Exhibit 99(a)
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Advanced Management Incorporated
McLean, Virginia
We have audited the accompanying balance sheets of Advanced Management
Incorporated, as of December 31, 1996 and 1997, and the related statements of
income, shareholder's equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Management
Incorporated as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
KELLER BRUNER & COMPANY, L.L.C.
Bethesda, Maryland
February 13, 1998, except for Note 11,
as to which the date is February 26, 1998
ADVANCED MANAGEMENT INCORPORATED
BALANCE SHEETS
December 31, 1996 and 1997
ASSETS 1996 1997
- ----------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 168,346 $ 813,303
Accounts receivable, net 6,361,598 5,016,407
Prepaid expenses 1,057,557 181,582
Notes receivable - shareholder, current maturities 26,089 -
------------------------------
Total current assets 7,613,590 6,011,292
------------------------------
Investments Available for Sale 5,413,249 6,174,464
------------------------------
Other Assets
Notes receivable - shareholder, net of current
maturities 1,894,051 -
Deposits 37,711 20,225
------------------------------
1,931,762 20,225
------------------------------
Property and Equipment, less accumulated
depreciation; 1996 $554,597, 1997 $614,972 148,209 97,687
------------------------------
$ 15,106,810 $ 12,303,668
==============================
See Notes to Financial Statements.
LIABILITIES AND SHAREHOLDER'S EQUITY 1996 1997
Current Liabilities
Accounts payable $ 426,532 $ 485,992
Accrued expenses 177,765 836,683
Contract contingency allowance 100,000 100,000
Accrued litigation settlement 1,088,000 -
---------------------------------
Total liabilities 1,792,297 1,422,675
---------------------------------
Commitments and Contingencies
Shareholder's Equity
Common stock - $5 par value; 1,000 shares
authorized, issued, and outstanding 5,000 5,000
Additional paid in capital 300,000 300,000
Accumulated unrealized gains on investments 543,445 411,638
Retained earnings 12,466,068 10,164,355
---------------------------------
13,314,513 10,880,993
---------------------------------
$ 15,106,810 $ 12,303,668
=================================
ADVANCED MANAGEMENT INCORPORATED
STATEMENTS OF INCOME
Years Ended December 31, 1996 and 1997
1996 1997
- ----------------------------------------------------------------------------
Contract revenue $ 20,648,940 $ 23,164,624
Other revenue 196,880 -
- ----------------------------------------------------------------------------
20,845,820 23,164,624
Direct contract costs 13,822,316 14,793,680
- ----------------------------------------------------------------------------
Gross profit 7,023,504 8,370,944
Indirect expenses 3,839,614 3,902,943
Bonuses - 670,000
- ----------------------------------------------------------------------------
3,839,614 4,572,943
- ----------------------------------------------------------------------------
Operating income 3,183,890 3,798,001
- ----------------------------------------------------------------------------
Other income (expense):
Investment income 397,834 957,863
Other income 234,370 261,816
Litigation settlement (1,088,000) -
Interest expense (1,907) (1,005)
Other expense (103,437) (147,355)
- ----------------------------------------------------------------------------
(561,140) 1,071,319
- ----------------------------------------------------------------------------
Net income $ 2,622,750 $ 4,869,320
============================================================================
See Notes to Financial Statements.
ADVANCED MANAGEMENT INCORPORATED
STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 31, 1996 and 1997
- ----------------------------------------------------------------------------------------------------------
Accumulated
Unrealized
Common Paid-In Gains (Losses) Retained
Stock Capital On Investments Earnings Total
Balance, December 31, 1995 $ 5,000 $ 300,000 $ 261,209 $ 10,015,478 $ 10,581,687
Unrealized gain on investments - - 282,236 - 282,236
Net income - - - 2,622,750 2,622,750
Shareholder distributions - - - (172,160) (172,160)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,000 300,000 543,445 12,466,068 13,314,513
Unrealized loss on investments - - (131,807) - (131,807)
Net income - - - 4,869,320 4,869,320
Shareholder distributions - - - (7,171,033) (7,171,033)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 5,000 $ 300,000 $ 411,638 $ 10,164,355 $ 10,880,993
==========================================================================================================
See Notes to Financial Statements.
ADVANCED MANAGEMENT INCORPORATED
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1997
1996 1997
- ---------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 2,622,750 $ 4,869,320
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 109,867 60,375
Increase (decrease) in allowance for doubtful accounts (26,725) 87,966
Realized gains on transfer and sales of investments - (616,220)
Realized loss on sale of investments 74,704 -
Deferred rent (38,623) -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,631,929) 1,257,225
Prepaid expenses (510,408) 817,642
Deposits 37,295 17,486
Increase (decrease) in:
Accounts payable 181,875 59,460
Accrued expenses (347,600) 658,918
Accrued litigation settlement 1,088,000 (1,088,000)
---------------------------
Net cash provided by operating activities 559,206 6,124,172
---------------------------
Cash Flows from Investing Activities
Principal payments received on note receivable-shareholder 28,223 23,844
Purchases of investment securities (3,801,861) (16,940,057)
Proceeds from sale of investment securities 3,342,731 11,753,460
Purchase of property and equipment (97,519) (9,853)
--------------------------
Net cash (used in) investing activities (528,426) (5,172,606)
--------------------------
Cash Flows from Financing Activities
Distributions to shareholder (172,160) (306,609)
--------------------------
Net cash (used in) financing activities (172,160) (306,609)
--------------------------
Net increase (decrease) in cash and cash
equivalents (141,380) 644,957
Cash and cash equivalents:
Beginning 309,726 168,346
--------------------------
Ending $ 168,346 $ 813,303
==========================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 1,907 $ 1,005
==========================
Income taxes - state $ 72,260 $ 1,538
==========================
See Notes to Financial Statements.
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Organization and Significant Accounting Policies
Nature of business: Advanced Management Incorporated (the Company), is a
Virginia corporation organized on August 10, 1981. The Company engages in
computer consulting, training, computer facility operations, and other computer
related services. Virtually all of the Company's business is currently with
government or quasi-government agencies. The Company's principal market
locations include Washington, D.C. and Leawood, Kansas.
A summary of the Company's significant accounting policies follows:
Basis of accounting: The accompanying financial statements have been prepared on
the accrual basis of accounting in accordance with generally accepted accounting
principles.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all cash accounts which are not subject to withdrawal restrictions or
penalties and money market funds with a maturity of three months or less, as
cash and cash equivalents.
Revenue and cost recognition: The Company's services are performed under various
time-and-material and fixed price contracts. Revenue from time-and-material
contracts is recognized on the basis of man-hours provided plus other
reimbursable contract costs incurred during the period. Revenue from fixed price
contracts is recognized on the percentage of completion method. Under this
method, individual contract revenue earned is based upon the percentage
relationship that contract costs incurred bear to management's estimate of total
contract costs. The Company currently provides for all known or anticipated
losses on contracts.
Allowance for doubtful accounts: The allowance for doubtful accounts is based on
management's evaluation of the collectibility of existing accounts receivable.
Investments available for sale: The Company has various holdings in bonds,
equity securities and mutual funds. These investments are accounted for under
the fair market value method as required by Statement of Financial Accounting
Standard 115. Under this pronouncement the Company does not reflect unrealized
gains or losses in the statement of operations, rather as an addition or
reduction to the shareholder's equity section of the balance sheet.
Property and equipment: Property and equipment are recorded at cost.
Depreciation has been calculated using accelerated and straight line methods
over the estimated useful lives of the respective assets.
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
Income taxes: The Company has elected to be treated as an "S" Corporation under
subchapter "S" of the Internal Revenue Code, which provides that, in lieu of
corporation income taxes, the shareholders separately account for their pro-rata
share of the Company's items of income, deductions, losses and credits. As a
result of this election, no income taxes have been recognized in the
accompanying financial statements.
Financial credit risk: The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is not exposed
to any significant credit risk on cash.
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.
Note 2. Accounts Receivable
The Company's accounts receivable consisted of the following amounts as of
December 31, 1996 and 1997:
1996 1997
- -----------------------------------------------------------------------------
Billed $ 6,187,507 $ 4,971,953
Unbilled 172,560 118,541
Other receivables 1,531 13,879
- -----------------------------------------------------------------------------
6,361,598 5,104,373
Allowance for doubtful accounts - 87,966
- -----------------------------------------------------------------------------
$ 6,361,598 $ 5,016,407
=============================================================================
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Investments - Available for Sale
As of December 31, 1996 and 1997, the Company owned bonds, equity security and
mutual funds that are readily marketable. The cost and fair market value of
these marketable securities were as follows:
1996 1997
--------------------------- ------------------------
Cost Market Value Cost Market Value
- ------------------------------------------------------------------------------------------------
Accrued interest:
Smith Barney $ 6,874 $ 6,874 $ 6,880 $ 6,880
Bonds:
NationsBank 1,981,104 1,969,066 2,455,060 2,505,300
Smith Barney 415,000 447,191 415,000 457,330
Equity securities:
Trigon Healthcare - - 122,403 169,352
Money funds:
Smith Barney 1,968 1,968 - -
Mutual funds:
American Capital Emerging
Growth - B 121,938 147,497 139,340 172,640
Federated American Lenders
Fund - - 1,086,411 1,049,685
Federated Equity Income Fund - - 514,735 497,421
Liberty American Lenders
Funds 1,422,036 1,744,675 - -
MFS - Emerging Growth
Class B 162,796 304,238 165,478 364,273
Smith Barney 758,088 791,740 857,519 951,583
- ------------------------------------------------------------------------------------------------
$ 4,869,804 $ 5,413,249 $ 5,762,826 $ 6,174,464
================================================================================================
Investment income for the years ended December 31, 1996 and 1997 consists of the
following components:
1996 1997
- --------------------------------------------------------------------
Interest $ 330,179 $ 136,985
Dividends 14,513 204,658
Capital gains 127,846 616,220
Capital losses (74,704) -
- --------------------------------------------------------------------
$ 397,834 $ 957,863
====================================================================
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Property and Equipment
Property and equipment consists of the following as of December 31, 1996 and
1997:
1996 1997
- ---------------------------------------------------------------------
Furniture and fixtures $ 199,963 $ 199,963
Computer hardware and software 38,412 48,265
Equipment 337,190 337,190
Automobiles 123,972 123,972
Leasehold improvements 3,269 3,269
- ---------------------------------------------------------------------
702,806 712,659
Less accumulated depreciation
and amortization 554,597 614,972
- ---------------------------------------------------------------------
$ 148,209 $ 97,687
=====================================================================
Note 5. Consulting Contract
The Company has entered into an agreement with Systems Development Group, Inc.
for accounting, contract support, and administration services on an "as needed"
basis. Billings for these services are based on cost plus 25%. During the years
ended December 31, 1996 and 1997, the Company paid $249,593 and $145,000,
respectively, to Systems Development Group, Inc. on these contracts. There were
no outstanding amounts due on these contracts at December 31, 1996 and 1997.
Note 6. Leasing Arrangements
The Company has entered into a lease commitment for office space.
The total minimum rental commitment under this lease as of December 31, 1997 is
outlined below:
Years ending December 31,
- -------------------------------------------------------------------------------
1998 $ 226,655
1999 57,079
- -------------------------------------------------------------------------------
$ 283,734
===============================================================================
Rent expense for the years ended December 31, 1996 and 1997 charged to
operations totaled $194,169 and $220,054, respectively.
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Retirement Plan
The Company maintains a qualified 401(k) and profit sharing plan for its
eligible employees. The Company can make discretionary contributions to this
plan of up to 15% of eligible compensation. At December 31, 1996 and 1997, the
Company charged to operations $37,930 and $157,467, respectively related to this
plan.
Note 8. Related Party Transactions
The Company loaned to the president of the Company, the sum of $2 million for
30 years at an interest rate of 7% in May 1993. Monthly principal and interest
payments amount to $13,306. During 1997, this note was forgiven by the Company
and the remaining principal of $1,896,298 is included as a distribution to the
shareholder.
The Company's distributions to the shareholder totaled $7,171,033 during 1997.
These distributions related to the transfer of investments from the Company's
portfolio of $4,909,793, premiums paid on behalf of the Owner for Officer's Life
Insurance of $364,942, and forgiveness of note of $1,896,298.
A bonus of $670,000 was paid to the shareholder during 1997.
Note 9. Major Customers
Substantially all of the Company's revenue for the years ended December 31, 1996
and 1997, and accounts receivable at December 31, 1996 and 1997 are derived
through contracts with the U.S. Government.
Note 10. Contingencies
The Company has cost reimbursable type contracts with the federal government.
Consequently, the Company is reimbursed based upon their direct expenses
attributable to the contracts, plus a percentage based upon overhead and general
and administrative expenses. The overhead and general and administrative rates
are estimates. Accordingly, if the actual rates as determined by the Defense
Contract Audit Agency are below the Company's estimates, a refund for the
difference would be due to the federal government. The Company does not
anticipate any significant adjustment.
The Company has undergone a contract audit performed by the Resolution Trust
Corporation (RTC). The preliminary findings by RTC indicate that they had
reimbursed the Company for unsubstantiated travel costs in the amount of
approximately $100,000. This amount has been set up as an allowance and included
on the balance sheets as a contract contingency. The Company is currently
contesting this finding.
ADVANCED MANAGEMENT INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Contingencies (Continued)
On May 27, 1996, the Company's Martinsburg, West Virginia post office contract
was terminated for the convenience of the U.S. Postal Service. This decision by
the U.S. Postal Service resulted in a law suit being filed against the Company
by its displaced West Virginia employees. These former employees alleged that
the Company violated the U.S. Fair Labor Standards Act and the West Virginia
Wage Payment and Collection Act. The suit was settled on May 9, 1997 for the sum
of $1,270,000 of which the Company has accrued and charged $1,020,000 to
operations for the year ended December 31, 1996. The Company's insurance
carrier, Hartford, paid the difference of $250,000.
Four individuals filed a lawsuit against the Company for wrongful termination
and pregnancy discrimination. This suit was settled on June 9, 1997 for a total
of $68,000. This amount was charged to operations for the year ended December
31, 1996.
Note 11. Subsequent Events
Effective January 31, 1998, the Company was acquired by Advanced Communication
Systems, Inc.
The Company distributed approximately $6,200,000 of investments to the
shareholder subsequent to year end.