12 $ .11 $ (.03)
===================================================================
Weighted average shares
outstanding (6):
Basic 15,645 12,948 14,893 14,893 14,893
Diluted 15,984 12,948 14,893 14,893 14,893
===================================================================
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 454 $ 150 $ 1,927 $ 269 $ 242
Working capital 15,979 101 (279) 794 95
Total assets 66,324 5,331 11,820 3,034 2,320
Long-term Debt, Including - 7,729 6,250 605 541
Current Portion (7) (8)
Shareholders' equity (deficit)(7) 55,329 (6,328) 755 668 114
(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 and Decision Science Applications
beginning August 1, 1998.
(2) Selling, general and administrative expenses for fiscal 1997, 1996, 1995,
and 1994 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) In 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliated entity that was subsequently dissolved.
(5) 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.
(6) Net income or pro forma net income (loss) per share was computed as
explained in Note 1 to the Consolidated Financial Statements.
(7) In January 1998, the Company sold 2,100,000 shares of Common Stock in the
IPO for proceeds net of Underwriting fees 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.
(8) 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."
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.
OVERVIEW
The Company is the largest proposal management company in the United
States. The Company's proprietary proposal management processes and team of
highly experienced professionals help its clients to achieve a higher
probability of winning the government and commercial contracts that are critical
to their success, and also provides systems engineering and program integration
services to aerospace, communications, and engineering companies.
The May 1998 acquisition of SAC and the August 1998 acquisition of DSA,
which collectively added approximately 450 employees to the Company's workforce,
provides for a greater percentage of the Company's revenues derived from
high-end contract support services. The majority of these services are with the
U.S. Government. SAC provides systems engineering, scientific research, program
management support and technical support to military and civilian space
programs, the intelligence community and the armed services. DSA provides
systems engineering, information systems development, scientific research and
program management support to the U.S. Government, principally the Department of
Defense.
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 (consisting only of normal
recurring 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.
The quarterly information presented for the fiscal year ended December
31, 1997 sets forth pro forma operating results. Pro forma amounts reflect
adjustments for (a) additional compensation to the principal executive officers
(which have historically been included in SG&A expenses) who are to be paid a
maximum of $2,700,000 ($675,000 per quarter) in salaries and bonuses for 1998
under the Executive Compensation Program, and (b) adjustments for Federal and
state income taxes as if the Company had been taxed as a C corporation at an
assumed effective income tax rate of approximately 40%. The pro forma adjustment
in clause (a) above is made to provide a more meaningful comparison of the
Company's SG&A expenses by recasting historical financials to be consistent with
future levels of executive compensation following termination of the Company's S
corporation status.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------------------------------
1998 1997
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net revenues $ 24,560 $ 20,546 $ 12,684 $ 10,659 $ 10,323 $ 10,866 $ 8,544 $ 7,229
Cost of revenues 15,458 12,077 6,960 5,988 5,691 6,181 4,792 3,865
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin 9,102 8,469 5,724 4,671 4,632 4,685 3,752 3,364
Selling, general and
administrative expenses 4,000 5,343 2,667 1,746 2,383 2,476 1,818 1,507
Amortization of goodwill 382 302 86 - - - - -
Cancelled secondary offering
costs 361 - - - - - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income $ 4,359 $ 2,824 $ 2,971 $ 2,925 $ 2,249 $ 2,209 $ 1,934 $ 1,857
========== ========== ========== ========== ========== ========== ========== ==========
Income or pro forma income
from continuing operations $ 2,652 $ 1,699 $ 2,427 $ 1,749 $ 1,263 $ 1,266 $ 1,100 $ 1,145
========= ========== ========== ========== ========== ========== ========== ==========
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 $ 1,894 $ 1,613 $ 2,456 $ 1,749 $ 1,263 $ 1,266 $ 1,100 $ 1,145
Income or pro forma income per
share from Continuing
Operations:
Basic $ .16 $ .10 $ .16 $ .12 $ .10 $ .10 $ .08 $ .09
Diluted $ .16 $ .10 $ .16 $ .12 $ .10 $ .10 $ .08 $ .09
========= ========== ========== ========== ========== ========== ========== ==========
Loss per share from
discontinued Operations:
Basic $ (.05) $ - $ - $ - $ - $ - $ - $ -
Diluted $ (.05) $ - $ - $ - $ - $ - $ - $ -
========= ========== ========== ========== ========== ========== ========== ==========
Net income or pro forma net
income per share:
Basic $ .11 $ .10 $ .16 $ .12 $ .10 $ .10 $ .08 $ .09
Diluted $ .11 $ .10 $ .16 $ .12 $ .10 $ .10 $ .08 $ .09
========= ========== ========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding:
Basic 16,535 16,371 15,297 14,347 12,948 12,948 12,948 12,948
Diluted 16,780 16,794 15,630 14,431 12,948 12,948 12,948 12,948
========= ========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
Gross margin percentage 37.1% 41.2% 45.1% 43.8% 44.9% 43.1% 43.9% 46.5%
Operating income percentage 17.7% 13.7% 23.4% 27.4% 21.8% 20.3% 22.6% 25.7%
Certain amounts in prior quarters have been reclassified to conform to current
presentation.
RESULTS OF OPERATIONS
The following table sets forth certain historical operating results as
a percentage of net revenues for 1998, and certain supplemental pro forma
operating results as a percentage of net revenues for 1997 and 1996.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 59.1% 55.5% 56.5%
Gross margin 40.9% 44.5% 43.5%
Selling, general and administrative expenses 21.8% 22.2% 32.2%
Operating income 19.1% 22.3% 11.3%
Income from continuing operations 12.5% 12.9% 7.1%
Loss from discontinued operations (1.2%) - -
Net income 11.3% 12.9% 7.1%
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
twofold; lower interest expense in the current year based on lower bank
borrowings 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%.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996
NET REVENUES. Net revenues increased $11.3 million, or 44.0% to $37.0
million for fiscal 1997 compared to $25.7 million for fiscal 1996. Net revenues
from proposal management services were $22.1 million for fiscal 1997 compared to
$14.7 million for fiscal 1996, an increase of $7.4 million or 50.3%. This
increase was attributable to an increase in the Company's customer base and the
number of proposals managed as a result of increased marketing efforts. Net
revenues from PDC's were $7.1 million for 1997, compared to $7.5 million for the
prior year, a decrease of $.4 million or 5.3%. This decrease was attributable to
a transfer of certain proposal development center projects from two major
clients to the proposal management segment, and reduced proposal development
center expenditures by another major client that shifted focus to contract
support services on contracts already won. Net revenues from contract support
services for 1997 were $7.8 million compared to $3.5 million for the prior year,
an increase of $4.3 million or 122.9%. The increase in contract support services
revenue was due primarily to the expanding number of clients utilizing the
Company's contract support services in 1997.
GROSS MARGIN. Gross margin increased $5.2 million, or 46.4%, to $16.4
million, for fiscal 1997 as compared to $11.2 million for fiscal 1996. As a
percentage of net revenues, gross profit increased to 44.5% as compared to 43.5%
for the prior year period. The increase in gross profit as a percentage of
revenues was primarily attributable to more favorable labor margins realized on
average from the new employees hired by the Company throughout 1997, and reduced
travel costs as a percentage of net revenues.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $.1 million, or 1.2%, to $8.2 million for
fiscal 1997, as compared to $8.3 million for fiscal 1996. As a percentage of
revenues, selling, general and administrative expenses also decreased to 22.2%
for fiscal 1997, as compared to 32.2% for the prior year period. This decrease
was primarily attributable to reduced aircraft expenses in 1997 compared to
1996. The Company purchased a Hawker aircraft in 1996 for use by the Company and
to be chartered to non-affiliated entities. Due to the investment by
non-employee shareholders in 1996 and the limited use by the Company, the
aircraft was sold to an affiliate of the Company's principal shareholder at
market value. This sale resulted in a gain of $137,000.
OPERATING INCOME Operating income was $8.2 million for 1997 compared to
$2.9 million for 1996, an increase of $5.3 million or 182.8%. As a percentage of
net revenues, operating income increased to 22.3% for 1997 from 11.3% the prior
year. The increase in operating income as a percentage of net revenues was due
primarily to increased revenues and the stabilization of fixed operating costs
in 1997.
OTHER INCOME (EXPENSE). Other expense, net was $.3 million in 1997
compared to other income of $.1 million for 1996. The variance was due to
revenues recognized in 1996 from aircraft charter services from the Company's
Hawker aircraft.
NET INCOME. Net income was $4.8 million for 1997 compared to $1.8
million for 1996, an increase of $3.0 million or 166.7%.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, the Company's net cash provided
by operating activities was $2.5 million, compared to cash flows provided by
operating activities of $7.2 million for the prior year. This change was mainly
due to lower net earnings during the current period resulting from income taxes,
an increase in accounts receivable and costs and estimated earnings in excess of
billings on contracts, and an increase in accrued compensation and payroll
taxes.
Net cash used in investing activities was $14.5 million for the year
ended December 31, 1998, compared to $.2 million for the prior year. The
Company's primary use of funds on investing activities during 1998 was the
acquisition of DSA wherein the purchase consideration included $14.0 million
cash.
Net cash provided by financing activities was $12.3 million for the
year ended December 31, 1998, compared to net cash used of $8.7 million for the
prior year. Financing activities provided funds of $22.4 million to the Company
as a result of the initial public offering. The primary use of cash in 1998 was
for the net repayment of $9.2 million of bank debt as compared to net borrowings
of $7.1 million for 1997. In 1998, distributions to shareholders decreased by
$9.3 million and repurchase of common stock decreased by $5.7 million as
compared to 1997.
The Company believes that funds generated by operations will continue
to provide adequate cash to fund its anticipated operating cash needs for at
least the next twelve months. The Company has a $25.0 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, 1998, the Company had no borrowings outstanding under the credit
agreement. The Company is in discussions with its lender to increase the size of
the credit facility to $50.0 million, under similar covenant restrictions and
other terms.
INFLATION
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible, seeking
to insure that billing rates reflect increases in costs due to inflation.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Among other issues, any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
The Company is in the process of investigating the impact of Year 2000
Issues on its business, including the Company's operational, information and
financial systems (e.g. general ledger; payroll, accounts receivable and
payable, etc.). Similarly, non informational systems, such as communication
systems and security systems are also being reviewed. As systems are evaluated
and assessed, a detailed work plan is being developed to ensure that each area
requiring modification or replacement is adequately and timely addressed. At
this time, the Company's work plan continues to indicate that most significant
areas have been or are scheduled to be remedied by December 1999. Such work plan
includes adequate time for remediation of the area, as well as testing to ensure
the remediation efforts were complete. Additionally, the Company has established
an Executive Oversight Committee to monitor implementation plans and to
determine whether all areas have been assessed and evaluated, resources
identified and remediation completed on a timely basis.
The Company has initiated communications with significant
suppliers and vendors on which the Company relies in an effort to determine the
extent to which the Company's business is vulnerable to the failure by these
third parties' to remediate their Year 2000 problems. While the Company has not
been informed of any material risks associated with Year 2000 Issues of
these entities, there can be no assurance that the computerized information
systems of these third parties will be Year 2000 compliant on a timely basis.
The inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company.
Additionally, management noted some risk with legacy products marketed
and maintained by the Company, the vast majority of which have been delivered to
the U.S. Government. Information collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most products have been heavily modified by the licensee or by a
third party integrator with whom the Company has no obligatory agreement.
Consequently, the Company's exposure has been reduced. However, the Company will
continue to evaluate these products and implement remediation plans, as deemed
appropriate. These products do not affect internal operations.
To date, management estimates that the total cost (including hardware,
software and services) incurred by the Company to evaluate, assess and remedy
Year 2000 Issues, has been approximately $200,000. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to range from $300,000 to $1,500,000. The
Company has expensed all internal costs related to the remediation of Year 2000
Issues.
The cost and the date on which the Company plans to complete the Year 2000
Issue modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Company's total Year 2000 Issue project cost and estimates to complete exclude
the estimated costs and time associated with the impact of a third party's Year
2000 Issue, which are not yet determinable.
It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts are
not completed by either the Company or significant third parties. In such an
event, it is possible that the ability to maintain accurate and complete
financial records of the Company's activities and transactions may be impaired.
Such events, should they occur, may significantly impair the Company's ability
to operate as it does today, creating business interruption, potential loss of
business, and earnings and liquidity difficulties. The Company presently
believes that with current and planned modifications to existing software and
conversions to new software, the risk of potential loss associated with the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material impact on the operations of the Company.
Though the Company's preliminary Year 2000 Issue work plan is believed to be
adequate to achieve compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company is designing
its work plan to address this potential occurrence. First, the work plan is
being designed to ensure that the most critical systems and areas are addressed
first, and in a manner that provides adequate time to remediate and test.
Second, the Company has secured external expert resources to assist in
evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. The Company will continue to monitor and adjust its
contingency plan needs in conjunction with the progress made on the primary work
plan.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities. Application of this
accounting standard is not expected to have a material impact on the Company's
consolidated financial position, results of operations or liquidity.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor-specific objective evidence, as defined.
As a result of certain issues raised in applying SOP 97-2, in March
1998, the AICPA issued a Statement of Position ("SOP") which will delay for one
year the effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1 in March 1998. SOP 98-1 establishes accounting standards
for costs of internal use software and is effective for financial statements for
fiscal years beginning after December 15, 1998. Management does not anticipate
that the adoption of SOP 98-1 will have a material effect on the company's
results of operations.
ITEM 7A
Not applicable.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements of the Company, including
Notes thereto, at December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997, and 1996 follow.
INDEX
Independent Auditors' Report F-1
Consolidated Balance Sheets at
December 31, 1998 and 1997 F-2
Consolidated Statements of Income
for the Years Ended December
31, 1998, 1997 and 1996 F-3
Consolidated Statements of
Shareholders' Equity (Deficiency)
for the Years Ended December
31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial
Statements F-6 - F-21
Schedule II - Valuation and Qualifying
Accounts for the Years Ended
December 31, 1998, 1997 and 1996 F-22
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, 1998 and 1997 and the
related consolidated statements of income, shareholders' equity (deficiency) and
cash flows for each of the years in the three year period ended December 31,
1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 1998, 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
January 25, 1999, except for
Notes 5 and 13 which are
as of March 12, 1999
F-1
SM&A CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands, except share data)
ASSETS 1998 1997
----------------- -----------------
Current assets:
Cash and cash equivalents $ 454 $ 150
Accounts receivable, net of allowance of $460 and $0, respectively 15,326 4,245
Costs and estimated earnings in excess of billings
on contracts in progress, net of allowance of $183 and $0, respectively 7,545 -
Prepaid income taxes 2,085 -
Prepaid expenses and other assets 559 422
----------------- -----------------
Total current assets 25,969 4,817
Property and equipment, net 2,390 378
Notes receivable - affiliates 2,832 -
Other assets 3,346 136
Goodwill, net 31,787 -
----------------- -----------------
$ 66,324 $ 5,331
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Trade accounts payable $ 2,496 $ 333
Accrued compensation and payroll taxes 6,585 3,310
Deferred income taxes 265 -
Other liabilities 644 287
Current portion of long-term debt - 786
----------------- -----------------
Total current liabilities 9,990 4,716
Deferred income taxes 725 -
Other liabilities 280 -
Long-term debt - 6,943
----------------- -----------------
Total liabilities 10,995 11,659
Commitments and contingencies
Shareholders' equity (deficiency):
Common stock, no par value; Authorized 50,000,000 shares.
Shares issued and outstanding 16,522,000 and 12,900,000,
respectively 165 5
Additional paid-in capital 54,164 316
Due from shareholder - (679)
Retained earnings (accumulated deficit) 1,000 (5,970)
----------------- -----------------
Total shareholders' equity (deficiency) 55,329 (6,328)
----------------- -----------------
$ 66,324 $ 5,331
================= =================
See accompanying notes to consolidated financial statements.
F-2
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
(in thousands, except per share data)
1998 1997 1996
----------------- ----------------- -----------------
Net revenues $ 68,449 $ 36,962 $ 25,699
Cost of revenues 40,483 20,529 14,512
----------------- ----------------- -----------------
Gross margin 27,966 16,433 11,187
Selling, general and administrative expenses 13,756 7,177 10,749
Amortization of goodwill and other intangibles 770 - -
Cancelled secondary offering costs 361 - -
----------------- ----------------- -----------------
Operating income 13,079 9,256 438
Other income (expense):
Interest expense (148) (505) (420)
Other, net 1,668 213 556
----------------- ----------------- -----------------
Income before income taxes 14,599 8,964 574
Income tax expense 6,072 147 9
----------------- ----------------- -----------------
Income from continuing operations 8,527 8,817 565
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 $ 7,712 $ 8,817 $ 565
================= ================= =================
Income per share from continuing operations:
Basic $ .55 * *
Diluted $ .53 * *
================= ================= =================
Loss from discontinued operations:
Basic $ (.05) * *
Diluted $ (.05) * *
================= ================= =================
Net income per share:
Basic $ .50 * *
Diluted $ .48 * *
================= ================= =================
Weighted average shares outstanding :
Basic 15,645 * *
Diluted 15,984 * *
================= ================= =================
* See Pro forma Supplemental Data below.
See accompanying notes to consolidated financial statements.
==============================================================================================================================
1997 1996
----------------- -----------------
PRO FORMA SUPPLEMENTAL DATA (UNAUDITED):
Historical income before income taxes $ 8,964 $ 574
Pro forma adjustment to selling, general and administrative
expenses (1,007) 2,475
----------------- -----------------
Pro forma income before income taxes 7,957 3,049
Pro forma income tax expense 3,183 1,219
----------------- -----------------
Pro forma net income $ 4,774 $ 1,830
================= =================
The pro forma adjustments for the years ended December 31, 1997 and 1996 include
the elimination (addition) 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.
Pro forma net income per share:
Basic $ .37 $ .12
Diluted $ .37 $ .12
================= =================
Weighted average shares outstanding :
Basic 12,948 14,893
Diluted 12,948 14,893
================= =================
See accompanying notes to consolidated financial statements.
F-3
SM&A CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
December 31, 1998, 1997 and 1996
(in thousands, except share data)
COMMON STOCK RETAINED TOTAL
-------------------- ADDITIONAL STOCK EARNINGS SHAREHOLDERS'
SHARES PAID-IN SUBSCRIPTION DUE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL NOTE RECEIVABLE SHAREHOLDER DEFICIT) (DEFICIENCY)
------------ ------ ---------- --------------- ----------- ------------ -------------
Balances at December 31, 1995 14,895,000 $ 5 $ 316 $ (205) $ -- $ 552 $ 668
Net income -- -- -- -- -- 565 565
Note due from shareholder -- -- -- -- (632) -- (632)
Collection of stock
subscription receivable -- -- -- 154 -- -- 154
------------ ------ ---------- --------------- ----------- ------------ -------------
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 -- -- -- -- -- (711) (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
============ ====== ========== =============== =========== ============ =============
See accompanying notes to consolidated financial statements.
F-4
SM&A CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,712 $ 8,817 $ 565
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for doubtful accounts 18 (27) 27
Depreciation and amortization 1,432 139 448
Deferred income taxes 588 -- --
Gain on sale of property and equipment (772) (137) --
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable, net (1,249) (581) (1,377)
Costs and estimated earnings in excess of billings (1,873) -- --
Prepaid expenses and other assets 644 (171) (336)
Trade accounts payable (956) (34) 300
Accrued compensation and payroll taxes (1,650) (1,003) 2,619
Income taxes payable (603) -- --
Other liabilities (776) 152 135
--------- --------- ---------
Net cash provided by operating activities 2,515 7,155 2,381
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (12,181) -- --
Payment for 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 (401) (140) (5,890)
Increase in capitalized software costs (445) -- --
Repayments from shareholder 679 (47) (632)
--------- --------- ---------
Net cash used in investing activities (14,505) (187) (6,522)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 22,421 -- --
Borrowings under long-term credit facility 7,553 27,336 6,025
Repayments under long-term credit facility (16,793) (20,228) (380)
Distributions to shareholders (711) (10,041) --
Repurchase of common stock (176) (5,863) --
Decrease in stock subscription note receivable -- 51 154
--------- --------- ---------
Net cash provided by (used in) financing activities
12,294 (8,745) 5,799
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 304 (1,777) 1,658
Cash and cash equivalents at beginning of year 150 1,927 269
--------- --------- ---------
Cash and cash equivalents at end of year 454 150 1,927
========= ========= =========
SUPPLEMENTAL INFORMATION - CASH PAID FOR:
Interest 232 505 421
Income taxes 5,552 100 --
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
In September 1998, the Company sold its approximate 37% ownership interest
in Savant Corporation to an affiliated company. Terms of payment included a
guaranteed note for $1.8 million.
In June 1998, the Company sold an aircraft to an affiliated company. Terms
of payment included a note for $880,000.
In January 1997, the Company sold an aircraft to an affiliated company.
Terms of payment included a note in the amount of $5.630 million.
Detail of businesses acquired in purchase transactions (in thousands):
Total consideration $ 45,767
Less stock consideration issued in acquisitions (31,732)
-------------
Cash consideration paid for acquisitions 14,035
Plus acquisition expenses 1,215
Less cash acquired in acquisitions (3,069)
-------------
Cash paid for acquisitions, net of cash acquired $ 12,181
=============
See accompanying notes to consolidated financial statements.
F-5
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997, and 1996
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SM&A Corporation (formerly Steven Myers & Associates, Inc.) and Subsidiaries
("the Company") was incorporated in California on January 25, 1985. The
Company's primary business is providing proposal management and contract support
services. In January 1998, the Company completed an initial public offering
("IPO") of Common Stock. Subsequently, in May, 1998 the Company acquired Space
Applications Corporation ("SAC"). SAC provides systems engineering, scientific
research, program management support and technical support to military and
civilian space programs, the intelligence community, and the armed services. In
August 1998, the Company acquired Decision-Science Applications, Inc. ("DSA").
DSA provides system engineering, information systems development, scientific
research and program management support to the U.S. Government, principally the
Department of Defense. SAC and DSA are collectively referred to as "the
Acquisitions." On December 31, 1998, SAC merged into DSA. In connection with the
merger, the surviving corporation changed its name to SM&A Corporation (East).
On December 1, 1998, the Company's Board of Directors adopted a plan to
discontinue the operations of Staminet, Inc., a subsidiary of Space Applications
Corporation (see Note 5).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the SM&A
Corporation and its two 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
determined by comparing the carrying value of intangible assets to the estimated
future operating income of the Company on an undiscounted cash-flow basis.
Should the carrying value of goodwill exceed the estimated operating income for
the expected period of benefit, an impairment for the excess would be recorded
at that time. As of December 31, 1998, 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-6
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain product related software development costs after
technological feasibility has been established. These costs are amortized based
on the greater of the straight-line method over the product's remaining
estimated economic life or the ratio of the product's current gross revenues to
the total of the product's current and anticipated future gross revenues.
Accumulated amortization and amortization expense as of and for the year ended
December 31, 1998 were both $199,000. There were no capitalized software costs
prior to 1998.
REVENUE RECOGNITION
PROPOSAL MANAGEMENT SERVICES - The majority of Proposal Management Service
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.
CONTRACT SERVICES - A significant portion of the Company's contract 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 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.
As many contracts extend over a long period of time, revisions in cost and price
estimates during the progress of work have the effect of adjusting earnings in
the current period applicable to performance in prior periods. 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.
SOFTWARE PRODUCTS - 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.
F-7
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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):
1998 1997 1996
---------- ---------- ----------
Basic net income per share:
Weighted average number of shares outstanding 15,645 12,948 14,893
Dilutive effect of stock options 339 - -
---------- ---------- ----------
Diluted net income per share:
Weighted average number of shares outstanding 15,984 12,948 14,893
========== ========== ==========
As of December 31, 1998, there were 114,500 shares considered anti-dilutive.
Such shares were excluded from the reconciliation above.
F-8
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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, the Company may be required to issue additional shares of common stock
to former shareholders of SAC depending upon the market price of the common
stock at certain defined liquidation dates. Conversely, SAC shareholders may be
required to return shares of common stock under these same conditions.
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 shareholders of common stock issued in the Acquisitions have demand
registration rights. The shareholders exercised such demand rights on February
1, 1999 and the Company expects to file for registration with the SEC in May
1999.
F-9
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 2. ACQUISITIONS (CONTINUED)
The Company recorded goodwill of approximately $32.3 million as a result of
these purchase transactions. The allocation of the purchase prices for both
Acquisitions and other purchase accounting adjustments is as follows (in
thousands):
Total purchase price, net $ 45,767
Net assets acquired (14,661)
Acquisition costs 1,215
-------------
Goodwill 32,321
Less accumulated amortization (534)
-------------
Goodwill, net $ 31,787
=============
Unaudited pro forma combined results of operations for the periods ended
December 31, 1998 and 1997 would have been as follows had each of the
acquisitions occurred as of the beginning of the respective periods (in
thousands, except per share data):
1998 1997
------------ ------------
Pro forma net revenues $ 96,442 96,806
============ ============
Pro forma income from continuing operations 6,601 4,840
Pro forma loss from discontinued operations (598) (93)
------------ ------------
Net income $ 6,003 $ 4,747
============ ============
Pro forma income per share from continuing operations:
Basic $.40 $ .31
Diluted $.39 $ .31
============ ============
Pro forma loss per share from discontinued operations:
Basic $ (.03) $ (.01)
Diluted $ (.03) $ (.01)
============ ============
Pro forma net income per share:
Basic $ .37 $ .30
Diluted $ .36 $ .30
============ ============
Weighted average shares outstanding:
Basic 16,373 15,743
Diluted 16,758 15,861
Pro forma adjustments have been applied to reflect the purchases and the
addition of amortization related to intangible assets acquired. The pro
forma adjustments also include the presentation of Staminet, Inc. as a
discontinued operation as of January 1, 1997.
F-10
NOTE 2. ACQUISITIONS (CONTINUED)
For the combined pro forma basic earnings per share figures, it is assumed
that 12,900,000 shares of SM&A common stock were outstanding since January
1, 1997 along with 819,743 shares issued in the SAC acquisition and 714,839
shares issued in the DSA acquisition. The December 31, 1997 combined pro
forma basic earnings per share figures also give effect to 1,261,000 shares
issued in the Company's IPO and factors in the dilutive effect of SM&A
options granted to SAC and DSA employees at acquisition as if such grants
occurred at the beginning of the periods presented. The pro forma results
presented above may not be indicative of future performance.
NOTE 3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
1998 1997
------------ ------------
Computer equipment $ 2,050 $ 305
Furniture and equipment 586 273
Leasehold improvements 367 19
Aircraft -- 891
------------ ------------
3,003 1,488
Less accumulated depreciation and
amortization (613) (1,110)
------------ ------------
$ 2,390 $ 378
============ ============
NOTE 4. DUE FROM AFFILIATES AND RELATED PARTY TRANSACTIONS
In September 1998, Space Applications Corporation, 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. As of December 31, 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, 1998 is $300,000 due from Savant for this consulting project. Terms
of the agreement were commensurate with market rates for similar consulting
services.
F-11
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 4. DUE FROM AFFILIATES AND RELATED PARTY TRANSACTIONS (CONTINUED)
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. The note bears interest at the prime rate (8.5% as of
December 31, 1998), is payable in full no later than June 25, 1999, and is
secured by a first-priority interest in the aircraft. As the aircraft was nearly
fully depreciated at the time of sale, the majority of the proceeds were
recognized as a gain on sale. As of December 31, 1998, the note balance,
including accrued interest, was $916,000.
At December 31, 1997, the principal shareholder of the Company owed $679,000,
including accrued interest, under the terms of a promissory note bearing
interest at 7.3% per annum. All amounts owed on this promissory note were repaid
in January 1998.
In January 1997, the Company sold an aircraft to an affiliate of the Company's
principal shareholder for a sales price of $5,635,000, of which $5,000 was paid
in cash. Concurrent with the sale, the affiliate assumed $5,630,000 of the
Company's long-term notes payable bearing interest of 7.3% and 10.07% per annum.
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 $300,000, $471,000,
and $0 for the years ended December 31, 1998, 1997, and 1996, 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 Space Applications
Corporation, 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, have been 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 are expected to be
fully terminated by March 31, 1999. The net liabilities of Staminet as of
December 31, 1998, which amounted to approximately $239,000, are included in
other current liabilities.
F-12
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 6. DEBT
A summary of debt is provided as follows (in thousands):
1997
---------------
Bank debt $ 7,149
Aircraft loans 517
Capital leases 63
---------------
7,729
Less current portion of
long-term debt (786)
---------------
$ 6,943
===============
In September 1998, the Company entered into a credit agreement with a bank which
provides a $25.0 million revolving line of credit. The credit agreement, which
is secured by a first priority interest in substantially all of the assets of
the Company, matures in September 2001 and has two interest rate options; the
Bank's Prime rate or LIBOR plus 1.25% to 2.0%, based on the ratio of total
indebtedness to earnings before interest and taxes. The credit agreement
requires payment of a fee of 0.25% of the average unused portion of the facility
and contains certain covenants. The most restrictive covenant requires the
Company to maintain consolidated net worth, as defined in the credit agreement,
of at least $35.0 million plus 75% of consolidated quarterly net income. As of
December 31, 1998, the Company was in compliance with, or has obtained waivers,
on all covenants. There were no amounts outstanding under the credit agreement
as of December 31, 1998; however, availability of funds was reduced by a standby
letter of credit in the amount of $1.1 million. The Company is currently in
discussions with its lender to increase the size of the credit facility to $50.0
million, with similar covenant restrictions and other terms.
Bank debt and a capital lease outstanding as of December 31, 1997 were repaid by
the Company in February 1998 with the proceeds received from the initial public
offering.
F-13
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 7. INCOME TAXES
Income tax expense attributable to income from continuing operations consists of
(in thousands):
CURRENT DEFERRED TOTAL
---------- ---------- ----------
Year ended December 31, 1998:
Federal $ 4,470 $ 484 $ $4,954
State 1,014 104 1,118
---------- ---------- ----------
$ 5,484 $ 588 $ 6,072
========== ========== ==========
For the years ended December 31, 1997 and 1996, the Company has provided for
income taxes at the appropriate California statutory state income tax rate
imposed on S Corporations, as follows (in thousands):
1997 1996
------------ -------------
State $ 147 $ 9
============ =============
A reconciliation of the Company's effective tax rate compared to the statutory
Federal tax rate is as follows:
1998
------------------
Income taxes at statutory Federal rates 34.0%
State taxes, net of federal income tax 5.5
benefit
Amortization of non-deductible goodwill 3.7
Other, net (1.6)
------------------
41.6%
==================
F-14
NOTE 7. INCOME TAXES (CONTINUED)
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):
1998
-----------------
Accrued expenses not currently deductible for tax
purposes $ 868
Project reserves 140
Allowance for doubtful accounts 248
Depreciation 52
Change of accounting from cash to accrual method for
acquired subsidiaries (1,023)
Prepaid expenses (164)
Installment sale transaction (439)
Capitalized software (664)
Other (8)
-----------------
Total net deferred income tax liability $ (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 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.
For the years ended December 31, 1997 and 1996, net deferred tax assets were
considered immaterial and did not have a significant impact on the financial
results of the Company.
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. S corporation distributions for the year ended December 31, 1997
amounted to $10.0 million.
F-15
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED)
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.
Included in shareholders' equity as of December 31, 1997, was $679,000 due from
an officer and principal shareholder of the Company. The balance was repaid in
full in January 1998.
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 1,500,000 shares of the Company's common stock
(see Note 13). 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 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 FAIR
WEIGHTED VALUE OF
AVERAGE OPTIONS
NUMBER OF SHARES EXERCISE PRICE GRANTED
---------------- -------------- ------------
Outstanding as of December 31, 1997 - -
Granted 1,515,700 $ 12.86 $ 7.41
Cancelled (58,500) (13.14)
Options converted in acquisition 175,906 5.67
---------------- -------------
Outstanding as of December 31, 1998 1,633,106 $ 11.52
================ =============
F-16
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 9. STOCK OPTION PLAN AND EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
options:
WEIGHTED WEIGHTED
NUMBER OF WEIGHED AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISEABLE PRICE
- ------------------ ----------- ---------------- -------- ------------ --------
$ 3.42-- $7.95 175,906 5.0 $ 5.67 - -
$ 11.75 -- $14.31 1,237,900 9.5 12.07 - -
$ 15.89 -- $19.13 219,300 9.6 17.34 - -
- ------------------ ----------- ---------------- -------- ------------ --------
$ 3.42 -- $19.13 1,633,106 9.5 $ 11.52 - -
================== =========== ================ ======== ============ =========
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: expected
life of 6.25 years; stock volatility of 51.76%; risk-free interest rate of
6.00%; and no dividends during the expected term. 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 1998 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would have
been $6.9 million, or $0.44 per basic share and $0.43 per diluted share.
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.
SAC and DSA, the acquired subsidiaries, each maintain 401(k) and profit sharing
plans for their employees (see Note 13). Contributions were made to the Plan by
both the employees and the Company. The Company's expense under these plans was
$479,000 for the year ended December 31, 1998.
F-17
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
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, 1998 are summarized as follows
(in thousands):
Year ending December 31:
1999 $ 4,903
2000 5,956
2001 5,675
2002 5,448
2003 5,537
Thereafter 24,845
-------------------
Total Future Minimum Lease Payments $ 52,364
===================
Rent expense amounted to $1,700,000, $392,000 and $184,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
NOTE 11. SEGMENT REPORTING DATA
SM&A Corporation classifies its operations into three lines of business, each
offering a distinct set of services. These lines of business are summarized as
follows; PROPOSAL MANAGEMENT, which involves assisting clients with the
procurement of government and commercial programs; SYSTEMS SOLUTIONS, which
includes systems engineering, scientific research, program management and
technical support services, and INFORMATION TECHNOLOGY SOLUTIONS, which focuses
on information systems development
The Company evaluates performance based on several factors, of which 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.
F-18
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 11. SEGMENT REPORTING DATA (CONTINUED)
Information as to the operations of the lines of business is set forth below.
The information presented for the years ended December 31, 1997 and 1996
represents pro forma supplemental data as described on the statements of income.
1998 1997 1996
----------- ----------- -----------
NET REVENUES:
Proposal Management Group $ 39,594(1) $ 36,962(1) $ 25,699(1)
Systems Solutions Group 20,327(1) - -
Information Technology Solutions Group 8,528 - -
----------- ----------- -----------
Total net revenues $ 68,449 $ 36,962 $ 25,699
=========== =========== ===========
OPERATING INCOME (LOSS):
Proposal Management Group $ 15,730(1) $ 8,249(1) $ 2,913(1)
Systems Solutions Group 6,259(1) - -
Information Technology Solutions Group 3,015 - -
Executive Group (11,925) - -
----------- ----------- -----------
Total operating income $ 13,079 $ 8,249 $ 2,913
=========== =========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Proposal Management Group $ 8,990(1) $ 4,774(1) $ 1,830(1)
Systems Solutions Group 3,936(1) - -
Information Technology Solutions Group 1,896 - -
Executive Group (6,295) - -
----------- ----------- -----------
Total income from continuing operations $ 8,527 $ 4,774 $ 1,830
=========== =========== ===========
ASSETS:
Proposal Management Group $ 8,906 $ 5,331 $ 11,820
Systems Solutions Group 8,654 - -
Information Technology Solutions Group 9,492 - -
Executive Group 39,272 - -
----------- ----------- -----------
Total assets $ 66,324 $ 5,331 $ 11,820
=========== =========== ===========
(1) For the year ended December 31, 1998, net revenues, operating income, and
income from continuing operations of the Proposal Management Group would
have been $41,594,000 $16,346,000 and $9,377,000, respectively, had certain
projects not been transferred to the Systems Solutions Group.
Correspondingly, net revenues, operating income, and income from continuing
operations of the Systems Solutions Group would have been $18,327,000,
$5,643,000 and $3,549,000, respectively. Amounts shown for the years
ended December 31, 1997 and 1996 have not been adjusted for this
presentation.
F-19
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
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 74.5% of total revenue for fiscal 1998. 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,
---------------------------------------
1998 1997 1996
---------------------------------------
U.S. Government 25% -% -%
Lockheed Martin Corporation 17 22 23
Raytheon Systems Company 16 11 7
The Boeing Company 8 10 10
Motorola Corporation 6 13 18
Litton Systems, Inc. 5 15 6
Hughes Space & Communications Company - 10 19
NOTE 13. SUBSEQUENT EVENTS
In January 1999, the Board of Directors approved the allocation of an additional
1,000,000 shares of common stock for grant under the 1997 Stock Option Plan.
This allocation is subject to shareholder approval at the Annual Shareholders'
meeting in May 1999 (Note 9).
In January 1999, the Board of Directors approved the adoption of 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 are limited to 15% of the employee's annual compensation. The
adoption of the ESP Plan and the related allocation of shares are subject to
shareholder approval at the Annual Shareholders' meeting in May 1999.
In March 1999, the defined contribution pension plans of Steven Myers &
Associates, Space Applications Corporation, and Decision-Science Applications,
Inc. 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 percent of eligible compensation with Company matching and profit sharing
contributions for certain classes of employees (Note 9).
F-20
SM&A CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 1998, 1997, and 1996
NOTE 13. SUBSEQUENT EVENTS (CONTINUED)
In March 1999, the planned sale of Staminet to its management team was
terminated. Accordingly, Staminet was liquidated. Additional severance, facility
lease termination costs, and other shut down expenses were accrued for as of
December 31, 1998 (Note 5).
F-21
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
-------------------------------------------------------------------
1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ - $ 60 $ 625 $ (42) $ 643
===================================================================
1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 27 $ - $ - $ (27) $ -
===================================================================
1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ - $ 27 $ - $ - $ 27
===================================================================
(1) REPRESENTS AMOUNTS ACQUIRED IN ACQUISITIONS.
F-22
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 1999 Annual Meeting of
Shareholders involving, among other things, the election of directors. Such
Proxy statement is being filed with the Securities and Exchange Commission
concurrently with 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 1999 Annual Meeting of
Shareholders involving, among other things, the election of directors. Such
Proxy statement is being filed with the Securities and Exchange Commission
concurrently with 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 1999 Annual Meeting of Shareholders involving, among other things, the
election of directors. Such Proxy statement is being filed with the Securities
and Exchange Commission concurrently with 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 1999 Annual
Meeting of Shareholders involving, among other things, the election of
directors. Such Proxy statement is being filed with the Securities and Exchange
Commission concurrently with this Form 10-K.
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, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficiency) for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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, 1998, 1997 and 1996.
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.
On October 23, 1998, the Company filed with the Securities and
Exchange Commission, an amended interim report on Form 8-K/A concerning
the Company's acquisition of Decision-Science Applications, Inc.
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
By: /s/ Steven S. Myers
-----------------------------------------
Steven S. Myers, Chief Executive Officer
Dated: March 26, 1999
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
- -------------------------------------
Steven S. Myers Chairman of the Board and Chief
Executive Officer (Principal Executive
Officer) March 26, 1999
/s/ Michael A. Piraino
- -------------------------------------
Michael A. Piraino President, Chief Operating Officer, and
Director March 26, 1999
/s/ Steven R. Mast
- -------------------------------------
Steven R. Mast Senior Vice President, Chief Financial
Officer and Secretary (Principal Financial
Officer and Principal Accounting Officer) March 29, 1999
/s/ J. Christopher Lewis
- -------------------------------------
J. Christopher Lewis Director March 26, 1999
/s/ James R. Mellor
- -------------------------------------
James R. Mellor Director March 27, 1999
/s/ Malcolm R. Currie
- -------------------------------------
Malcolm R. Currie Director March 27, 1999
EXHIBIT INDEX
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
(incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K filed on June
4, 1998).
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
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on
August 21 1998).
2.3 Agreement of Merger dated November 24, 1998 between
Space Applications Corporation and SM&A Corporation
(East), effective date December 31, 1998.*
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 1997 Stock Option Plan and related form of Stock
Option Agreement (filed on January 5, 1998 as Exhibit
10.1 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.2 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.
333-4075) and incorporated herein by reference).
10.3 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).
10.4 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).
10.5 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).
10.6 Employment Agreement with Kenneth W. Colbaugh (filed
on November 21, 1997 as Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein
by reference).
10.7 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. 333-4075) and incorporated herein
by reference).
10.8 Executive Bonus Plan (filed on November 21, 1997 as
Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075)
and incorporated herein by reference).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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.*
10.17 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).
10.18 Note dated June 25, 1998 for sale of Turbo Commander
aircraft.*
10.19 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.*
10.20 Promissory Note dated September 11, 1998 executed by
the Registrant in favor of Mellon Bank in the
principal amount of $15,000,000.*
10.21 Promissory Note dated September 11, 1998 executed by
the Registrant in favor of Imperial Bank in the
principal amount of $10,000,000.*
10.22 General Continuing Guaranty dated September 11, 1998
of Space Applications Corporation securing
obligations of the Registrant under promissory note
in favor of Mellon Bank.*
10.23 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.*
10.24 Security Agreement dated September 11, 1998 between
Mellon Bank, N.A. and Space Applications
Corporation.*
10.25 Security Agreement dated September 11, 1998 between
Mellon Bank, N.A. and Decision-Science Applications,
Inc.*
10.26 Common Stock Purchase Agreement dated September 30,
1998 between Space Applications Corporation and
Summit Aviation.*
10.27 Employment Agreement dated December 10, 1998 between
the Registrant and Michael A. Piraino.*
10.28 Vienna Office Lease; Multitenant Office Deed of Lease
Agreement between Opus East, L.L.C., as Landlord, and
SM&A Corporation, as Tenant.*
21 Subsidiaries of the Registrant*
23 Consent of KPMG LLP*
27 Financial Statement Schedule*
- ---------------------
* Filed herewith.
- --------