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.