<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 2000
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 0-23585
EMERGENT INFORMATION TECHNOLOGIES, INC.
---------------------------------------
(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
--------------------------------------------------------------------------------
(Address of principal executive offices)
(949) 975-1487
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
SM&A CORPORATION
--------------------------------------------------------------------------------
(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 [_].
As of August 10, 2000, 16,358,863 shares of the registrant's common stock, no
par value, were outstanding.
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2000 4
and June 30, 1999
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 5-6
30, 1999
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
2
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 264 $ 1,226
Accounts receivable, net of allowance for doubtful accounts 24,858 22,676
Costs and estimated earnings in excess of billings on
contracts in progress, net of allowances 10,864 7,851
Prepaid income taxes 4,127 4,665
Prepaid expenses and other assets 1,707 440
Deferred income taxes 1,466 1,466
-------- -------
Total current assets 43,286 38,324
Property and equipment, net 5,840 5,636
Notes receivable - affiliates 1,387 1,744
Other assets 3,725 2,360
Goodwill, net 55,697 48,778
-------- -------
Total assets $109,935 $96,842
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 4,974 $ 3,475
Current portion of long-term debt 7,151 -
Accrued compensation and payroll taxes 7,913 6,093
Accrued earnout payable - 6,000
Other current liabilities 1,097 532
-------- -------
Total current liabilities 21,135 16,100
Deferred income taxes 399 399
Other liabilities 840 870
Long-term debt, excluding current portion 36,000 29,017
-------- -------
Total liabilities 58,374 46,386
Shareholders' equity:
Common stock; no par value; 50,000,000 shares authorized;
16,199,000 and 16,109,000 shares issued and outstanding
as of June 30, 2000 and December 31, 1999, respectively 161 161
Additional paid in capital 45,285 45,285
Retained earnings 6,115 5,010
-------- -------
Total shareholders' equity 51,561 50,456
-------- -------
Total liabilities and shareholders' equity $109,935 $96,842
======== =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated
financial statements.
3
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $32,385 $26,527 $63,972 $51,841
Cost of revenues 18,953 15,539 37,783 29,969
------- ------- ------- -------
Gross margin 13,432 10,988 26,189 21,872
Selling, general and administrative expenses 9,887 5,852 19,088 11,333
Software development expenses 1,111 973 2,390 2,141
Amortization of goodwill and other intangibles 642 285 1,163 630
------- ------- ------- -------
Operating income 1,792 3,878 3,548 7,768
Other expense, net 1,017 129 1,610 90
------- ------- ------- -------
Income before income taxes 775 3,749 1,938 7,678
Income tax expense 333 1,547 833 3,146
------- ------- ------- -------
Net income $ 442 $ 2,202 $ 1,105 $ 4,532
======= ======= ======= =======
Net income per share:
Basic $ 0.03 $ 0.14 $ 0.07 $ 0.28
Diluted $ 0.03 $ 0.14 $ 0.07 $ 0.28
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 16,199 16,090 16,190 16,301
Diluted 16,238 16,247 16,218 16,471
======= ======= ======= =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated
financial statements.
4
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,105 $ 4,532
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for doubtful accounts 52 (30)
Depreciation and amortization 1,873 1,113
Changes in assets and liabilities, net of effect from
acquisitions:
Accounts receivable, net (1,085) (4,855)
Costs and estimated earnings in excess of billings (3,013) (3,732)
Prepaid expenses and other assets (3,381) (33)
Trade accounts payable 957 (765)
Accrued compensation and payroll taxes 1,462 1,357
Income taxes 974 (808)
Other liabilities 18 (545)
------- -------
Net cash used in operating activities (1,038) (3,766)
Cash flows from investing activities:
Acquisition, principally goodwill, net of cash acquired (13,730) (3,393)
Additional expenditures related to acquisitions - (757)
Purchases of property and equipment (685) (1,627)
Repayment from shareholder 357 823
-------- -------
Net cash used in investing activities (14,058) (4,954)
Cash flows from financing activities:
Long-term borrowings 14,134 16,811
Proceeds from issuance of common stock - 329
Common stock repurchase - (4,948)
-------- -------
Net cash provided by financing activities 14,134 12,192
Net (decrease) increase in cash and cash equivalents (962) 3,472
Cash and cash equivalents at beginning of period 1,226 454
-------- -------
Cash and cash equivalents at end of period $ 264 $ 3,926
======== =======
Supplemental information - Cash paid for:
Interest $ 1,516 $ 85
Income taxes $ 189 $ 3,892
======== =======
</TABLE>
5
<PAGE>
Supplemental schedule of noncash investing activity:
Detail of business acquired and other purchase accounting adjustments as
follows (in thousands):
Cash consideration paid for acquisition $13,564 $3,263
Plus acquisition expenses 1,202 155
Less cash acquired in acquisition (1,036) (25)
------- ------
Cash paid for acquisition, net of cash acquired $13,730 $3,393
======= ======
See accompanying notes to the unaudited condensed consolidated
financial statements.
6
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Emergent Information Technologies, Inc. (formerly SM&A Corporation) and its
subsidiaries (collectively, "the Company") is a comprehensive provider of
competitive-edge information technology and consulting services and software
products. The Company's proprietary software applications serve the
telecommunications, healthcare and other industries. Within the defense and
aerospace sector, the Company provides systems engineering, program management
and consulting services to both commercial and government customers. Finally,
the Company delivers proposal management and win strategy development services
for commercial clients.
In January 1998, the Company completed an initial public offering ("IPO")
of common stock, no par value ("Common Stock"). In May 1998, the Company
acquired Space Applications Corporation ("SAC"). SAC provides systems
engineering, scientific research, program management support and technical
support to military and civilian space programs, the intelligence community and
the armed services. In August 1998, the Company acquired Decision-Science
Applications, Inc. ("DSA"). DSA provides systems engineering, information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. In March 1999, the
Company acquired Systems Integration Software, Inc. ("SIS"). SIS provides
software integration services and products to a wide variety of commercial
companies with services ranging from custom software development to complete
testing and outsourcing. In September 1999, the Company acquired Kapos
Associates, Inc. ("KAI"). KAI provides operations research, war gaming and
systems analysis to the U.S Government. In February 2000, the Company acquired
System Simulation Solutions, Inc. ("S3I"). S3I specializes in the design,
development and application of powerful simulation software products for the
U.S. Air Force assisting them on evaluating large-scale campaign-level
operations. SAC, DSA, SIS, KAI and S3I are collectively referred to as "the
Acquisitions." These transactions were accounted for as purchases and,
accordingly, the condensed consolidated financial statements include the
financial results of the Acquisitions from the effective dates of the respective
events.
Several software applications originally developed by the Acquisitions for
both commercial and government customers have been upgraded to standalone,
proprietary applications by the Company. The Company expects to continue to
develop and improve proprietary software applications, leveraging knowledge
gained from the defense industry as well as through commercial customer
interaction and product improvement initiatives.
The accompanying unaudited interim condensed consolidated financial
statements of 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 six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2000.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
7
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 30 years. The recoverability of goodwill is
determined by comparing the carrying value of intangible assets to the estimated
future operating income of the Company on an undiscounted cash-flow basis.
Should the carrying value of goodwill exceed the estimated operating income for
the expected period of benefit, an impairment for the excess would be recorded
at that time. As of June 30, 2000, no impairment has been recognized.
These consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto for the year ended
December 31, 1999. This information is included in the Company's Annual Report
on Form 10-K/A with the Securities and Exchange Commission on June 5, 2000.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income Per Share -- Basic net income per share is computed by dividing
--------------------
net income available to common shareholders by the weighted average number of
common shares outstanding during the periods presented. Diluted net income per
share is computed by dividing net income available to common shareholders by the
weighted average number of common and common equivalent shares outstanding
during the periods presented assuming the exercise of all in-the-money stock
options. Common equivalent shares have not been included where inclusion would
be anti-dilutive.
The following table illustrates the computation of basic and diluted
earnings per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted income per common
share - net earnings $ 442 $ 2,202 $ 1,105 $ 4,532
--------- ---------- ----------- ----------
Denominator for basic income per share - weighted
average shares outstanding during the period 16,199 16,090 16,190 16,301
Incremental common shares attributable to dilutive
outstanding stock options 39 157 28 170
--------- ---------- ----------- ----------
Denominator for diluted income per common share 16,238 16,247 16,218 16,471
--------- ---------- ----------- ----------
Basic net income per common share $ 0.03 $ 0.14 $ 0.07 $ 0.28
========= ========== =========== ==========
Diluted net income per common share $ 0.03 $ 0.14 $ 0.07 $ 0.28
========= ========== =========== ==========
</TABLE>
Recent Accounting Developments -- In June 1998, the Financial Accounting
------------------------------
Standards Board ("FASB") issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS 137 and SFAS 138. The provisions of the statement require
the recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet and the measurement of those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This
statement, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is currently reviewing SFAS 133, 137
and 138 and has not yet determined its impact, if any, on the Company's
financials.
In December 1999, SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles (GAAP) to
revenue recognition in financial statements. The Company is required to adopt
SAB 101 in the fourth quarter of 2000. Although the Company believes its revenue
recognition policies are in accordance with GAAP, the Company is currently
reviewing SAB 101 and has not yet determined its impact, if any, on the
Company's financials.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company does not expect that the
adoption of FIN 44 will have a material adverse effect on our financial position
or results of operations.
8
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. ACQUISITIONS
In February 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of S3I for approximately $6.4 million in cash. S3I
has the right to receive up to approximately $1 million in additional
consideration contingent upon S3I's achievement of certain operating results for
the twelve-month periods ending February 28, 2001, and February 28, 2002. The
earnouts are payable in cash and, if earned, are due within 60 days after each
of the first and second anniversary of the closing date, and will be recorded as
an addition to goodwill. This transaction was accounted for as a purchase and,
accordingly, the condensed consolidated financial statements include the
financial results of S3I from February 1, 2000, the beginning of the accounting
period in which the purchase transaction was finalized. Results of operations
for the six months ended June 30, 2000 and 1999 would not have been materially
impacted on a pro forma basis if the acquisition of S3I had occurred as of the
beginning of the respective periods.
The Company acquired SIS in March 1999, and KAI in September 1999, for an
aggregate amount of $5.6 million in cash and additional consideration contingent
upon the achievement of certain operating results. The Company paid $7.2
million in April 2000 as the earnout payment under the SIS acquisition
agreement. These transactions were accounted for as purchases and, accordingly,
the condensed consolidated financial statements include the financial results of
SIS and KAI from the effective dates of each such acquisition. Results of
operations for the six months ended June 30, 2000 and 1999 would not have been
materially impacted on a pro forma basis if the acquisition of SIS and KAI had
occurred as of the beginning of the respective periods.
The Company recorded goodwill of approximately $58.2 million as a result of
the Acquisitions. The Company incurred costs and expenses in connection with
the Acquisitions, including legal and accounting, and other various expenses.
Eligible costs were capitalized as part of goodwill in accordance with generally
accepted accounting principles. The allocation of the purchase price for the
Acquisitions and other purchase accounting adjustments are as follows (in
thousands):
<TABLE>
2000 1999
------- --------
<S> <C> <C>
Total purchase price, net $13,860 $ 5,636
Net assets acquired (901) (837)
Acquisition costs 906 661
------- --------
Goodwill 13,865 5,460
Less accumulated amortization (946) (1,281)
------- --------
Goodwill, net $12,919 $ 4,179
======= ========
</TABLE>
NOTE 4. LONG-TERM DEBT
On August 9, 2000, the Company amended its revolving line of credit (the
"Amended Credit Facility") with its bank syndicate. The Amended Credit Facility,
which is secured by a first priority interest in substantially all of the assets
and a pledge of capital stock of each subsidiary of the Company, has a current
maturity of July 2001. The Amended Credit Facility requires the following
commitment reductions: (i) $45 million by August 12, 2000; (ii) $42.8 million by
September 23, 2000; (iii) $41.8 million by September 30, 2000; and (iv) $36
million by December 31, 2000. As of June 30, 2000, the Company was not in
compliance with certain financial covenants, however, waivers have been obtained
from the lenders in exchange for the aforementioned amendment. The Company's
effective interest rate on outstanding borrowings under the Amended Credit
Facility at June 30, 2000 was 10.19%.
9
<PAGE>
EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5. SEGMENT REPORTING DATA
The Company classifies its operations into four lines of business, each
offering a distinct set of services. These lines of business are summarized as
follows: Emergent West focuses on implementing and integrating web-based
selling systems; Emergent Central supports commercial telecommunications with
operational support systems, billing, network and control software, business-to-
business internet commerce and other related industries; Emergent East provides
information technology support, science, and program management for both
commercial and government clients; and Steven Myers & Associates assists clients
with the procurement of government and commercial programs.
The Company evaluates performance based on several factors, of which a
primary financial measure is business segment revenue earned. The revenue
recognition policies of the business segments vary according to the type of
contract involved.
Information as to the lines of business is set forth below. The information
presented for the three and six months ended June 30, 2000 and 1999 represents
historical supplemental data as described on the statements of income (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------
2000 1999 2000 1999
------------ ---------------------------------- ----------
<S> <C> <C> <C> <C>
Net revenues
Emergent Central $ 3,765 $ 4,613 $ 6,955 $ 9,753
Emergent East 19,115 10,703 38,449 19,737
Emergent West 54 - 54 -
Steven Myers & Associates 9,451 11,211 18,514 22,351
------------ ----------- ----------- ----------
Total revenues $32,385 $26,527 $63,972 $51,841
============ =========== =========== ==========
Depreciation and amortization expense:
Emergent Central $ 101 $ 77 $ 189 $ 111
Emergent East 704 532 1,298 771
Emergent West - - - -
Steven Myers & Associates 42 18 81 50
Executive Group 167 141 305 181
------------ ----------- ----------- ----------
Total depreciation and amortization $ 1,014 $ 768 $ 1,873 $ 1,113
============ =========== =========== ==========
Operating income (loss):
Emergent Central $ (528) $ 761 $(1,023) $ 1,488
Emergent East 2,034 2,790 4,295 5,120
Emergent West 26 - 26 -
Steven Myers & Associates 3,065 3,690 5,742 7,947
Executive Group (2,805) (3,363) (5,492) (6,787)
------------ ----------- ----------- ----------
Total operating income (loss) $ 1,792 $ 3,878 $ 3,548 $ 7,768
============ =========== =========== ==========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements of the Company and its
subsidiaries and the notes thereto included elsewhere in this Quarterly Report
on Form 10-Q. From time to time, the Company through its management, may make
forward-looking public statements, such as statements concerning the 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 contained 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 that 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 that 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net Revenues. Net revenues increased $5.9 million, or 22.1%, to $32.4
million for the three months ended June 30, 2000 as compared to $26.5 million
for the three months ended June 30, 1999. The increase resulted primarily from a
combination of internal revenue growth and acquisitions (KAI and S3I contributed
revenue of $2.8 million). Factors contributing to our internal growth rate
include: (i) increased demand in the information technology and high-end
contract support services market; (ii) increased billing rates resulting from an
increase in associates' wages; (iii) sales of internally developed software
products and related maintenance services; and (iv) sales of software licenses.
Gross Margin. Gross margin increased $2.4 million, or 22.2%, to $13.4
million, for the three months ended June 30, 2000 as compared to $11.0 million
for the three months ended June 30, 1999. As a percentage of net revenues, gross
margin increased to 41.5% compared to 41.4% for the same three months of 1999.
Selling, General & Administrative Expenses, Software Development Costs and
Amortization of Goodwill and Other Intangibles. Selling, general and
administrative expenses increased $4.0 million, or 69.0%, to $9.9 million for
the three months ended June 30, 2000 as compared to $5.9 million for the three
months ended June 30, 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 30.5% for the three months ended June 30,
2000, as
11
<PAGE>
compared to 22.1% for the same three months of 1999. This increase was the
result of non-recurring expenses related to corporate rebranding and consulting
and audit fees pertaining to the prior year. Also contributing were increases in
administrative costs related to the increase in number of personnel as well as
facility expenses attributable to the Company's new office facilities in Vienna,
Virginia and Colorado Springs, Colorado. In the three months ended June 30,
2000, the Company expensed $1.1 million of development costs for software
products to be sold to commercial customers as compared to $973,000 in the prior
year period. Amortization of goodwill and other intangibles increased to
$642,000 for the three months ended June 30, 2000, from $285,000 for the same
three months of 1999, reflecting the acquisitions of S3I in the current year and
KAI in late 1999.
Operating Income. Operating income was $1.8 million for the three months
ended June 30, 2000 as compared to $3.9 million in the prior year period. As a
percentage of revenues, operating income decreased to 5.5% for the three months
ended June 30, 2000 from 14.6% for the same three months of 1999, which is
attributed to the increase in selling, general and administrative expenses,
discussed above.
Other Expense. Other expense, net was $1.0 million for the three months
ended June 30, 2000 as compared to other expense, net of $129,000 for the same
three months of 1999. The increase in other net expenses is due to higher
interest expense based on increased bank borrowings.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Revenues. Net revenues increased $12.1 million, or 23.4%, to $64.0
million for the six months ended June 30, 2000 as compared to $51.8 million for
the six months ended June 30, 1999. The increase resulted primarily from a
combination of internal revenue growth and acquisitions (KAI and S3I contributed
2000 revenue of $5.0 million). Factors contributing to our internal growth rate
include: (i) increased demand in the information technology and high-end
contract support services market; (ii) increased billing rates resulting from an
increase in associates' wages; (iii) sales of internally developed software
products and related maintenance services; and (iv) sales of software licenses.
Gross Margin. Gross margin increased $4.3 million, or 19.7%, to $26.2
million, for the six months ended June 30, 2000 as compared to $21.9 million for
the six months ended June 30, 1999. As a percentage of net revenues, gross
margin decreased to 40.9% compared to 42.2% for the same six months of 1999. The
decrease in gross margin as a percentage of revenues was attributed to an
increase in compensation and benefits to direct employees and a reduction in
contribution from the Company's proposal management business as a percentage of
total revenues.
Selling, General & Administrative Expenses, Software Development Costs and
Amortization of Goodwill and Other Intangibles. Selling, general and
administrative expenses increased $7.8 million, or 68.4%, to $19.1 million for
the six months ended June 30, 2000 as compared to $11.3 million for the six
months ended June 30, 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 29.8% for the six months ended June 30,
2000, as compared to 21.9% for the same six months of 1999. This increase was
the result of non-recurring expenses related to corporate rebranding and
consulting and audit fees pertaining to the prior year. Also contributing were
increases in administrative costs related to the increase in number of personnel
as well as facility expenses attributable to the Company's new office facilities
in Vienna, Virginia and Colorado Springs, Colorado. The Company expensed $2.4
million of development costs for software products to be sold to commercial
customers for the six months ended June 30, 2000 as compared to $2.1 million in
the prior year period. Amortization of goodwill and other intangibles increased
to $1.2 million for the six months ended June 30, 2000, from $630,000 for the
same six months of 1999, reflecting the acquisition of S3I in the current year
and SIS and KAI in the prior year.
Operating Income. Operating income was $3.5 million for the six months
ended June 30, 2000 as compared to $7.8 million in the prior year period. As a
percentage of revenues, operating income decreased to 5.6% for the six months
ended
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June 30, 2000 from 15.0% for the same six months of 1999, which is attributed to
the increase in selling, general and administrative expenses, discussed above.
Other Expense. Other expense, net was $1.6 million for the six months ended
June 30, 2000 as compared to other expense, net of $90,000 for the same six
months of 1999. The increase in net expenses is due to higher interest expense
of $1.5 million based on increased bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, the Company's net cash used in
operating activities was approximately $1.0 million, compared to cash used in
operating activities of $3.8 million in the same period of the prior year. This
decrease was due to an increase in collection of accounts receivables.
Net cash used in investing activities was $14.1 million for the six months
ended June 30, 2000, compared to cash used in investing activities of $5.0
million for the same period of the prior year. The Company's primary uses of
funds for investing activities during the six months ended June 30, 2000 were
the acquisition of S3I in February 2000, the earnout payment in April 2000 under
the SIS acquisition agreement, and purchases of property and equipment used in
operations.
Net cash provided by financing activities was $14.1 million in the six
months ended June 30, 2000, compared to $12.2 million for the same period of the
prior year. The primary source of cash provided by financing activities for the
six months ended June 30, 2000 was net borrowings to fund the acquisition of S3I
and the earnout payment to SIS.
The definitive agreements with KAI and S3I obligate the Company to make
earnout payments contingent upon the achievement of certain operating results.
The earnouts are payable in cash and are due within the next eighteen months.
The Company expects to pay such earnout payments from existing cash and cash
equivalents, cash flow from operations through reduction in days sales
outstanding and liquidation of assets.
RISK FACTORS
The Company's income may be highly affected by software sales and development
expenses
The Company has spent approximately 5.0% of its revenue on proprietary
software development since the first quarter of 1999 to improve software
applications originally developed by the Acquisitions for both commercial and
government customers and upgrade them to standalone, proprietary applications.
The Company expects to continue to develop and improve proprietary software
applications, leveraging knowledge gained from the defense industry as well as
through commercial customer interaction and product improvement initiatives.
Software revenues may not offset this development expense. In addition, the
Company may incur increased sales and marketing costs associated with trying to
sell new and existing software products. The revenue realized by such software
products may produce significant fluctuations in income.
The markets in which the Company competes are highly competitive
The Company seeks to achieve significant growth in the information
technology ("IT") services, systems engineering and proprietary software
products markets; however, there can be no assurance that the Company will be
successful in such efforts. The market for services in the contract support
industry is highly competitive, highly fragmented and subject to rapid change.
Such competition is likely to increase in the future. Many competitors have
greater personnel, financial,
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technical and marketing resources. These competitors include: Computer Sciences
Corporation, Electronic Data Systems Corporation, and Unisys Corporation. In
addition, product acceptance and direct (sales force) and indirect (partners and
resellers) channel development may contribute materially to the success or
failure of the Company's software products in the marketplace.
The market for the Company's subsidiary, Steven Myers & Associates, is a
niche market with a number of competitors. Steven Myers & Associates provides
proposal management services in the procurement of government and commercial
contracts for the aerospace and defense industry and is the largest provider of
such services and principally compete with numerous smaller proposal management
companies in this highly specialized industry. Steven Myers & Associates 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. Such competitors include many larger management consulting firms
such as McKinsey & Company, Booz Allen & Hamilton, and Science Applications
International Corp., as well as the consulting arms of major accounting firms,
IT service and solutions firms such as American Management Systems, Answer Think
Consulting Group, BTG, Inc., Diamond Technology Partners, Inc., and CACI
International. In addition, there can be no assurance that the Company will be
successful in such efforts. In addition, significant further expense for sales
and marketing may require the Company to promote a major expansion of services
in such area. If unsuccessful in further penetrating the market for such
services, or Steven Myers and Associates' current 86.5% win rate in the
proposal management business drops significantly, the Company's growth prospects
could be materially and adversely affected.
The Company may fail to manage its future growth effectively
The Company is currently experiencing significant growth and intend to
pursue further growth as part of our business strategy. The Company's ability to
manage the growth of operations will require the Company to continue to improve
operational, financial and other internal systems and to attract, develop,
motivate and retain employees. The Company's rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation of
financial reporting systems and increased pressure on senior management and will
increase the demands on systems and internal controls. In addition, 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's growth strategy will require an increase in its personnel,
particularly skilled software developers, 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 increase its current rate of growth, effectively manage its
expanding operations or achieve planned growth on a timely or profitable basis.
To the extent that the Company is unable to manage growth effectively and
efficiently, business, financial condition and results of operations could be
materially and adversely affected.
The Company's business depends substantially on the defense industry
Approximately 28.4% of consolidated revenues were derived from services
provided by Steven Myers and Associates related to government procurement
contracts for the six months ended June 30, 2000. In addition, significant
portions of our revenues are derived from contracts or subcontracts directly
with the U.S. Government. For the foreseeable future, we expect that the
percentage of revenues attributable to such contracts will continue to be
substantial, albeit a declining share of our revenue. U.S. Government
expenditures for defense products may decline in the future, with such
reductions having an effect on our clients, and indirectly or directly, on us. A
number of trends may contribute to such a decline, including:
. large weapon systems being replaced with smaller, more precise high
technology systems
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. multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter
. threat scenarios evolving away from global conflicts to regional conflicts
. 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 its 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 our business, operating results and financial condition.
There are risks associated with government contracting
The Company is subject to risks associated with compliance with
governmental regulations, both directly and through government-contractor
clients. 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 its business, operating results and financial condition. The
Company relies on the continuance and expansion of 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.
In addition, significant portions of the Company's revenues are derived
from contracts or subcontracts with the U.S. Government. Its services are
performed pursuant to the following types of contracts:
. cost reimbursable
. time and materials
. fixed-price contracts and subcontracts
Under fixed-price contracts and time-and-materials contracts, the Company
bears any risk of increased or unexpected costs that may reduce profits or cause
the Company to sustain a loss.
The Company's U.S. Government contracts and subcontracts are subject to
termination, reduction or modification as a result of changes in the U.S.
Government's requirements or budgetary restrictions, or at the convenience of
the U.S. Government. When the Company participates as a subcontractor, it is
also subject to the risk that the primary contractor may fail or become unable
to perform its duties and responsibilities as a prime contractor. If a contract
were to be terminated for convenience, the Company would be reimbursed for
allowable costs incurred up to the date of termination and would be paid a
proportionate amount of the stipulated profits or fees attributable to the work
actually performed.
Contracts with the U.S. Government are generally complex in nature, and
require the Company to comply with numerous U.S. Government regulations
regarding discrimination in the hiring of personnel, fringe benefits for
employees, safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping and
accounting, management qualifications, drug free work place and numerous other
matters.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of the Company
or of its major clients could have a material adverse effect. The Company's
books and records are subject to annual audit by the Defense Contract Audit
Agency, which can result in adjustments to contract costs and fees. If any costs
are improperly allocated to a
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contract, such costs are not reimbursable and, if already reimbursed, will
require the Company to refund such amounts to the government. If improper or
illegal activities are discovered in the course of any audits or investigations,
the contractor may also be subject to various civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or disqualification from
doing business with the government. If the Company becomes subject to penalties
or sanctions, such penalties or sanctions could have a material adverse effect
on its business, financial condition and results of operations.
There are risks associated with the Company's acquisition strategy
The Company has acquired five companies (SAC, DSA, SIS, KAI and S3I) since
the IPO. There can be no assurance that the anticipated economic, operational
and other benefits of its acquisitions will be realized. The Company cannot be
sure that it will be able to successfully integrate acquired businesses in a
timely manner without substantial costs, delays or other operational or
financial problems. The difficulties of such integration may initially be
increased by the Company's need to integrate personnel with different business
backgrounds and corporate cultures. In addition, acquisitions may involve
spending significant funds. The Company's failure to effectively integrate the
acquired companies may adversely affect its ability to bid successfully on
certain engagements and otherwise grow its business. Client dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on its reputation as a whole, and this could result in increased difficulty in
marketing services or acquiring companies in the future. In addition, the
Company cannot be certain that the acquired companies will operate profitably or
will not otherwise hurt operating results. There are other risks with
acquisitions. These include diversion of management attention, potential loss of
key clients or personnel, risks associated with unanticipated problems,
liabilities or contingencies and risks of entering markets in which we have
limited or no direct experience. The occurrence of some or all of the events
described in these risks could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company relies on a relatively limited number of clients
The Company derives a significant portion of revenues from a relatively
limited number of clients. For example, revenues from the ten most significant
clients accounted for approximately 80.0%, 76.0%, 90.3%, and 98.0% of total
revenues for the years ended December 31, 1999, 1998, 1997, and 1996,
respectively. Three clients, the U.S. Government, Lockheed Martin Corporation
and Raytheon Company accounted for approximately 64.1%, 57.2% and 33.3% of total
revenues for the years ended December 31, 1999, 1998 and 1997, respectively.
Raytheon Corporation is the Company's single largest commercial client,
accounting for approximately 20.5%, 15.8%, and 10.9% of total revenues for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company relies on the proprietary rights of Steven Myers & Associates
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, patent, copyright and trademark laws
to protect its proprietary rights. There can be no assurance that the steps
taken to protect its proprietary rights will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce the Company's
intellectual property rights.
Although the Company believes that its services do not infringe on the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of claims alleging infringement of third-party intellectual
property rights. Any such claims could require the Company to spend significant
amounts in litigation, pay damages, develop non-infringing intellectual property
or acquire licenses to the intellectual property that is the subject of asserted
infringement.
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The Company relies heavily upon its key employees
The Company's success is highly dependent upon the efforts, abilities,
business development capabilities and project execution of its executive
officers, in particular those of Steven S. Myers, Chairman of the Board and
Michael A. Piraino, Chief Executive Officer and President. The loss of the
services of either of these individuals for any reason could materially and
adversely affect the Company's business, operating results and financial
condition, including its ability to secure and complete engagements. The Company
currently maintain a key-man life insurance policy in the amount of $2.0 million
each, for Mr. Myers and Mr. Piraino.
The Company's quarterly results may fluctuate significantly
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including the size, timing and
duration of client engagements and the timing of software products licensing
revenues. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations.")
The Company's stock price is subject to significant volatility
The Company's Common Stock was first publicly traded on January 29, 1998
after our initial public offering at $12.00 per share. Between January 29, 1998
and June 30, 2000 the closing sale price has ranged widely. The market price of
the Company's Common Stock could continue to fluctuate substantially due to a
variety of factors, including:
. quarterly fluctuations in results of operations;
. adverse circumstances affecting the introduction or market acceptance of new
services offered;
. announcements of new services by competitors;
. loss of key employees;
. changes in the regulatory environment or market conditions affecting
customers;
. changes in earnings estimates or stock rating by analysts;
. lack of market liquidity resulting from a relatively small amount of public
stock float;
. sales of common stock by existing holders; and
. the announcement and market acceptance of proposed acquisitions.
The Company's principal shareholder has significant control
Steven S. Myers, Chairman of the Board, beneficially owns approximately
44.4% of the Company's outstanding common stock and will have the ability to
control or significantly influence the election of directors and the results of
other matters submitted to a vote of shareholders. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company and may adversely affect the voting or other rights of other holders
of common stock. The Company's board of directors is currently comprised
entirely of individuals supported by Mr. Myers.
The Company may fail to manage its cash flow and violate its debt covenants
The Company has recently expended and expect to continue to expend
significant amounts of cash in connection with our growth and the recent
acquisition of companies. In addition, as a result of certain earnout
obligations, the Company may be required to make further expenditures of cash in
connection with such acquisitions. The Company also requires certain levels of
cash in the
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normal operation of business. The Company currently maintains credit facilities
with its banks in the amount of $45 million. At June 30, 2000, the Company has a
balance outstanding pursuant to such credit facilities of $43.1 million.
While the Company believes that current financing needs will be adequately
addressed with profits from operations for the foreseeable future, there can be
no assurance that such will be sufficient for all its requirements in the
future, that the Company's banks will increase its credit facilities as and when
needed, that such banks will renew its credit facilities at the expiration of
their current term or that any such modification or renewal will be on terms
satisfactory to the Company. In such case, the Company may be compelled to
consider, among other things, raising additional cash through equity markets or
liquidate assets. If the Company is unable to obtain additional financing when
so required, there would be a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there are any disclosures required under
this item with respect to market risk sensitive instruments. The Company's
obligations under its long-term debt bear interest at rates which have been
indexed to current market rates.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 6, 2000.
(b) Omitted pursuant to Instruction 3 to Item 4 From 10-Q.
(c) (i) Election of seven directors as follows:
For Against Abstain
--- ------- -------
Steven S. Myers 9,978,043 0 78,517
Michael A. Piraino 9,978,043 0 78,517
J. Christopher Lewis 9,975,377 0 81,183
Vincent C. Smith 9,978,043 0 78,517
Joseph B. Fuller 9,978,043 0 78,517
Luther J. Nussbaum 9,978,043 0 78,517
Albert S. Nagy 9,975,377 0 81,183
(c)(ii) Approval of amendment to the Company's Bylaws increasing the
specified limits of the authorized number of directors to a
minimum of four and a maximum of seven:
For: 10,028,440
Against: 25,016
Abstain: 100
(c)(iii) Approval of amendment to the Company's 1997 Stock Option Plan to
increase the number of shares of common stock available for
issuance thereunder to 4,000,000 shares:
For: 9,842,148
Against: 214,312
Abstain: 100
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment Number Four to amended and restated credit and security
agreement dated August 9, 2000 among the Company, Mellon Bank and
Wells Fargo Bank.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On May 5, 2000, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting on the acquisition of
Emergent Information Technologies, Inc. ("EITI") by the Company in a short
form merger. As part of the merger, the Company changed its name to
"Emergent Information Technologies, Inc." and EITI was merged into the
Company with the Company as the surviving corporation. The Form 8-K also
reported on the contribution to Steven Myers & Associates, Inc. of certain
assets constituting the proposal management portion of the Company's
business.
On May 26, 2000, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting on the delisting of
Company securities from the Nasdaq National Market.
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SIGNATURE
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.
EMERGENT INFORMATION TECHNOLOGIES, INC.
Date: August 14, 2000 By: /s/ MICHAEL OKADA
--------------------------------------
Michael Okada
Corporate Controller, Chief Accounting
Officer, and Assistant Secretary
(Principal Accounting Officer)
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EXHIBIT INDEX
Description
-----------
10.1 Amendment Number Four to amended and restated credit and security
agreement dated August 9, 2000 among the Company, Mellon Bank and Wells
Fargo Bank
27.1 Financial Data Schedules (EDGAR)
