SOFTWARE ANALYSIS & MANAGEMENT, INC.
April 3, 1998
CONTENTS
Independent Auditor's Report 1
Balance Sheet 2
Statement of Income and Retained Earnings 3
Statement of Cash Flows 4
Notes to the Financial Statements 5 - 10
Independent Auditor's Report on
Additional Information 11
Schedule of Overhead 12
General and Administrative Expenses 13
INDEPENDENT AUDITOR'S REPORT
To Software Analysis & Management, Inc., the Board of Directors,
and Stockholders:
We have audited the balance sheet of Software Analysis & Management, Inc. as of
April 3, 1998 and the related statements of income and retained earnings and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the April 3, 1998 financial statements referred to above
presents fairly, in all material respects, the financial position of Software
Analysis & Management, Inc. as of April 3, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
September 9, 1998
Placentia, California /s/McCullough, Ray & Bryan
1
SOFTWARE ANALYSIS & MANAGEMENT, INC.
BALANCE SHEET
APRIL 3, 1998
ASSETS
CURRENT ASSETS
Cash $ 34,669
Certificate of deposit 101,000
Accounts receivable (net of
allowance for doubtful accounts of $33,600) 2,642,877
Employee advances 93,101
Prepaid expenses 45,856
2,917,503
PROPERTIES, at cost 452,242
Less: Accumulated depreciation ( 124,552)
- -------
327,690
OTHER ASSETS
Deposits 32,990
TOTAL ASSETS $ 3,278,183
= =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 83,387
Lines of credit 1,260,000
Notes payable - current portion 76,748
Notes payable - affiliate 157,500
Leases payable - current portion 61,133
Accounts payable 576,663
Accrued expenses 332,644
Income taxes payable 20,746
Deferred income taxes 116,391
-------
2,685,212
LONG-TERM LIABILITIES
Notes payable 183,333
Leases payable 12,521
195,854
TOTAL LIABILITIES 2,881,066
STOCKHOLDERS' EQUITY
Common stock, 100,000 shares 43,539
authorized; 51,000 issued and
outstanding
Retained earnings 353,578
397,117
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,278,183
= =========
See accompanying notes.
2
SOFTWARE ANALYSIS & MANAGEMENT, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED APRIL 3, 1998
SALES $ 19,968,977 100.0%
- ---------- -----
COST OF SALES
Labor costs 13,915,761 69.7
Overhead 2,692,626 13.5
--------- ----
16,608,387 83.2
---------- ----
GROSS PROFITS 3,360,590 16.8
GENERAL & ADMINISTRATIVE EXPENSES 3,223,555 16.1
--------- ----
OPERATING INCOME 137,035 0.7
OTHER INCOME/(EXPENSE)
Miscellaneous income 10,000 0.1
Interest expense ( 127,748 ) ( 0.6)
----------------- - ---
( 117,748 ) ( 0.6)
----------------- - ---
NET INCOME BEFORE
INCOME TAXES 19,287 0.1
------ ---
INCOME TAXES
Current 20,746 0.1
Deferred ( 6,343 ) 1.1
- ----- ---
14,403 0.1
------ ---
NET INCOME 4,884 0.0%
----- ===
RETAINED EARNINGS, BEGINNING 348,694
RETAINED EARNINGS, ENDING $ 353,578
= =======
See accompanying notes.
3
SOFTWARE ANALYSIS & MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 3, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,884
- -----
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 60,247
Change in current assets & liabilities:
(Increase) decrease:
Accounts receivable ( 953,059)
Employee advances ( 26,466)
Prepaid expenses ( 22,387)
Deposits ( 7,195)
Increase (decrease):
Accounts receivable 421,263
Accrued expenses ( 151,017)
Income taxes payable 18,946
Deferred taxes payable ( 6,343)
- -----
Total adjustments ( 666,011)
- -------
NET CASH USED BY OPERATING ACTIVITIES ( 661,127)
- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for purchase of property ( 158,121)
- -------
NET CASH USED BY INVESTING ACTIVITIES ( 158,121)
- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 731,606
Proceeds from line of credit 6,576,500
Principal payments on line of credit ( 6,086,500)
Principal payments on long-term debt ( 380,762)
- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 840,844
-------
NET INCREASE IN CASH 21,596
CASH, BEGINNING 114,073
CASH, ENDING $ 135,669
= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 127,552
= =======
Income taxes $ 1,432
= =====
See accompanying notes.
4
SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
Software Analysis & Management, Inc., was established in 1985 under the laws of
the State of California. Their primary business purpose is to provide consulting
services to and perform subcontracting work for many different companies and
government organizations. The Company's major customers are in the aerospace and
aviation industries. They have five locations throughout the United States.
ACCOUNTS RECEIVABLE
The Company extends credit to its customers in the normal course of business and
performs ongoing evaluations of its customers, maintaining allowances for
potential credit losses which, when realized, have been within management's
expectations. At the balance sheet date 85% of total receivables are within five
major customers.
FISCAL YEAR
The Company operates on a 52-53 week fiscal year, which ends on the Friday
closest to March 31. The fiscal year ended April 3, 1998 consisted of
fifty-three weeks.
PROPERTIES
Properties and equipment are carried at cost. Depreciation is reported using the
modified accelerated cost recovery system guidelines for assets acquired after
December 31, 1986 for financial reporting, Federal, and State income tax
purposes. The assets have estimated useful lives that range from five to seven
years.
5
SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
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.
INCOME TAXES
For tax purposes, the Company was forced to change from the cash method to the
accrual method of accounting. Over the four years ending in 1997, 1998, 1999,
2000, the Company will recognize the deferred income generated by using the cash
method. The annual amount will be $146,097. Due to this timing difference,
deferred income taxes have been reported in these financial statements. This
amount represents the estimated income tax effects of the timing differences in
reporting income and expenses for income tax purposes and financial statement
purposes.
NOTE 2 - PROPERTIES
Properties consist of:
Computer equipment $161,176
Automobiles 233,082
Furniture & fixtures 57,984
452,242
Less: accum deprec. (124,552)
$327,690
Depreciation expense for years ended April 3, 1998 was $60,247.
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SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 3 - LINES OF CREDIT
There are two line of credit agreements with Sanwa Bank. The terms for both
agreements are as follows:
A secured line of credit in the amount of $250,000, maturing on July 31, 1998,
with interest due monthly at a rate of 2.0% over the standard certificate
deposit rate. It is renewable, based on an annual review, and is secured by all
the Company's assets and each of the three stockholders have given a personal
guarantee for $50,000 and pledged certificate of deposit of $100,000. The amount
due at the balance sheet date is $250,000.
An unsecured line of credit in the amount of $1,750,000 is also available for
working capital, maturing on October 31, 1998, with interest due monthly at the
Sanwa Reference Rate plus .75%. There are some restrictive covenants pertaining
to this line that include maintaining a current ratio of 1.10 : 1.00, a net
worth balance of $500,000, and a maximum debt to effective tangible net worth
ratio of not more than 3.00 : 1.00. The amount due at the balance sheet date is
$1,010,000. The company is in violation of the restrictive covenants for this
line of credit.
NOTE 4 - NOTES PAYABLE
Notes payable consists of the following:
Note payable - secured by automobile, at 3.9%, payable
in monthly installments of $732, including interest,
maturing March, 1999. The entire balance is considered
current. $ 8,572
Note payable - secured by automobile, at 3.9%, payable
in monthly installments of $732, including interest,
maturing March, 1999. The entire balance is considered
current. 8,572
Note payable - secured by automobile, at 7.9%, payable
in monthly installments of $778, including interest,
maturing April, 1999. The entire balance is considered
current. 9,604
Note payable - affiliate - payable to LIL Enterprises, a related party, with
interest accruing at a rate of 10% per annum. The entire balance is due upon
demand and therefore considered current. 157,500
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SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 4 - NOTES PAYABLE (con't)
Note payable - guaranteed by all stockholders, payable in monthly payments of
$4,167, with an interest rate of 2% over the prime interest rate. This note is
payable to the California Economic Development Lending Initiative (CEDLI) for a
term of five years maturing November 1, 1998. This note is subordinate to all
debt owed to Sanwa Bank. The restrictive covenants include a minimum debt
service coverage ratio of 1.10, minimum tangible net worth of $500,000. The
entire balance is considered current. The company has violated the minimum debt
service coverage
ratio. 233,333
-------
$417,581
========
NOTE 5 - CAPITAL LEASES
The Company has a lease agreement with LIL Enterprises, a related party secured
by computer hardware purchased in March, 1997. The lease qualifies as a capital
lease. The lease is an 18-month term with an interest a rate of 26%. The balance
at April 3, 1998 is $42,967. The entire balance is considered current.
The Company has a lease agreement with NTFC secured by equipment purchased in
November, 1997. The lease qualifies as a capital lease. The lease is a two-year
term with an interest rate of 21.4%. The monthly payment including principal and
interest amounts to $1,919. The balance at April 3, 1998 is $30,687 with $18,166
being current.
NOTE 6 - CONCENTRATIONS
For the year ended April 3, 1998, the Company earned revenues from three major
customers that amounted to approximately 80% of the total sales.
8
SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 7 - LEASE COMMITMENTS AND RENT EXPENSE
The company leases two offices located in Orange and Pasadena, California under
two long-term leases expiring April 30, 2001 and March 31, 2002, respectively.
Total rent expense for the year ended April 3, 1998 was $318,385.
The following is a schedule by years of future minimum rental payments required
under the operating lease agreements:
Year Ended Leases
1999 $ 293,163
2000 300,267
2001 262,421
2002 and
thereafter 263,676
$1,119,527
NOTE 8 - INCOME TAX EXPENSE
The Company accounts for income taxes under the provisions of the Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes." This
provision utilizes the asset and liability method which recognizes deferred tax
assets and liabilities determined by the differences between financial statement
and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Income tax expense for the years ended April 3, 1998 is as follows:
Current - Federal $ 5,861
State 14,885
------
20,746
Deferred (6,343)
------
$ 14,403
========
The deferred liabilities are arising from:
Temporary differences-Cash basis adjustment $116,391
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SOFTWARE ANALYSIS & MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
APRIL 3, 1998
NOTE 9 -RETIREMENT PLAN
The Company provides the opportunity for employees to defer
compensation up to $9,500 in a retirement plan under the provisions
of a IRS 401(k) Plan. This is a defined contribution plan. There
are no contributions made by the Company.
NOTE 10 - SUBSEQUENT EVENTS
The stockholders are negotiating to sell their stock to RCM
Technologies, Inc. effective July 14, 1998.
10