1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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STEVEN MYERS & ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0080929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4695 MACARTHUR COURT, EIGHTH FLOOR, NEWPORT BEACH, CA 92660
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(Address of principal executive offices)
(714) 975-1550
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes__X__ No_____
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Outstanding at
Class March 31, 1998
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Common Stock 15,000,000
2
STEVEN MYERS & ASSOCIATES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 (unaudited) and December 31,
1997
Statements of Earnings for the three months ended March 31, 1998
and 1997 (unaudited)
Statements of Cash Flows for the three months ended March 31,
1998 and 1997 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities; Use of Proceeds from Registered Securities
Item 6. Exhibits and Reports on Form 8-K
3
STEVEN MYERS & ASSOCIATES, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, 1998 DECEMBER 31, 1997
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ASSETS
Current assets:
Cash $ 17,516 $ 150
Accounts receivable, net of allowance of $10 and $0
at March 31, 1998 and December 31, 1997, respectively 5,917 4,245
Other accounts receivable -- 8
Prepaid expenses and other current assets 342 414
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Total current assets 23,775 4,817
Property and equipment, net 345 378
Other assets 55 136
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Total assets $ 24,175 $ 5,331
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 97 $ 280
Current portion of long-term debt 11 786
Accrued salaries, wages and payroll taxes 3,972 2,574
Accrued bonus 811 736
Income taxes payable 1,042 53
Other liabilities 209 287
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Total current liabilities 6,142 4,716
Deferred tax liability 161 --
Long-term debt, excluding current portion 8 6,943
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Total liabilities 6,311 11,659
Stockholders' equity (deficit):
Common stock, no par value 150 5
Additional paid-in capital 22,645 316
Due from stockholder -- (679)
Accumulated deficit (4,931) (5,970)
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Total stockholders' equity (deficit) 17,864 (6,328)
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Total liabilities and stockholders' equity (deficit) $ 24,175 $ 5,331
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4
STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
MARCH 31, 1998 MARCH 31, 1997
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Net revenues $ 10,659 $ 7,229
Cost of revenues 5,988 3,865
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Gross profit 4,671 3,364
Selling, general and administrative expenses 1,746 1,181
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Operating income 2,925 2,183
Other (income) expense:
Interest expense 70 124
Other income , net (139) (174)
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Earnings before income taxes 2,994 2,233
Income tax expense 1,245 0
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Net earnings $ 1,749 $ 2,233
======== ========
Earnings per common share:
Basic $ 0.12
Diluted 0.12
========
Weighted average common shares used in computing
per share amounts:
Basic 14,347
Diluted 14,431
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PRO FORMA SUPPLEMENTAL DATA (UNAUDITED):
Earnings before income taxes, as reported $ 2,994 $ 2,233
Pro forma adjustment to selling, general, and
administrative expenses -- 326
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Pro forma earnings before income tax expense 2,994 1,907
Pro forma income tax expense 1,245 762
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Pro forma net earnings $ 1,749 $ 1,145
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Pro forma earnings per common share:
Basic $ 0.12 $ 0.09
Diluted 0.12 0.09
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Weighted average common shares used in computing pro
forma per share amounts:
Basic 14,347 12,948
Diluted 14,431 12,948
======== ========
The pro forma adjustments include the elimination of salaries and
bonuses paid to three principal executive officers (which have historically been
included in selling, general, and administrative expenses) in excess or less
than $2.7 million ($675,000 per quarter) in the aggregate (the maximum salaries
and bonuses payable for 1998 under the Executive Compensation Program) and
adjustments for Federal and state income tzxes as if the Company had been taxed
as a C corporation rather than an S corporation.
Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and B common stock of the Company into an
aggregate of 12.9 million shares of common stock effected upon the consummation
of the initial public offering.
Supplemental earnings per share has been computed by dividing
supplemental net income by the weighted average number of shares of common stock
outstanding during the period. Supplemental net income per share information is
calculated under Statement of Financial Accounting Standard No. 128 "Earnings
per Share."
Earnings per common share is not presented for 1997 because it is not
meaningful.
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STEVEN MYERS & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, 1998 MARCH 31, 1997
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Cash flows from operating activities:
Net Earnings $ 1,749 $ 2,233
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for doubtful accounts 10 --
Depreciation and amortization 44 29
Gain on sale of fixed assets -- (137)
Changes in assets and liabilities:
Accounts receivable (1,682) (471)
Prepaid expenses and other current assets 80 (211)
Other assets 81 2
Accounts payable (183) (261)
Accrued salaries, wages, and payroll taxes 1,398 (1,454)
Accrued bonuses 75 150
Income taxes payable 989 --
Deferred tax liability 161 --
Accrued dividends payable -- 1,230
Other liabilities (78) (58)
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Net cash provided by operating activities 2,644 1,052
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Cash flows from investing activities:
Net purchases of property and equipment (11) --
Net proceeds from sale of property and equipment -- 6
Repayment from stockholder 679 --
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Net cash provided by investing activities 668 6
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Cash flows from financing activities:
Proceeds from issuance of common stock 22,474 51
Advances (repayments) of long-term debt (7,710) 4,990
Distribution to shareholders (710) (1,230)
Common stock repurchase -- (5,863)
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Net cash provided by (used in) financing activities 14,054 (2,052)
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Net increase (decrease) in cash 17,366 (994)
Cash at beginning of period 150 1,927
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Cash at end of period $ 17,516 $ 933
======== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $ 147 $ 38
Income taxes 94 8
======== ========
Supplemental schedule of noncash investing activity:
In January 1997, the Company sold the Hawker Jet to an affiliated company
for $5,635,000. Terms of payment included $5,000 cash and transfer of the
related long-term notes payable of $5,630,000.
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STEVEN MYERS & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Steven Myers
and Associates, Inc. (the "Company") have been prepared pursuant to the rules of
the Securities and Exchange Commission for quarterly Reports on Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. The information furnished herein includes all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of results for these
interim periods.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1998.
The financial statements for the three months ended March 31, 1998
include information from January 1, 1998 through January 28, 1998, during which
the Company was an S corporation. Prior to converting from an S corporation to a
C corporation, the Company did not pay Federal income taxes and had 12,900,000
shares of common stock outstanding.
In addition, these financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto for the year
ended December 31, 1997. Supplementary information which includes the historical
pro-forma financial statements of the Company prior to its initial public
offering ("IPO") is included in Form S-1 filed by the Company with the
Securities and Exchange Commission on November 21, 1997 as amended (the "S-1").
Due to the Company converting from an S corporation to a C corporation, the
information found in the S-1 filing includes restated historical income
statement information to allow for better and fairer comparisons going forward.
These restatements reflect the elimination of salaries and bonuses paid to three
principal executive officers (which have historically been included in selling,
general, and administrative expenses) in excess or less than $2.7 million
($675,000 per quarter) in the aggregate (the maximum salaries and bonuses
payable for 1998 under the Company's Executive Compensation Program) and
adjustments for Federal and state income taxes as if the Company had been taxed
as a C corporation rather than an S corporation during such period. Income tax
expense for the first quarter of 1998 includes approximately one month in which
the Company was still an S corporation and was not required to pay Federal and
most state income taxes and two months in which the Company was a C corporation
and was required to pay federal and state taxes.
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
NOTE 2. INITIAL PUBLIC OFFERING
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, 1,050,000 were sold by existing shareholders and 2,100,000 were sold by the
Company, generating $23,436,000 in proceeds to the Company, net of offering
expenses of $1,764,000.
The Company made cash payments of S corporation distributions (the "S
Corporation Dividend") to shareholders totaling $710,000. The S Corporation
dividend represented the undistributed earnings of the Company taxed or taxable
to the shareholders through the date of the IPO. The dividends were accrued
January 28, 1998 and paid February 5, 1998. Cash provided from the operating
activities of the Company prior to the IPO was used to fund the dividend
payment.
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NOTE 3. INCOME TAX PROVISION AND PRO FORMA FINANCIAL DATA
Prior to the IPO, 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.
Historical pro forma figures and pro forma net income per share figures
are presented as if the Company had been taxed as a C corporation for the
periods presented. The pro forma tax provision has been calculated assuming a
40% combined effective tax rate.
In January 1998, the Company still operated as an S corporation; thus,
the income statement presentation for the three months ending March 31, 1998,
includes only appropriate federal and state income taxes for the period in which
the Company has been a C corporation. Upon termination of the S corporation
status on January 28, 1998, the Company recorded a 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.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET INCOME PER SHARE
Basic net income per common share is computed based on weighted average
common shares outstanding during the period. Diluted net income per common share
is computed based on weighted average common shares and common equivalent shares
(stock options) outstanding during the period. The Company currently has
15,000,000 shares of common stock outstanding. As of December 31, 1997, there
were 12,900,000 shares of common stock outstanding.
Pursuant to Statement of Financial Accounting Standards No. 128, basic
and diluted earnings per share have been included. Basic earnings per share is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period and shares repurchased during the period shall be
weighted for the portion of the period that they were outstanding. Diluted
earnings per share is consistent with that of basis earnings per share while
giving effect to all dilutive potential common shares that were outstanding
during the period. The Company's diluted earnings per share is calculated by
arriving at basic earnings per share and factoring in the dilutive effect of the
790,000 options issued in January 1998 under the Company's 1997 Stock Option
Plan (using the treasury stock method and the initial public offering price per
share). The dilutive effect of the options was insignificant. Basic earnings per
common share is equal to diluted earnings per common share.
8
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FACTORS CONCERNING FORWARD-LOOKING STATEMENTS
From time to time, Steven Myers & Associates, Inc. (the "Company", or
"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.
Dependence on Defense Industry. A substantial portion of the Company's revenues
are derived from proposal management services, including proposal development
centers, related to government procurement contracts. For the foreseeable
future, the Company expects that the percentage of its revenues attributable to
such contracts will continue to be substantial. In the future, U.S. Government
expenditures for defense products may decline with such reductions having an
effect on the Company's clients, or, indirectly, the Company. A number of trends
may contribute to such a decline, including: (i) large weapon systems being
replaced with smaller, more precise high technology systems, (ii) multiple
procurements for similar weapons being consolidated into joint service
procurements, (iii) threat scenarios transitioning from global conflicts to
regional conflicts, and (iv) 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 the Company's 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 the Company's clients and, as a
result, a reduction in the volume of proposals managed by the Company. Unless
offset, such reductions could materially and adversely affect the Company's
business, operating results and financial condition.
Risks of Government Contracting. The Company, through its government-contractor
clients, is subject to risks associated with compliance with governmental
regulations. 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 the Company's business, operating results and financial
condition. The Company relies for the continuance and expansion of its business
on a facility security clearance from the U.S. Government, and individual
security clearances, at various levels, for nearly all members of its staff.
There can be no assurance that necessary security clearances will continue to be
made available by the U.S. Government.
9
Client Concentration. SM&A derives a significant portion of its revenues from a
relatively limited number of clients. Clients typically retain the Company for
major proposals as needed on an engagement basis rather than pursuant to
long-term contracts, and a client can usually terminate an engagement at any
time without a significant penalty. Moreover, there can be no assurance that the
Company's existing clients will continue to engage the Company for additional
assignments or do so at the same revenue levels. The loss of any significant
client could materially and adversely affect the Company's business, financial
condition and results of operations. In addition, the level of the Company's
services required by an individual client may diminish over the life of its
relationship with the Company, and there can be no assurance that the Company
will be successful in establishing relationships with new clients as this
occurs.
Competition and Market Penetration. 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 principally
competes with numerous smaller proposal management companies in this highly
specialized industry. The Company also competes with some of its clients'
internal proposal development resources. The Company has recently entered and
seeks to achieve significant growth in the contract support services market. The
market for services in the contract support industry is competitive, highly
fragmented and subject to rapid change. Such competition is likely to increase
in the future. Many of the Company's competitors have greater personnel,
financial, technical and marketing resources than the Company. The Company also
competes with its clients' in-house resources. This source of competition may
increase as consolidation of the aerospace and defense industry creates larger
organizations. Although the Company believes that it has the ability to further
penetrate the contract support services market, there can be no assurance that
the Company will be successful in such efforts. In addition, significant further
expense for sales and marketing may be required to promote a major expansion of
the Company's services in such area. If the Company is unsuccessful in its
efforts to penetrate further the market for such services, or if its historical
win rate in the proposal management business drops significantly, the Company's
growth prospects could be materially and adversely affected.
Management of Growth. The Company's business involves the delivery of services
through an experienced team of trained professionals. The Company's success
depends in large part upon its ability to attract, develop, motivate and retain
highly-skilled professionals and administrative employees. The Company has
experienced significant growth in recent years and intends to pursue further
growth as part of its business strategy. This growth strategy will require an
increase in the Company's 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 the Company will be able to attract and retain the qualified personnel
necessary to pursue its growth strategy. There can be no assurance that the
Company will be able to maintain or accelerate its current growth, effectively
manage its expanding operations or achieve planned growth on a timely or
profitable basis. To the extent the Company is unable to manage its growth
effectively and efficiently, the Company's business, financial condition and
results of operations could be materially and adversely affected.
Risks Related to Possible Acquisitions. An element of SM&A's growth strategy is
to expand its operations through the acquisition of complementary businesses.
The Company has no prior history of making acquisitions and there can be no
assurance that the Company will be able to identify, acquire, profitably manage
or successfully integrate any such businesses into the Company without incurring
substantial expenses, delays or other operational or financial problems.
Moreover, competitors of the Company are also soliciting potential acquisition
candidates, which could both increase the price of any acquisition targets and
decrease the number of attractive companies available for acquisition. Further,
acquisitions may involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel, increased
costs to improve managerial, operational, financial and administrative systems,
legal liabilities, and increased interest expense and amortization of acquired
intangible assets, some or all of which could materially and adversely affect
the Company's business, operating results and financial condition. Client
satisfaction or performance problems at a single acquired firm could have a
materially adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings or performance at levels historically
enjoyed by the Company. The failure of the Company to manage its acquisition
strategy successfully could materially and adversely affect the Company's
business, operating results and financial condition.
10
OVERVIEW
The Company is the largest proposal management company in the United
States. The Company's proprietary proposal management processes and team of
approximately 175 highly experienced professionals help its clients to achieve a
higher probability of winning the government and commercial contracts that are
critical to their success. The Company is also significantly expanding systems
engineering and program integration services to aerospace, communications and
engineering companies.
RESULTS OF OPERATIONS
The following information sets forth pro forma operating results for
the three months ended March 31, 1997. The 1997 amounts reflect pro forma
adjustments for (a) the elimination of salaries and bonuses paid to the three
principal executive officers (which have historically be included in SG&A
expenses) in excess or less than $2.7 million ($675,000 per quarter) in the
aggregate (which amount is equal to the maximum salaries and bonuses payable 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.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenues. Net revenues increased 48.6% to $10.7 million for the
three months ended March 31, 1998 from $7.2 million for the first quarter of
1997. Net revenues from proposal management services were $6.9 million for the
three months ended March 31, 1998 compared to $4.3 million for the comparable
three months of the prior year, an increase of $2.6 million or 60.5%. Net
revenues from proposal development centers ("PDCs") were $2.1 million for the
three months ended March 31, 1998, up from $1.4 million for the comparable three
months of the prior year, an increase of $0.7 million or 50.0%. Net revenues
from contract support services for the three months ended March 31, 1998 were
$1.7 million compared to $1.5 million for the three months ended March 31, 1997,
an increase of $0.2 million or 13.3%. These increases were the result of
continued strong demand for the Company's proposal management services, the
establishment of an additional PDC, the Company's increased customer base and
expansion of subcontract support activity.
Gross profit. Gross profit was $4.7 million for the three months ended
March 31, 1998 compared to $3.4 million for the three months ended March 31,
1997, an increase of $1.3 million or 38.2%. As a percentage of net revenues,
gross profit was 43.9% for the three months ended March 31, 1998, down from
47.2% for the comparable three months of the prior year. This decrease as a
percentage of net revenues was primarily attributable to success fees earned in
the first quarter of 1997 of $277,000, which earn a 100% margin. There were no
success fees earned in the first quarter of 1998.
SG&A expenses. Selling, general, and administrative expenses for the
three months ended March 31, 1998 were $1.7 million compared to $1.5 million for
the three months ended March 31, 1997, an increase of 13.3%. The increase was
primarily the result of an increase in senior management staff responsible for
new employee recruiting and training, and increased facility lease costs. The
Company relocated to an expanded facility in June 1997. As a percentage of net
revenues, SG&A expenses decreased to 15.9% for the three months ended March 31,
1998, from 20.8% for the comparable three months of the prior year.
Other (income) expense. Other income was $69,000 for the three months
ended March 31, 1998 compared to income of $50,000 for the three months ended
March 31, 1997.
Income tax expense. The Company's income tax expense for the three
months ended March 31, 1998 was $1.2 million compared to $762,000 for the three
months ended March 31, 1997. The effective tax rate for the first quarter of
1998 was 41.6% compared to 40.0% for the first quarter of 1997. The 1998 rate
was higher due to the recognition of net deferred tax liabilities on the date
the Company's C corporation election became effective, mitigated by a shorter C
corporation period in 1998 as compared to the pro forma C corporation period of
1997.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations and the timely collection of its accounts receivable. Accounts
receivable as of March 31, 1998 was $5.9 million as compared to the March 31,
1997 balance of $4.2 million. Due to a large and diverse client base which
consists mostly of Fortune 100 companies, management expects to continue the
trend of timely accounts receivable collections.
The Company's primary source of funds from investing activities for the
first quarter of 1998 was the January, 1998 repayment to the Company of the
Steven and Paula Myers promissory note dated December, 1996 for $679,000,
representing full payment of the original $632,000 note plus all accrued
interest. The principal use of cash for investing activities during the three
months ended March 31, 1998 and the three months ended March 31, 1997 was for
the purchase of office computer equipment used primarily for enhancing the
Company's data processing, marketing and financial reporting systems. The
Company does not anticipate making any significant capital expenditures in the
near future.
Financing activities provided funds of $22.5 million to the Company in
the three months ending March 31, 1998 as a result of the IPO. The primary uses
of cash were for the repayment of all outstanding bank debt, payment of IPO
related expenses and final S corporation dividends. The Company paid $7.7
million in full payment of the revolving line of credit and term loan
facilities, $1.0 million in payment of expenses directly related to the IPO and
$0.5 million in full payoff of a note secured by the Company aircraft. In
January, 1998, the Company made final S corporation distributions totaling
$710,000. The distributions represented the undistributed earnings of the
Company taxed or taxable to the shareholders through the date of the IPO.
The Company believes that remaining net proceeds from the IPO, together
with funds generated by operations will continue to provide adequate cash to
fund its anticipated operating cash needs, which may include future acquisitions
of complementary businesses, for at least the next twelve months. The Company
has a $4.0 revolving line of credit facility with a bank. The interest rate on
the revolving line of credit agreement is the daily prime rate. The Company has
not used the credit facility to finance its working capital needs and, at March
31, 1998, the Company had $4.0 million available under the credit facility. The
Company is currently negotiating with lenders regarding a new credit facility.
YEAR 2000
The Company has performed a review of its internal systems to identify
and resolve the effect of Year 2000 software issues on the integrity and
reliability of the Company's financial and operational systems. Based on this
review, management believes that its internal systems are substantially
compliant with Year 2000 issues. In addition, the Company is also communicating
with its principal service providers and vendors to ensure Year 2000 issues will
not have an adverse impact on the Company. Based upon its internal review and
communications with its principal service providers and vendors, the Company
believes that the costs of achieving Year 2000 compliance will not have a
material adverse impact on the Company's business, operations or financial
condition.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period covered by that financial statements. SFAS 130 requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. SFAS 130 did not have a material impact
on the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that
12
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. It amends FASB Statements No. 94,
"Consolidation of All Majority-Owned Subsidiaries," to remove the special
disclosure requirement for previously unconsolidated subsidiaries. SFAS 131
requires, among other items, that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets, information about the revenues derived from the enterprise's
product or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.
13
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES
(A) CHANGES IN SECURITIES
Pursuant to the Company's 1997 Stock Option Plan (the "1997 Stock
Option Plan"), in January 1998 the Company granted to certain employees and
associates options to purchase an aggregate of 790,000 shares of Common Stock at
an exercise price per share of $12.00. Another 710,000 options are available to
grant to employees.
The Company's 1997 Stock Option Plan provides for the granting of
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Stock Options") and nonstatutory
options. Under the 1997 Stock Option Plan, options covering an aggregate of
1,500,000 shares of the Company's Common Stock may be granted, in each case to
directors, employees and consultants of the Company, except that Incentive Stock
Options may not be granted to nonemployee directors or nonemployee consultants.
The exercise price of Incentive Stock Options must not be less than the fair
market value of a share of Common Stock on the date the option is granted (110%
with respect to optionees who own at least 10% of the outstanding Common Stock).
The Company's Compensation Committee has the authority to determine the time or
times at which options granted under the 1997 Stock Option Plan become
exercisable, provided that options expire no later than ten years from the date
of grant. Options are nontransferable, other than by will and the laws of
descent and distribution, and generally may be exercised only by an employee
while employed by the Company or within 90 days after termination of employment
(one year for termination resulting from death or disability). The 1997 Stock
Option Plan terminates in October 2007.
No underwriter was engaged in connection with the foregoing issuance of
securities. Such issuance was made in reliance upon the exemption for the
registration requirements afforded by Section 4 (2) of the Securities Act of
1933, as amended. The Company has reason to believe that all of the optionees
were familiar with or had access to information concerning the operations and
financial condition of the Company, and all of those individuals acquired their
options for investment and not with a view to the distribution of such options
or the underlying shares of Common Stock.
(B) USE OF PROCEEDS FROM REGISTERED SECURITIES
A Registration Statement on Form S-1 (File No. 333-40725) registering
3,150,000 shares of the Company's Common Stock, filed in connection with the
Company's IPO, was declared effective by the Securities and Exchange Commission
on January 27, 1998. The IPO closed on February 3, 1998 and the offering has
terminated. All of the shares covered by the Registration Statement were sold
upon termination of the Offering. The Company and its selling shareholders sold,
in the aggregate, all 3,150,000 shares registered in the IPO, with an aggregate
offering price to the public of $37.8 million through an underwriting syndicate
managed by Donaldson, Lufkin & Jenrette Securities Corporation and Lehman
Brothers Inc.
In connection with the IPO, the Company incurred total underwriting
discounts and commission expenses of $1.8 million through March 31, 1998. After
aggregate underwriting discounts and commissions, the Company's net proceeds
from the IPO were $23.4 million. From February 3, 1998 through March 31, 1998,
the amount of net offering proceeds used by the Company has been $7.1 million in
full payment of all existing revolver and term loan indebtedness with a bank,
and $0.3 million towards a full payoff of $0.5 million made on a note secured by
the Company aircraft. All other expenses associated with the IPO were paid
through working capital generated from operations. The remainder of the net
offering proceeds are invested in high quality short-term securities.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit No.
- -----------
3.1 Articles of Incorporation, as amended and restated*
3.2 Bylaws of the Registrant, as amended and restated*
10.1 1997 Stock Option Plan, and related form of Stock Option Agreement*
10.2 Form of Indemnification Agreement*
10.3 Office Facilities Lease*
10.4 Hawker Aircraft Sale Agreement*
10.5 Employment Agreement with Steven S. Myers*
10.6 Employment Agreement with Kenneth W. Colbaugh*
10.7 Security and Loan Agreement dated January 2, 1997 between Imperial
Bank and the Registrant, First Amendment and Addendum thereto and
related Note and Addendum thereto and LIBOR Addendum to Note*
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A. and the
Registrant and related Aircraft Security Agreement -- Chattel
Mortgage, Security Agreement and Unconditional Guaranty of Payment*
10.9 Steven S. Myers Promissory Note*
10.10 Company Note*
10.11 Executive Bonus Plan*
10.12 Securities Purchase Agreement dated September 25, 1996*
10.13 Investor Rights Agreement dated September 25, 1996*
10.14 Security and Loan Agreement and Addendum, Exhibit "A" -- Waiver to
Certain Provisions between Imperial Bank and the Registrant*
11.1 Computation of Earnings per Share
27 Financial Data Schedule
- -----------------
* included in the Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on November 21, 1997, as amended.
(B) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended March 31,
1998.
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STEVEN MYERS & ASSOCIATES, INC.
Date: May 14, 1998 By: /s/ RONALD A. HUNN
--------------------------------
Ronald A. Hunn
Vice President, Chief Financial
Officer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)
16
EXHIBIT INDEX
Exhibit No. Description
11.1 Computation of Earnings Per Share
27 Financial Data Schedules (EDGAR)