SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] For the Quarterly Period Ended: June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15 (D)
of The Securities Exchange Act of 1934
For the Transition Period From _________ To ________
Commission File Number: 333-5753
Exigent International, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 59-3379927
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1225 Evans Road
Melbourne, Florida 32904-2314
(Address of principal executive offices) (Zip code)
407-952-7550
(Registrant's telephone number including area code)
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 ____
The number of shares outstanding of the registrant's common stock, $.01
par value, on July 20, 1999 was 4,525,091.
<PAGE>
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
QUARTER ENDED JUNE 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements. Page
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4
Consolidated Statements of Income for the Six Months Ended June 30, 1999 and July 31, 1998 6
Consolidated Statements of Income for the Three Months Ended June 30, 1999 and July 31, 7
1998
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and July 31, 8
1998
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information. 21
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 1999 December 31,
(unaudited) 1998
------------------- ---------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 858,797 $ 429,970
Accounts receivable, pledged 3,137,930 1,873,772
Costs and estimated earnings in excess of
billings on uncompleted contracts, pledged 4,869,374 5,072,788
Prepaid expenses 42,234 10,677
Deferred income taxes 595,000 595,000
Income taxes receivable 843,938 843,938
------------------- ---------------------
TOTAL CURRENT ASSETS 10,347,273 8,826,145
------------------- ---------------------
PROPERTY AND EQUIPMENT
Cost 6,344,289 6,265,709
Accumulated depreciation (4,443,439) (3,982,347)
------------------- ---------------------
NET PROPERTY AND EQUIPMENT 1,900,850 2,283,362
------------------- ---------------------
OTHER ASSETS
Software development costs, net of accumulated amortization 4,799,952 4,463,729
Deposits 70,491 74,179
Cash surrender value of life insurance 17,028 17,028
------------------- ---------------------
TOTAL OTHER ASSETS 4,887,471 4,554,936
------------------- ---------------------
TOTAL ASSETS $ 17,135,594 $ 15,664,443
=================== =====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1999 December 31,
(unaudited) 1998
------------------- ---------------------
CURRENT LIABILITIES
<S> <C> <C>
Line of credit $ 2,211,093 $ 1,811,093
Accounts payable 155,506 227,750
Accrued expenses 3,038,422 2,734,200
Billings in excess of costs and estimated earnings
on uncompleted contracts 632,135 270,418
Income taxes payable 131,517 5,098
Current portion, long-term debt 204,456 204,456
------------------- ---------------------
TOTAL CURRENT LIABILITIES 6,373,129 5,253,015
------------------- ---------------------
LONG-TERM LIABILITIES
Long-term debt, less current portion 313,004 427,816
Deferred income taxes 1,355,000 1,355,000
Other liabilities - 44
------------------- ---------------------
TOTAL LONG-TERM LIABILITIES 1,668,004 1,782,860
------------------- ---------------------
TOTAL LIABILITIES 8,041,133 7,035,875
------------------- ---------------------
STOCKHOLDERS' EQUITY
Class A Preferred Shares, $.01 par value 5,000,000 shares authorized,
318,548 and 609,882 issued and outstanding at June 30, 1999 and
December 31, 1998,at $2.50 per share liquidation/dissolution preference 3,185 6,099
Common Shares, $.01 par value, 30,000,000 shares authorized, 4,509,637
and 4,130,103 issued and outstanding at June 30, 1999 and December 31,
1998,respectively 45,097 41,301
Paid in capital 2,277,834 2,012,780
Retained earnings 6,768,345 6,568,388
------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 9,094,461 8,628,568
------------------- ---------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 17,135,594 $ 15,664,443
=================== =====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the six months ended ended
June 30, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
REVENUES $ 18,289,962 $ 16,496,571
COST OF SALES 13,559,891 12,741,584
------------------ ------------------
GROSS PROFIT 4,730,071 3,754,987
GENERAL AND ADMINISTRATIVE EXPENSES 4,361,232 3,121,248
RESEARCH AND DEVELOPMENT COSTS 24,938 56,636
------------------ ------------------
OPERATING INCOME 343,901 577,103
------------------ ------------------
OTHER INCOME (EXPENSE)
Interest income 11,810 23,096
Interest expense (25,072) (64,680)
Loss on disposal of fixed assets (2,805) -
Other, net 5,427 6,966
------------------ -----------------
TOTAL OTHER INCOME (EXPENSE) (10,640) (34,618)
------------------ -----------------
INCOME BEFORE INCOME TAXES 333,261 542,485
INCOME TAX EXPENSE 133,304 216,918
------------------ -----------------
NET INCOME $ 199,957 $ 325,567
================== =================
EARNINGS PER SHARE - BASIC $ 0.05 $ 0.08
================== =================
EARNINGS PER SHARE - DILUTED $ 0.04 $ 0.06
================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months ended
June 30, 1999 July 31, 1998
------------------- ---------------------
<S> <C> <C>
REVENUES $ 9,199,081 $ 8,811,196
COST OF SALES 6,861,839 6,686,789
------------------- ---------------------
GROSS PROFIT 2,337,242 2,124,407
GENERAL AND ADMINISTRATIVE EXPENSES 2,228,732 1,708,040
RESEARCH AND DEVELOPMENT COSTS 16,057 8,370
------------------- ---------------------
OPERATING INCOME 92,453 407,997
------------------- ---------------------
OTHER INCOME (EXPENSE)
Interest income 519 14,487
Interest expense (17,590) (48,716)
Loss on disposal of fixed assets (2,805) -
Other net income (expense) 3,966 6,966
------------------- ---------------------
TOTAL OTHER INCOME (EXPENSE) (15,910) (27,263)
------------------- ---------------------
INCOME BEFORE INCOME TAXES 76,543 380,734
INCOME TAX EXPENSE 30,617 152,785
------------------- ---------------------
NET INCOME $ 45,926 $ 227,949
=================== =====================
EARNINGS PER SHARE - BASIC $ 0.01 $ 0.06
=================== =====================
EARNINGS PER SHARE - DILUTED $ 0.01 $ 0.04
=================== =====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXIGENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30, 1999 July 31, 1998
------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 199,957 $ 325,567
------------------- ------------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,428,553 892,000
Accretion of unearned stock compensation 8,350
Loss on disposal of Fixed Assets 2,805 -
Changes in operating assets and liabilities:
Accounts receivable (1,264,158) (537,281)
Costs and estimated earnings in
excess of billings on uncompleted contracts 203,414 (1,275,260)
Prepaid expenses (31,557) 1,709
Inventory - (1,295)
Prepaid income taxes - (53,222)
Deposits 3,688 (7,461)
Accounts payable (72,244) (359,342)
Accrued expenses 304,222 (10,855)
Billings in excess of costs and estimated earnings
on uncompleted contracts 361,717 (930,371)
Income taxes payable 126,419 (208,190)
Other liabilities (44) 44
Total adjustments 1,071,165 (2,489,524)
------------------ ------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,271,122 (2,163,957)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of capital assets (84,978) (523,826)
Cash paid for capitalized software development (1,300,091) (2,101,113)
------------------ ------------------
NET CASH USED BY INVESTING ACTIVITIES (1,385,069) (2,624,939)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 400,000 2,300,000
Principal payments on long-term debt (114,812) (266,666)
Proceeds from exercise of stock options and warrants 257,586 352,675
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 542,774 2,386,009
------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 428,827 (2,402,887)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 429,970 3,640,508
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 858,797 $ 1,237,621
================== ==================
See accompanying notes.
</TABLE>
<PAGE>
EXIGENT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The condensed consolidated financial statements for the
three and six-month periods ended June 30, 1999 and July 31, 1998 are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in Exigent International, Inc.'s ("Exigent's" or the
"Company's") Annual Report on Form 10-K for the fiscal year ended December 31,
1998. The results of operations for the three and six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
The Company maintains its records on a calendar year basis. The Company's first,
second and third quarters normally end on the Friday closest to the last day of
the last month of such quarter, which was July 2, 1999 for the second quarter of
fiscal 1999.
However for convenience the financial statements are dated as of June 30, 1999.
Certain prior period amounts have been restated to correspond to the current
period presentation.
NOTE 2 - FISCAL YEAR CHANGE
The Company changed its fiscal year to correspond with a calendar year end,
effective December 31, 1998. Previously, the Company had a January 31 year-end.
The current fiscal quarter and six-month period ended June 30, 1999 is therefore
compared to the three and six months ended July 31, 1998.
NOTE 3 - LINE OF CREDIT
Software Technology, Inc. ("STI"), Exigent's primary subsidiary, had a
$3,000,000 line of credit available from a bank as of June 30, 1999 and December
31, 1998. The line of credit note bears interest on the unpaid principal balance
at a rate per annum equal to the bank's prime rate or LIBOR plus 2.5%. As of
June 30, 1999 and December 31, 1998, the outstanding draws against the line were
$2,211,093 and $1,811,093, respectively. The interest rate at June 30, 1999 and
<PAGE>
December 31, 1998 was 7.53% and 7.56%, respectively. All accounts receivable,
equipment, furniture and fixtures of STI are pledged as collateral on the line
of credit. The weighted average interest rate on short-term borrowings during
the six-month period ended June 30, 1999 was 7.44%.
NOTE 4 - EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per
share for the six and three months ended June 30, 1999 and July 31, 1998,
respectively:
For the six months ended
June 30, 1999 July 31, 1998
------------- -------------
Numerator:
Net income (numerator for basic and diluted
earnings per share) $ 199,957 $ 325,567
=========== ===========
Denominator:
Denominator for basic earnings per share-
weighted average common shares 4,269,453 3,978,504
Effect of dilutive securities:
Convertible preferred stock 526,439 647,386
Stock options and warrants 740,544 501,454
----------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares 5,536,436 5,127,344
----------- ----------
Basic earnings per share $ 0.05 $ 0.08
=========== ==========
Diluted earnings per share $ 0.04 $ 0.06 * Basic earnings per share for the six
months ended July 31, 1998 was restated due to an error in computation.
For the three months ending
June 30, 1999 July 31, 1998
------------- -------------
Numerator:
Net income (numerator for basic and diluted
earnings per share) $ 45,926 $ 227,949
=========== ===========
Denominator:
Denominator for basic earnings per share-
weighted average common shares 4,352,104 4,037,675
Effect of dilutive securities:
Convertible preferred stock 463,856 623,523
Stock options and warrants 813,823 633,692
----------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares 5,629,783 5,294,890
----------- ----------
Basic earnings per share $ 0.01 $ 0.06
=========== ==========
Diluted earnings per share $ 0.01 $ 0.04
=========== ==========
** Basic earnings per share for the three months ended July 31, 1998 was
restated due to an error in computation.
<PAGE>
NOTE 5 - STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the six months ended June
30, 1999 are as follows:
<TABLE>
Additional
Common Stock Class A Preferred Paid in Retained
Shares Amount Shares Amount Capital Earnings Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1999 4,130,103 $ 41,301 609,882 $ 6,099 $2,012,780 $6,568,388 $ 8,628,568
Exercise of convertible
securities 88,200 882 - - 256,704 - 257,586
Class A preferred converted to
common 291,334 2,914 (291,334) (2,914) - -
Accretion of unearned
compensation 8,350 8,350
Net Income
199,957 199,957
----------------------------------------------------------------------------------------
BALANCE JUNE 30, 1999 4,509,637 $ 45,097 318,548 $ 3,185 $2,277,834 $6,768,345 $ 9,094,461
========================================================================================
</TABLE>
Class A Preferred Stock converts 1:1 to Common Stock and has no preferential
treatment except for a liquidation preference.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of (i) the
consolidated financial condition as of June 30, 1999 as compared with the fiscal
year ended December 31, 1998; (ii) the consolidated results of operations for
the six months ended June 30, 1999 and July 31, 1998; and (iii) the consolidated
results of operations for the three months ended June 30, 1999 and July 31,
1998, of Exigent and its subsidiaries: Software Technology, Inc. ("STI"),
FotoTag, Inc. ("FotoTag") and Middleware Solutions, Inc. ("M/Ware"). This
discussion should be read together with Exigent's Form 10-K for the fiscal year
ended December 31, 1998.
General. In 1994, STI obtained its first significant commercial contracts from
Motorola, Inc. to provide satellite ground station software for a constellation
of satellites that provides a direct link with portable handsets for worldwide
telephone service (the "Iridium" system). The Motorola multi-year contract
allowed STI to leverage its technology into the commercial arena. In 1996, STI
was awarded a contract to provide similar software for the Global Positioning
Satellite (GPS) System. With these two contracts, STI is involved in two premier
satellite endeavors and numerous proprietary ones.
Although the recent quarters reflect a lull in the Company's commercial
satellite business, the Company continued to invest during these periods in the
advanced features for its OS/COMET(R) basic product as well as the next
generation Windows(R) NT version of OS/COMET. This investment has started to pay
off with the award of DataLynx, a commercial satellite project with Allied
<PAGE>
Signal Technical Services for software for the control center and ground
stations of the DataLynx Project and the delivery of Calypso Pro(TM), a NT
product, to a government customer in the first quarter of 1999. In addition, the
Company continues to invest in several new unannounced products as well as its
strategic alliance with Motorola for the Teledesic effort, with an anticipated
start late in 1999.
STI has invested in excess of $6,000,000 over the last three years in its
premier software product OS/COMET. This investment facilitated the significant
contract awards that management believes would have been otherwise unattainable.
Continued expenditures for development of new products is expected, and the
Company has recently been heavily involved in developing proposals for new
commercial products as well as satellite constellations.
STI's government business continues at a strong pace with orders coming in from
both existing and new customers. The backlog as of June 30, 1999 for commercial
and government contracts was $51,733,524, of which $46,620,166 is unfunded. The
award of DataLynx represents a significant new commercial win for the Company,
representing software product sales in excess of $500,000 and a role in this new
commercial venture in anticipation of greater outsourcing by the U.S.
Government.
Exigent has completed development of its commercial software product,
FotoTag(R), investing in excess of $1,000,000 over the past three fiscal years
for this product development. Management continues the marketing and promotion
of this product with the product currently being marketed worldwide to address
the need for airport security and baggage and passenger reconciliation products.
The Company's new subsidiary, M/Ware, has been organized expressly for the
development and distribution of middleware software, including Interplay(TM),
and certain other products. The initial product, Interplay was released on July
27, 1999.
The Company believes that its investments in OS/COMET and its product family,
including Pluto(TM), Calypso(TM), Calypso Pro, the Integrated Control Center
(ICC)(TM) and OS/COMET Solo(TM), the Active Tracking Engine (ATE), FotoTag and
Interplay as well as unannounced products have positioned the Company well for
the remainder of 1999 and beyond.
Liquidity. As of June 30, 1999, Exigent's ratio of current assets to current
liabilities decreased to 1.6 from 1.7 at December 31, 1998. This decrease was
due largely to a $400,000 draw down on the Company's line of credit to finance a
$1,264,158 increase in accounts receivable over the six months. The sources and
uses of cash are explained in detail below.
Exigent's cash portfolio (cash and cash equivalents) increased $428,827 during
the six months ended June 30, 1999. The increase was due to cash provided by
operating activities of $1,271,122, cash used in investing activities of
$1,385,069 and cash provided by financing activities of $542,774. The increase
in cash from operating activities from December 31, 1998 to June 30, 1999 was
primarily the result of the sale of Company products in both the commercial as
<PAGE>
well as the government sector of the business and the noncash impact of the
depreciation and amortization of assets. During this time, the Company invested
approximately $437,000 in the ongoing support of the strategic agreement with
Motorola, Inc. SATCOM projects. This investment is intended to help position
Exigent for sales to future commercial satellite projects. By comparison,
Exigent's cash portfolio decreased $2,402,887 for the six months ended July 31,
1998. The decrease was due to cash used by operating activities of $2,163,957,
cash used in investing activities of $2,624,939 and cash provided by financing
activities of $2,386,009.
In the six months ended June 30, 1999, Exigent acquired $84,978 of capital
assets compared to $523,826 in the six months ended July 31, 1998. Capital needs
are expected to continue, but cannot be quantified at this time, as Exigent
intends to remain current with computing technologies. This expansion will be
funded in part through operating leases set up with external leasing companies.
Currently, the Company has a lease line of credit through Oliver-Allen
Corporation with a funding limit of $770,000. The leases will extend for a
period of three years from each draw against the funding limit. Through the
six-month period ended June 30, 1999, Exigent had drawn down approximately
$693,162 against this lease line of credit. An increase to the lease line will
be discussed to finance future needs.
During the last three fiscal years the Company has made substantial investments
in the development of software products. The investments made for the six months
ended June 30, 1999 were significant but reduced from the prior year as the
Company rolled out several new products. In the six months ended June 30, 1999
and July 31, 1998, Exigent spent $1,300,091 and $2,101,113, respectively, in
capitalized software development costs primarily related to several products.
The decrease in the first six months of fiscal year 1999 resulted from the
completion and rollout of product additions for the OS/COMET product family
including Pluto, Calypso and the Integrated Control Center (ICC). The
development of its newest product, Interplay, was completed in July of 1999.
M/Ware was organized expressly for the development and distribution of
middleware software and certain other products. M/Ware will be responsible for
Interplay as well as other products. Investment in capitalized software
development is expected to continue at least through the next five months at the
current level with a minor reduction as Interplay is released in July.
As of June 30, 1999, Exigent had cumulatively borrowed $2,211,093 under the line
of credit to fund its operations. The Company reduced long-term debt by $114,812
during the six months ended June 30, 1999 to $313,004 at June 30, 1999.
Management believes existing cash, funds generated by operations, and the
available line of credit will be sufficient to fund Exigent's current operating
requirements at least through the fiscal year ending December 31, 1999.
Additional funds may be required to fulfill the development schedule for new
Exigent products and to finance any acquisitions and major project start-ups.
The Company is currently in discussions with several institutions to obtain
financing to enhance product development requirements and for general corporate
purposes. There can be no assurance that definitive arrangements relating to
this funding will be entered into on acceptable terms. Should such financing not
be available, the Company will prioritize its future development projects
accordingly.
<PAGE>
Results of Operations for the six months ended June 30, 1999 and July 31, 1998.
Sales for the six months ended June 30, 1999 were $18,289,962, compared with
$16,496,571 for the six months ended July 31, 1998, an increase of 11%, with the
mix of government and commercial sales having changed significantly. The
breakdown between government and commercial sales for each of the six-month
periods is as follows:
<TABLE>
June 30, 1999 July 31, 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Government $ 15,448,211 84% $ 12,416,022 75%
Commercial 2,841,751 16% 4,080,549 25%
==================== ======== ==================== ============
$ 18,289,962 100% $ 16,496,571 100%
==================== ======== ==================== ============
</TABLE>
This revenue mix could move back to a higher percentage of commercial sales if
the Company is awarded new commercial satellite projects. These projects have
been delayed because they often are in need of funding and support from both
vendors and investors.
Cost of sales as a percentage of revenue for the six months ended June 30, 1999,
at 74%, was slightly reduced with the percentage for the six months ended July
31, 1998, at 77%. This reduction was largely due to the adjustments made in the
structure of the Company fringe benefits.
Gross profit was up significantly at $4,730,071 (26% of sales) compared to
$3,754,987 (23% of sales) for the six months ended June 30, 1999 and July 31,
1998, respectively. This increase in gross profit was the result of an increase
in product sales in excess of $500,000 partially offset by the increase in
product amortization of approximately $400,000 in addition to the aforementioned
change in the fringe benefit structure.
General and administrative expenses for the six months ended June 30, 1999 were
$4,361,232, 40% or $1,239,984 greater than expenses of $3,121,248 for the six
months ended July 31, 1998. This increase was due primarily to the presentation
of the data for the six months ended July 31, 1998. In 1998 both revenue and
expenses were presented using government approved projected rates and in 1999
both are presented using actual expenses. After adjusting the general and
administrative expenses for the six months ended July 31, 1998 to the same basis
used for the six months ended June 30, 1999, the actual increase was $731,807.
This increase arose from an increase in marketing expenses of $350,000 resulting
from the release of three new products (OS/ICC, Calypso and Pluto), attendance
at more tradeshows than the previous year, and the marketing thrust associated
with the FotoTag product. In addition, there was an increase in professional
fees of $71,000 associated with expenses for outside professional services
needed to resolve several accounting issues, an increase in reserves for
incentive pay of $90,000 established to reward and retain the Company's
personnel and an increase of approximately $230,000 due to the establishment of
a Chief Technical Office within the Company.
Research and development expenses for the six months ended June 30, 1999 were
significantly reduced from the first six months of last year as the Company
concentrated on completing the development of several new products. However the
<PAGE>
expenditures for the second quarter increased significantly over the second
quarter of last year. Research and development expenses are expected to continue
increasing during the third quarter of 1999 as the Company continues the
research required for its next generation product.
Net income decreased significantly to $199,957 (1% of sales) for the six months
ended June 30, 1999 versus $325,567 (2% of sales) for the six months ended July
31, 1998. This decrease was due primarily to the increase in G&A expenses.
Results of Operations for the three months ended June 30, 1999 and July 31,
1998. Sales for the three months ended June 30, 1999 were $9,199,081, compared
with $8,811,196 for the three months ended July 31, 1998, an increase of 4%,
with the mix of government and commercial sales having changed significantly.
The breakdown between government and commercial sales for each of the
three-month periods is as follows:
<TABLE>
June 30, 1999 July 31, 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Government $ 7,883,767 86% $ 6,966,314 79%
Commercial 1,315,314 14% 1,844,882 21%
==================== ======== ==================== ============
$ 9,199,081 100% $ 8,811,196 100%
==================== ======== ==================== ============
</TABLE>
This revenue mix is expected to move back to a higher percentage of commercial
sales following the award and start-up of new commercial satellite projects.
Cost of sales as a percentage of revenue from services for the three months
ended June 30, 1999, at 75%, was consistent with the percentage for the three
months ended July 31, 1998, at 76%.
Gross profit was up slightly at $2,337,243 (25% of sales) compared to $2,124,407
(24% of sales) for the three months ended June 30, 1999 and July 31, 1998,
respectively.
General and administrative expenses for the three months ended June 30, 1999
were $2,228,732, 31% or $520,692 greater than expenses of $1,708,040 for the
three months ended July 31, 1998. Of the total variance $121,088 was due to the
difference in presentation of revenue and expenses explained previously.
Net income decreased significantly to $45,926 (1% of sales) for the three months
ended June 30, 1999 versus $227,949 (3% of sales) for the three months ended
July 31, 1998. This decrease was due to the large volume of product sales in the
three months ended July 31, 1998 and the increase in the G&A expenses.
OUTLOOK
General and administrative expenses are expected to stabilize at current levels
as the current staffing has positioned the Company to grow and support an
increased volume of business and employees. In addition, the current level of
expenditures included the cyclical cost associated with the concentration of
four trade shows in February and March 1999 along with the outside professional
services supporting issues addressed at the annual shareholder's meeting.
<PAGE>
Management believes that the benefits offered by Exigent remain above the level
of its competition and should help to retain existing employees and to attract
new employees. Overhead costs for benefits are expected to decrease as a
percentage of total labor for the fiscal year ending December 31, 1999 as
compared to the eleven months ended December 31, 1998 with the adjustments made
earlier in the year in the structure of the benefits offered. Management
believes that it is important to maintain the benefits at the current level, but
to do so and hold costs stable in the face of the increasing cost of health care
will be a management challenge.
The Company's current long-term business plan is to seek opportunities for
growth and diversification of its product and service offerings through internal
growth and acquisitions. To implement its long-term growth strategy, the Company
may need to raise capital through private or public debt and/or equity
financing(s). The Company's application to the Nasdaq Stock Market for listing
on the Nasdaq SmallCap Market was approved during the first quarter and trading
in both the Company Common Stock and Warrants began on March 1, 1999 under the
symbols "XGNT" and "XGNTW", respectively. The company's Warrants will expire on
January 31, 2000. Assuming our Common Stock continues to trade at a price which
is higher than the exercise price for the Warrants the Company anticipates
revenue from the purchase of the underlying shares to accelerate in the second
half of 1999.
FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company or events, or timing
of events, relating to the Company to differ materially from any future results,
performance or achievements of the Company or events, or timing of events,
relating to the Company expressed or implied by such forward-looking statements.
The more prominent known risks and uncertainties inherent in the Company's
business are presented in condensed form below. However, not all possible risks
and uncertainties to which the Company is subject are referenced below, nor can
it be assumed that there are not other risks and uncertainties which may be more
significant to the Company. The reader is referred to the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange Commission (SEC) on
June 14, 1999 and declared effective on June 25, 1999, for a more detailed
discussion of these risks and uncertainties.
Risks Related to the Company
o The failure of the market to accept our key products may result in reduced
revenue and capital available for future product development.
o The existence or sufficiency of customer funding for our contracts may
cause our quarterly results to fluctuate and adversely affect our stock
price.
<PAGE>
o Since we rely heavily on US government entities for a substantial portion
of our revenues, our financial results may be materially adversely affected
by a decrease in US government expenditures for space-related programs.
o Since we rely on a small number of customers for a large portion of our
commercial revenue, the loss of one or more of these major customers could
have a material adverse effect on our financial results.
o Customers may discontinue purchases from us as a result of pressure from
other divisions within their organization which compete against us.
o Since our products are used in high cost production and operation of
satellites, the amount of damages for which we may be liable due to defects
in our products may be significant.
o The length of our sales cycle increases our costs and increases the risk
that we may not ultimately procure contracts. o We may incur substantial
legal expenses and diversion of our technical and management personnel in
protecting our proprietary rights against infringement by others.
o We may incur substantial legal and indemnification expenses if we are
accused of infringing or misappropriating the proprietary rights of others.
o Our revenues could decrease if we are unable to license technology and
software required to product our products and deliver our services.
o Competition for and failure to hire qualified technical personnel may
result in higher costs and lower revenue.
o We may incur unexpected costs in connection with correcting Year 2000
problems.
o Our anti-takeover provisions may discourage a third party from acquiring
our shares at a favorable price.
o If we fail to estimate accurately our actual costs for fixed price
contracts, we may incur losses on these contracts.
o If we are unable to obtain additional financial resources we may not be
able to implement our product development and growth plans.
o Default on loan agreements may accelerate loan repayments, causing a cash
shortfall.
Risks Related to the Industry
o Because most of our customers are engaged in the space industry, our
financial results and stock price could be materially adversely affected if
this industry does not continue to grow.
o We operate in an industry with rapidly-changing technology. If we fail to
adapt to technological changes within the industry our products may become
obsolete or unmarketable, which could have a material adverse effect on our
financial results.
o Intense competition for limited number of customers may cause us to lose
projects or result in decreased revenues.
o Our customers in the satellite and telecommunications industry are subject
to significant US and foreign government regulation. Changes in these
regulations may make our products or services unsuitable for a customer's
needs or otherwise decrease demand for our products of services.
<PAGE>
Year 2000 Issues
Some existing computer programs will be unable to recognize dates properly in
the Year 2000 ("Y2K") and beyond. During 1997, Exigent conducted an informal
study of its products, systems and operations, including products under
development, to improve their business functionality, to identify those of its
computer hardware, software and process control systems that do not properly
recognize dates after December 31, 1999, and those that are linked to third
parties' systems. Based on this informal study, Exigent recognized that the
OS/COMET product required certain modifications to be Y2K compliant. Those
modifications have been made to the software and are available in the current
release, Version 3.5. Exigent has also initiated communications with certain
third parties whose computer systems' functionality could adversely impact the
Company. These communications, which the Company expects to complete by July
1999, will facilitate coordination of any necessary Y2K conversions and will,
additionally, permit Exigent to determine the extent to which the Company may be
vulnerable to the failure of third parties to address their own Y2K issues. The
Company expects to complete its review of all desk top computing resources by
September 30, 1999. Due to the fact that the Company believes it has secured
sufficient resources to address the Y2K issue as it relates to its own computer
systems and certain third parties whose computer systems' functionality could
adversely impact the Company, the Company does not believe that contingency
planning is warranted at this time. The results of its review of all desk top
computing resources, when completed, may reveal the need for contingency
planning at a later date. The Company will evaluate the need for contingency
planning based on the progress and findings of its review.
The costs of Exigent's Y2K compliance efforts are being funded with cash flows
from operations. Some of these costs relate solely to the modification of
existing systems, while others are for new systems that will improve business
functionality. In total, these costs are not expected to be substantially
different from the normal, recurring costs that are incurred for systems
development and implementation, in part due to the reallocation of internal
resources and the deferral of other projects. As a result, these costs are not
expected to have a material adverse effect on Exigent's overall results of
operations or cash flows.
The assessment of the costs of Exigent's Y2K compliance effort, and the
timetable for the Company's planned completion of its own Y2K modifications, are
management's best estimates. These estimates were based upon numerous
assumptions regarding future events, including assumptions as to the continued
availability of certain resources, and, in particular, personnel with expertise
in this area, and as to the ability of such personnel to locate and either
re-program or replace, and test, all affected computer hardware, software and
process control systems in accordance with the Company's planned schedule. There
can be no guarantee that these estimates will prove accurate, and actual results
could differ from those estimated if these assumptions prove inaccurate.
Based upon progress to date, however, Exigent believes that it is unlikely that
the foregoing factors will cause actual results to differ significantly from
those estimated. As to the systems of the third parties that are linked to
<PAGE>
Exigent's, there can be no guarantee that such systems that are not now
Y2K-compliant will be timely converted to compliance. Additionally, there can be
no guarantee that third parties of business importance to Exigent will
successfully and timely reprogram or replace, and test, all of their own
computer hardware, software and process control systems.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 30, 1999. The
following matters were approved by the vote specified below:
<TABLE>
Broker
Proposal 1 - Election of Directors For Withhold Non-Votes
---------------------------------- --- -------- ---------
Approval of election of two Class I directors
to the Board of Directors for a term expiring
at the 2000 Annual Meeting
<S> <C> <C> <C>
Don F. Riordan, Jr. 3,257,361 27,546 62,596
Daniel J. Stark 3,244,286 40,621 62,596
Approval of election of three Class II directors
to the Board of Directors for a term expiring at
the 2001 Annual Meeting
Arthur H. Collier 3,255,546 29,361 62,596
Robert M. Janowiak 3,257,169 27,738 62,596
B.R. "Bernie" Smedley 3,231,130 53,777 62,596
Approval of election of two Class III directors
of the Board of Directors for a term expiring at
the 2002 Annual Meeting
Scott B. Helm 3,254,068 30,839 62,596
William R. Usher 3,252,071 32,836 62,596
</TABLE>
<TABLE>
Broker
Proposal 2 For Against Abstain Non-Votes
---------- --- ------- ------- ---------
<S> <C> <C> <C> <C>
Adoption of the Omnibus Stock Option and 2,854,999 162,100 31,992 298,412
Incentive Plan
Broker
Proposal 3 For Against Abstain Non-Votes
---------- --- ------- ------- ---------
Adoption of the Employee Stock Purchase Plan 2,908,496 57,742 21,757 359,508
Broker
Proposal 4 For Against Abstain Non-Votes
---------- --- ------- ------- ---------
Ratification of the selection of the firm of 3,217,892 36,182 29,633 63,796
Ernst & Young LLP as independent auditors for
the fiscal year ending December 31, 1999
</TABLE>
The text of the items referred to under this Item 4 is set forth in the Proxy
Statement dated May 10, 1999 previously filed with the Securities and Exchange
Commission and incorporated herein by reference.
<PAGE>
Item 5. Other Information
1. Stockholders who intend to submit proposals at the 2000 Annual
Meeting of Stockholders must notify the Company of this intention no later than
December 31, 1999. Such proposals must otherwise be in compliance with the
Company's Certificate of Incorporation, Bylaws and applicable laws, rules and
regulations for consideration at the 2000 Annual Meeting.
2. Exigent Warrants currently trading on the Chicago Stock Exchange as
XNTWS and on the Nasdaq SmallCap as XGNTW will expire on January 30, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Exigent International, Inc.
August 12, 1999 By: /s/ B.R. Smedley
- --------------- ----------------------------------------------------
Date B.R. "Bernie" Smedley, Chief Executive Officer
August 12, 1999 By: /s/ Jeffery B. Weinress
- --------------- ----------------------------------------------------
Date Jeffery B. Weinress, Chief Financial Officer
August 12, 1999 By: /s/ Sally H. Ball
- --------------- ----------------------------------------------------
Date Sally H. Ball, Principal Accounting Officer
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