-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ju8uieVWEgX79XjtPyCZaSQ501gZiXBHLlPwF3RYAK/7DgQKzSpIsq/+xG2OvGJY UwoA9SczW0zFwGYajSB94A== 0001095811-01-501298.txt : 20010418 0001095811-01-501298.hdr.sgml : 20010418 ACCESSION NUMBER: 0001095811-01-501298 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGENT INFORMATION TECHNOLOGIES INC CENTRAL INDEX KEY: 0001050031 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 330080929 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23585 FILM NUMBER: 1604053 BUSINESS ADDRESS: STREET 1: 4695 MACARTHUR COURT STREET 2: 8TH FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9499751550 MAIL ADDRESS: STREET 1: 4695 MACARTHUR COURT STREET 2: 8TH FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: SM&A CORP DATE OF NAME CHANGE: 19980818 FORMER COMPANY: FORMER CONFORMED NAME: STEVEN MYERS & ASSOCIATES INC DATE OF NAME CHANGE: 19980123 10-K 1 a71291e10-k.txt FORM 10-K PERIOD END DECEMBER 31, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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, 8TH FLOOR, NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (949) 975-1487 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE (TITLE OF CLASS) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of April 6, 2001, 18,943,734 shares of the Registrant's common stock, no par value ("Common Stock"), were outstanding. The aggregate market value of shares of Common Stock held by non-affiliates, based upon the closing sale price of the stock on the Nasdaq Small Capitalization Market on April 6, 2001, was approximately $11,989,506.(1) This document incorporates certain information by reference from the Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for June 6, 2001. - ----------- 1. For purposes of this report, in addition to those shareholders which fall within the definition of "affiliate" under Rule 405 of the Securities Act of 1933, as amended, holders of ten percent or more of the Registrant's Common Stock are deemed to be affiliates. ================================================================================ 2 PART I ITEM 1 INTRODUCTION This Annual Report on Form 10-K contains certain statements which are not historical in nature, and are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended by Public Law 104-6. Such forward-looking statements are principally contained in the sections entitled "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, without limitation, statements relating to (i) the anticipated growth in the proposal management, management consulting, contract support, systems engineering and program management services markets; (ii) anticipated trends in the financial condition and results of operations of Emergent Information Technologies, Inc. ("Emergent" or the "Company") (including expected changes in the Company's gross margin and general, administrative and selling expenses); (iii) the ability of the Company to finance its working capital requirements; (iv) the Company's business strategy for expanding its services markets; and (v) the Company's ability to distinguish itself from its current and future competitors. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described in the "Risk Factors" discussion contained herein, important factors to consider in evaluating such forward-looking statements include (i) the shortage of reliable market data regarding the information technology solutions, high-end systems engineering, and integrated proposal management services markets; (ii) changes in external competitive market factors or in the Company's internal budgeting process which might impact trends in the Company's results of operations; (iii) unanticipated working capital or other cash requirements; (iv) changes in the Company's business strategy or an inability to execute its strategy due to unanticipated changes in the information technology services solutions, high-end systems engineering and integrated proposal management and contract support services markets; and (v) various other factors that may prevent the Company from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail in the "Risk Factors" discussion contained herein, there can be no assurance that the actual results will not differ materially from such forward-looking statements contained herein. When used in this report, the words "anticipate," "believe," "intends," "estimate," and "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company cautions readers that forward-looking statements, including without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company's reports with the Securities and Exchange Commission. OVERVIEW Emergent Information Technologies, Inc, formerly SM&A Corporation, was founded in 1982. After years of consistent revenue and profit growth, the Company completed an initial public offering in January 1998 and embarked on a strategic acquisition program to broaden its service and product offering capabilities. The Company is a comprehensive provider of high-end systems engineering services and integrated proposal management services. The Company has two distinct operating groups: Information technology support, science, and program management for government clients ("Emergent-East"), and proposal management and competitive strategy consulting services ("Steven Myers & Associates"). During 2000, the Company made a strategic decision to discontinue a third line of business consisting of commercial software development. Emergent Information Technologies, Inc. delivers its services and products to a diverse group of clients including aerospace and defense contractors as well as federal and state government agencies. 1 3 Emergent-East Emergent-East provides (i) information technology, systems engineering, and program integration services, (ii) modeling and simulation support, (iii) advanced scientific research, and (iv) management and technical analysis to federal and state government agencies, major aerospace and defense contractors. Emergent-East provides a full spectrum of information technology services such as wargaming capabilities, and modeling and simulation services which significantly enhances and expands a client's technical evaluation and decision making capabilities. Emergent-East's systems engineering services helps its clients to define the work that must be done to meet the objectives of a program or contract. Systems engineers define top level program objectives, perform cost studies and analyses, and then manage the process to ensure that top level requirements are being met as the program evolves from design through development, test and production phases. Concurrent with systems engineering, Emergent-East provides program integration functions, which ensure that the program has been meticulously planned and that the program team follows the plan. Emergent-East's IT and related services are provided on either a time-and-materials or cost reimbursable basis. Those services provided to federal and state agencies are done so through a number of contract vehicles including, but not limited to, full and open competitive contracts, the GSA schedules, blanket purchase agreements and indefinite delivery and indefinite quantity agreements. Revenue growth rates and margins in the government IT and related services sector, while not providing the same economics as commercial activities, do provide a predictability of revenue and profit due to the long-term structured orientation of government IT and related services that is uncharacteristic of the commercial market in general. Steven Myers & Associates ("SM&A") SM&A is the largest and most successful provider of integrated proposal management services through a proprietary proposal management strategy and process. In conjunction with this process, SM&A typically assumes a leadership role and places dedicated teams at client facilities to manage all aspects of the competitive proposal development process. Since 1982, SM&A has supported over 500 proposals worth over $173 billion in value for clients with a corresponding proposal win rate of 86.4% based on the dollar value of contracts awarded. SM&A had over $2.3 billion in new contract awards and 20 proposal wins by its clients during 2000. The combination of its unprecedented win rate and superior reputation has contributed to SM&A's dominant market share of proposal management services actually outsourced by government contractors. Emergent-East has leveraged SM&A's win rate to its advantage by using SM&A's proposal management expertise to win a major contract in 2000, potentially worth over $40M in contract revenues over its five year life time. One additional proposal has been submitted by Emergent-East using SM&A's leadership, that is potentially worth over $350M in its eight year contract life. Several additional prime proposals using this relationship are in various stages of preparation, prior to submittal to the government. SM&A also leverages its success in winning business for its clients and its involvement in the project life cycle to extend its services beyond proposal development to SM&A's comprehensive capabilities in the areas of information technology services, systems engineering program integration, and other technical areas. SM&A has been expanding its management consulting practice with both traditional aerospace and defense as well as non-aerospace customers. 2 4 Integration of Acquisitions During 1998, the Company acquired two high-end engineering and information technology consulting firms (the "1998 Acquisitions"): Space Applications Corporation ("SAC") and Decision-Science Applications, Inc. ("DSA"). SAC, founded in 1969, provided systems engineering, scientific research, program management support and technical support to military and civilian space programs, the intelligence community and the armed services. DSA, founded in 1977, provided systems engineering, information systems development, scientific research and program management support to the U.S. Government, principally the Department of Defense ("DoD"). The 1998 Acquisitions increased the scope and depth of the Company's high-end profile services, adding more than 400 systems engineering, information technology and program integration experts and expanding Emergent's domestic presence with offices in strategic locations near significant market centers. In March 1999, the Company acquired Systems Integration Softare, Inc. ("SIS"). SIS developed proprietary software products and services focused on improving system performance and network reliability. This transaction was accounted for as a purchase. The SIS operations were discontinued effective August 2, 2000, and therefore included in discontinued operations. In September 1999, the Company acquired Kapos Associates Inc. ("KAI"). KAI provides operations research, wargaming and systems analysis to the U.S. Government. This transaction was accounted for as a purchase and, accordingly, the consolidated financial statements include the financial results of KAI from the effective date of the acquisition. Its operations have been integrated with Emergent-East. The acquisitions of SIS and KAI are collectively referred to herein as "the 1999 Acquisitions." 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 United States Air Force assisting it in evaluating large-scale campaign level operations. The operations have been integrated with Emergent-East. This transaction was accounted for as a purchase and, accordingly, the consolidated financial statements include the financial results of S3I from the effective date of the acquisition. The Company has consolidated the acquisitions of DSA, SAC, KAI, and S3I under common management into Emergent-East. During 2000, the Company began integration of the systems and operations of the acquisitions and the acquisitions have been fully integrated by the first quarter 2001. On August 2, 2000, the Company's Board of Directors adopted a plan to discontinue the operations of Emergent-Central, previously disclosed as a business segment of the Company formed in 1999 to develop and license proprietary commercial software applications with focuses in telecommunications, enterprise security solutions, medical information and network management solutions. Emergent-Central was developed from the acquisition of SIS and a portion of DSA. The Company determined by August 2000 that the additional capital needed to further develop the software and bring it to market was not available due to the change in the Company's access to bank financing and its inability to raise additional capital for commercial software development. MARKETS The Company is actively competing in two addressable markets: (i) the government services market (both as prime contractor and subcontractor) and, (ii) the proposal management and management consulting services market. The former market is mainly addressed by Emergent-East, the latter market mainly by SM&A. Government Services (Emergent-East) The Company estimates the annual market for government services of interest to the Company at about $89 billion, including $69 billion of Federal Services and $20 billion of State and local services. Within this market, the Company currently focuses on providing IT services, systems engineering, science, modeling and simulation, and decision support services. Federal Procurement Spending. The Federal government will spend approximately $230 billion in fiscal year 2001 to acquire goods and services, of which approximately two-thirds will be spent by the Department of Defense (DoD). Of the remaining third, a significant portion is spent on information technology goods and services. Approximately 36% of Federal procurement dollars are spent on supplies, 50% on services, and 14% on research and development (R&D). The Company primarily addresses specific niches within the services market, including professional services, automated data processing, and telecommunications services. This market constitutes about 14% of Federal procurement spending, or about $37 billion in 2001. In addition, the Company competes successfully 3 5 for various research and development contracts as well. Outsourced Federal R&D spending will be about $32 billion in 2001. Thus, the total Federal services market addressable by the Company is about $69 billion per year, the majority of which resides in the DoD. Spending at the DoD reached a modern era peak in 1986. The decline in defense spending accelerated with the ending of the Cold War and the completion of the Gulf War in 1991. Spending on defense goods declined 67% from 1986 to 1997 (the recent nadir of spending) and has since rebounded modestly. Spending on defense operations and maintenance (O&M) and R&D is still declining, reaching an expected low this year of 16% less than the peak in 1986. The decline has been less steep than the decline in procurement spending as the level of activity of the remaining, less numerous U.S. armed forces has never been higher in peacetime than today. Of significance to the Company is the fact that, as the Defense end-strength has declined (both uniformed and civilian), the requirement for outsourcing of services has increased. The significant decline in spending on defense goods since 1986 has had a dramatic affect on aerospace and defense suppliers, resulting in a massive market consolidation. On the other hand, the increased outsourcing of information technology and other defense O&M services has led to a 314% increase in service contracts with commercial entities since 1987 -- increasing from approximately $5.1 billion to approximately $21.1 billion in 2001 (in inflation adjusted 1999 dollars). The Company believes this represents a highly addressable subset of the $36.8 billion Federal services market mentioned above. State and Local Procurement Spending. State and local governments will procure approximately $400 billion of goods and services in 2001. Of this amount, the Company estimates that approximately 5% is spent on services for which the Company can successfully compete -- a market of approximately $20 billion annually. State and local service-based projects are generally smaller and less complex than Federal ones, thus reducing the addressable market. The Government Services Market and Trends The Company believes that growth of the market for government services is dependent on a number of factors, including but not limited to: * U.S. Government Outsourcing. In response to a reduced federal budget and demands for efficiencies in government operation, many services that were once performed in-house by U.S. Government employees are now being outsourced to private industry. It is well-documented that this trend will likely continue as the government finds it increasingly difficult to recruit, train, and retain qualified IT specialists, scientists, engineers, and other professionals. * U.S. Government Contract Bundling. In the past, contracts were awarded in larger numbers for smaller amounts. As part of the streamlining of government initiatives, services contracts are often being bundled into larger value contracts. In addition, the government's traditional role as program integrator is now often delegated to prime contractors. This provides fewer opportunities for bidding, but allows the winning prime contractors to significantly increase revenue and profit. This factor allows companies who can write proposals well (such as Emergent-East, in partnership with its SM&A subsidiary) and manage subcontractors efficiently to grow rapidly in a flat market. * DoD Focus on Interoperability. Many of the command and control (C2) systems developed in the last decade use information technologies inefficiently, do not capitalize on commercial standards, and do not interoperate with each other. A major trend in the marketplace is the modification of systems to work with each other and the testing and certification of those systems for use in joint and coalition warfare. New C2 systems must be designed from the beginning to work with other C2 systems. The Company's expertise in the engineering of these C2 systems positions it to take advantage of this trend. * New administration. The new administration has expressed interest in "skipping a generation" of weapon systems. This may result in the cancellation or restructuring of existing programs and the analysis of new alternatives. The Company is well positioned to provide the engineering services to support this restructuring and analysis work through systems analysis, modeling and simulation, systems engineering and systems integration services. * Focus on Commercial Technology. The U.S. Government, in order to reduce the total cost of ownership of information systems, has emphasized commercial-off-the shelf (COTS) hardware and software. As these systems evolve, the needs of the government users often differ from the original customer expectations of the targeted COTS technology, thus requiring customized solutions, either through the development of database structures that process and display information or through software adaptations that process the data in a different manner. 4 6 Proposal Management and Management Consulting Services (SM&A) Companies competing for large government and commercial contracts often seek the assistance of an outside firm of experts that can manage the proposal process and maximize the company's prospects of winning new business. In addition, companies interested in penetrating new markets or consolidating existing markets will often retain the services of firms capable of conducting unbiased research and providing clear advice about needed investments or restructuring, unencumbered by internal corporate expectations. The Company estimates that the annual market for SM&A's proposal management services is about $200 million, of which $60 million is readily addressable within SM&A's current business model. The market for management consulting services is much larger, depending on how broadly the Company wants to pursue that market by competing with the more established firms in the field. The Company believes that growth of the market for proposal management is dependent on a number of factors, including but not limited to: * Increase in the Defense Spending Budget. The defense budget is growing in some areas as the drawdown from the end of Cold War has ceased, combined with the need for modernization. A good deal of that spending will be driven by increased investment in IT, command and control systems, communications, computers and intelligence systems. Additional funding for new weapons could originate from additional cost savings in existing programs. The decrease in operational overhead of the Department of Defense will create additional opportunities to provide proposal management for new defense services contracts. Spending on new competitive defense systems contracts bottomed out in 1997 at barely more than one-third of the peak in 1986. The Company estimates that new competitive contract spending on defense systems increased 22% from 1997 to 2000 and will increase at the same or better rate in the next three years. Spending on new competitive defense R&D contracts is still in decline as R&D spending has declined overall and resources have been shifting into government-run R&D centers and away from contractors. From 1997 to 2000, the decline in the value of new R&D starts was about 17%. The new administration has pledged a 20% increase in defense R&D spending. As mentioned before, the market for outsourced defense services has actually increased since 1986, rising some 314% through 2001. Of that increase, new competitive starts increased about 20% from 1997 to 2000 with new service contract starts estimated to have surpassed R&D starts for the first time in fiscal year 2000, confirming the shift away from cutting-edge defense research to more routine implementation of IT projects. * Increasing Importance of Proposal Management Services. The Company believes that various factors in the aerospace and defense industries are contributing to an increased need to win projects. Recent consolidation activity in these industries has resulted in fewer, larger firms as well as an increased disparity between the resources of such larger firms and the remaining relatively smaller firms. The large consolidated firms are more motivated to win programs to support their operations and the smaller firms have an even greater need to access the resources necessary to compete with larger firms for programs. The U.S. Government has also conducted a number of "winner-take-all" competitions in which the government chose a single winner from two large aerospace suppliers that had traditionally jointly supplied a product. The winner may receive a multi-billion dollar contract while the loser may be allocated a program sub-contract or be required to shut down an existing production facility and re-assign or lay off several thousand workers. Consequently, proposal management services and a winning outcome are becoming increasingly crucial to all competitors. * Internal Proposal Capabilities of Existing Clients is Decreasing. The Company believes that the internal proposal capabilities of existing clients may be decreasing due to fiscal pressures currently being exerted on the organizations. This trend is expected to create additional opportunities for regional management services. * Expanding into supporting traditional management consulting companies. The Company is expanding its proposal management services to support traditional management consulting companies and state and local municipalities. In addition, SM&A has always provided management consulting services to its traditional customers, performing market research, management studies and other services. The Company believes that SM&A's excellent reputation and market access will continue to offer an avenue to increase this area of service. 5 7 GOVERNMENT SERVICES AND SUBCONTRACTING PERFORMED BY THE COMPANY Systems Engineering. The Company's systems engineering work assists its clients to define the work that must be done to meet a given program's objectives. The first step formally defines the top level program objectives including mission requirements, annual and total budget, and the schedule for each major program milestone and then communicates them to each engineering, information technology and management department. The systems engineers perform trade studies and analyses to objectively evaluate the cost, schedule, risk and likely performance of alternative solutions. The systems engineers then manage the top level program requirements data base. As the program evolves from design through development, test and production phases, they constantly evaluate the work of the program's design and test groups to be certain that these top level requirements are being met. Program Integration. Concurrent with systems engineering are the Company's program integration functions. This work is done to ensure that a given program has been meticulously planned and that the program team follows the plan. The Emergent program integration effort is critical to the financial success of the client. The work has an initial phase in which the program to be accomplished is defined in detail. This includes the detailed description of all tasks to be done by all of the participants over the lifetime of the program, the scheduling of these tasks, the sizing of each task and the definition of the inter-relationship among the tasks. This information is maintained by the program integration team in an electronic and sometimes web-enabled format easily accessible to the management team. After the definition work is completed, the program integration staff focuses on the execution of the program, in which the status of each task is constantly evaluated (and reported to management, including the government project office), the likely attainment of future milestones is predicted, and the program risks are constantly re-evaluated to allow proactive management decisions to mitigate risk. Systems Analysis. A major part of systems engineering and program integration is the ability to quantify and justify decisions in the definition, design, and execution of a program. Determining military utility and the impact a decision has on that utility is key to providing clients with the irrefutable data needed to design, develop and integrate their systems. Our modeling and simulation capability provides the framework where these decisions can be evaluated in an unbiased manner, and documented in a repeatable, validated format. Applied Research and Space Science. NASA has outsourced many of the applied research aspects of space physics and solar physics. Our scientists conduct research into origins and effects of the sun, and the environment in space and its effects upon satellites and our environment. These scientists use data from a wide range of scientific spacecraft, earth based sensors, and laboratory experiments to conduct this research. The results of their research are often published in scientific journals or used to develop next generation scientific payloads for future exploration. Software and Database Development. Many government customers need customized solutions for specific needs for information. This involves either the tailoring of a database to sort and present information in a meaningful way, or the development of processing algorithms and the coding of those algorithms to process the data in a specific way. We start with a set of requirements, derive a design, develop the necessary code or database structures and integrate the results into our customers systems. We also develop stand-alone solutions through the integration of commercial hardware and software tailoring of databases. Modeling and Simulation. The Company provides modeling and simulation support to the U.S. Air Force, other government agencies, and contractors. The Company's customers use modeling and simulation to quickly and inexpensively test (compared to building and testing actual prototypes) new concepts, tactics and doctrine. PROPOSAL MANAGEMENT AND MANAGEMENT CONSULTING SERVICES PERFORMED BY THE COMPANY Proposal Management. Proposal management involves assisting clients with the procurement of government and commercial programs. The process whereby SM&A manages a proposal can be divided into three phases: the pursuit phase, the proposal phase, and the evaluation phase. The Pursuit Phase. Once hired to manage a proposal, the SM&A team assists the client in the creation of a win strategy that leads to selection of sub-contractors, an investment plan, a technical baseline, and a program implementation plan. SM&A often advises or coordinates the marketing campaign as well. At the proper time, SM&A assembles a team of proposal specialists at the client's site typically deploying a proposal manager, volume leaders for each of the major proposal volumes, specialists well versed in the new management processes required by the government, and production specialists expert in the new forms of electronic proposals often required by a government acquisition agency. 6 8 The Proposal Phase. Each SM&A team manages a client team, typically 50 to 200 engineers, IT specialists and managers, providing full time, hands-on execution of the SM&A process from strategy formulation, through all phases of proposal preparation and review, to the post-submittal responses to the government's questions. The proposal process typically requires three to twelve months of intensive activity at the client's site. The SM&A team manages a process that starts with analysis of the government's request for proposal and results in the creation of a series of proposal documents, each following a proprietary SM&A template. These templates guide the team in developing the key "facts" that will win, which typically consist of the most cost-effective technical solution to meet the government's needs and a low-risk program plan that will deliver the product on time and within budget. Following SM&A's page-by-page quality review, the proposal is submitted and, if required, an oral presentation is made. SM&A creates the materials (technical charts, videos, models) for the oral presentations, which are becoming more common. Various forms of electronically formatted proposal content are becoming an increasingly larger component of the delivered work product. The Evaluation Phase. After the proposal is submitted, the proposal team's interaction with the U.S. Government is a critical part of the SM&A winning process. Many teams submit their proposals and then key personnel are reassigned on other projects. Conversely, in an SM&A-managed proposal, the core competence is maintained to answer formal questions from the government, and prepare the Best and Final Offer. Another area of SM&A action during the government's proposal evaluation period is working with the client's team in preparation for winning the award. Many proposals include a very aggressive start-up phase that requires the delivery of significant products within the first 30 to 60 days after the contract award. SM&A provides management support, program planners and schedulers, systems engineers and IT specialists to assist the client's team to meet early post-award commitments. After a contract award, SM&A can leverage its marketplace dominance to generate follow-on contracts for Emergent-East. CLIENTS The Company provides its high-end systems engineering, and integrated proposal management services to numerous Fortune 100 clients and the U.S. Government. The Company provides contract support services to various branches of the U.S. Government including the U.S. Air Force, U.S. Navy, U.S. Army, NASA and government intelligence agencies. Raytheon Company and Lockheed Martin Corporation combined accounted for approximately 29% and 36% of the Company's revenues for the years ended December 31, 2000 and 1999, respectively. In addition, for the year ended December 31, 2000, the U.S. Government accounted for 27% (28% in 1999) of the Company's revenues. These revenues are a result of various engagements by several business units of these companies and governmental entities. Although such business units are affiliated with the parent entities, the Company's experience has indicated that the particular engagements are subject to the discretion of each individual business and governmental unit. In 2000, 27% (28% in 1999) of the Company's revenues resulted from contracts directly with the U.S. Government. Contracts with the U.S. Government are subject to termination, reduction or modification as a result of changes in the U.S. Government's requirements or budgetary restrictions, at the convenience of the U.S. Government, or when we participate as a subcontractor, if the primary contractor is in default. Upon termination of a contract at the convenience of the U.S. Government, the contractor is generally entitled to reimbursement for allowable costs incurred up to the date of termination and a proportionate amount of the stipulated profits or fees attributable to the work actually performed. BACKLOG The Company's backlog represents an estimate of the remaining future revenues from existing signed contracts and letters of intent concerning contracts that have been awarded but in some cases not yet signed. The backlog estimates include revenues expected under the current terms of executed contracts and revenues from contracts in which the scope and duration of the services required are not definite but estimable. At December 31, 2000 the Company's backlog was approximately $116 million. The Company's engagements are terminable at will and no assurance can be given that the Company will receive any of the fees associated with the backlog described above. SALES AND MARKETING 7 9 The Company markets its services directly to senior executives of major corporations. The Company employs a variety of business development and marketing techniques to communicate directly with current and prospective clients, including making on-site presentations, trade advertising, attending industry seminars featuring presentations by Emergent personnel, attending trade shows and authoring articles and other publications about the industry and the Company's methodologies, processes and technologies. A significant portion of new business arises from prior client engagements. Clients frequently expand the scope of engagements during delivery to add complementary activities. Also, the Company's on-site presence affords it the opportunity to become aware of, and to help define, additional project opportunities as they are identified by the client. The strong client relationships arising out of many engagements facilitates the Company's ability to market additional capabilities to its clients in the future. In addition, the Company's senior management team is actively involved in meeting with companies that have not yet engaged Emergent and newly appointed senior managers in current Emergent clients who might not be thoroughly knowledgeable of Emergent's previous assistance to the client. GOVERNMENT CONTRACTS In 2000, 27% (28% in 1999) of the Company's revenues resulted from contracts directly with the U.S. Government. Contracts with the U.S. Government are subject to termination, reduction or modification as a result of changes in the U.S. Government's requirements or budgetary restrictions, at the convenience of the U.S. Government, or when we participate as a subcontractor, if the primary contractor is in default. Upon termination of a contract at the convenience of the U.S. Government, the contractor is generally entitled to reimbursement for allowable costs incurred up to the date of termination and a proportionate amount of the stipulated profits or fees attributable to the work actually performed. COMPETITION In each of its markets, Emergent has able competitors, which differ depending upon the characteristics of the customer including its size, geographic location, and computing environment. Many established competitors have greater marketing, technical, and financial resources than the Company, and there can be no assurance that Emergent will be able to continue to compete successfully with existing or new competitors. PROFESSIONAL SERVICES Systems Engineering. Systems engineering markets are highly competitive and include a large number of highly capable firms in the United States, such as Booz-Allen & Hamilton, Science Applications International Corporation, Veridian, and Litton TASC. The market is also highly fragmented. The Company, however, has found increasing opportunities to work with clients who have previously retained Emergent. The trend towards contract bundling has driven larger government contractors into the same market space, which has increased competition from companies with much larger sales and marketing workforces and the ability to apply a larger team of experts into winning contracts. However, this same trend has provided the opportunity for more teaming opportunities with potential competitors, leveraging individual strengths. Program Integration. Program integration markets are highly competitive, with internal resources of the larger prime contractors being the primary competitor. There is also a large number of smaller firms who provide similar services. Systems Analysis. The systems analysis marketplace is dominated by smaller companies that dominate specific niches, with a smaller number of medium size firms that compete in many of the larger market segments. The Company dominates the Air Force Modeling and Simulation market for campaign and strategic level analyses, and in the air to air engagement arena. There is more competition on the horizon as the U.S. Government is looking at joint service simulations at the strategic and campaign levels, but none of these systems are operational, nor provide the fidelity of our models. Applied Research. The applied research market is limited to a few companies that effectively recruit, retain and motivate high level scientists. Typically, companies in this market hire away talent in pursuit of competitive procurements, as the skills of most researchers are unique. This makes competition very fragmented and diffuse and requires vigilance on the part of the Company to maintain a competitive and enjoyable work environment. Proposal Management. The market for proposal management services in the procurement of government and commercial contracts for aerospace and defense is a niche market with a number of competitors. The Company is the largest provider of such services and principally competes with numerous smaller proposal management companies in this highly specialized industry. Shipley Associates, with approximately one-third the revenue as SM&A, is the largest competitor. The Company also competes with some of its client's internal proposal development resources. A number of SM&A's clients maintain internal business acquisition teams that are designed to handle the procurement of government contracts, although the number of such in-house departments has been decreasing in recent years. 8 10 PRINCIPAL COMPETITIVE FACTORS IN PROFESSIONAL SERVICES The Company believes the principal competitive factors in the professional services market include in priority order: Industry and program knowledge, rapidly deployable skilled personnel, responsiveness, reputation and price. Proposal management factors are similar but in a different priority, they include: Reputation, the level of experience and skill of staff professionals, industry expertise, quality of service, responsiveness, and procurement success rate. The need to provide efficient and cost-effective service is of even greater importance where the cost of proposal development is likely to be a larger percentage of the contract amount than with a large program. EMPLOYEES As of December 31, 2000, the Company had approximately 735 employees. Approximately 94% are information technology and proposal management professionals and 6% are administrative personnel. The Company believes that its success depends significantly upon attracting, retaining and motivating talented, innovative and experienced professionals. For this reason, Emergent is comprised of highly experienced information technology specialists, program managers, engineers and skilled technicians, tested in some of the largest and most complex military, commercial and government programs of the past 30 years. The typical Emergent employee has more than 20 years of applicable experience and a majority of our employees possess advanced degrees in science, engineering or information technology fields. The Company has instituted a training and recruitment program to help acquire and ensure retention of high quality personnel and to enable it to respond to expanding customer needs. The performance of each Emergent employee is constantly evaluated both by the Emergent team with whom the employee is working and by the client who has engaged the Company. Emergent executives are always on call to discuss any and all personnel issues. Emergent has maintained the highest standards of performance to ensure client satisfaction. The Company also attracts and motivates its professional and administrative staff by offering competitive packages of base and incentive compensation and benefits. The Company's employees are not represented by any labor union and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. In addition to the other information in this Annual Report on Form 10-K, the following factors should be considered carefully in evaluating us and our business and prospects. 9 11 RISK FACTORS THERE ARE RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO INTEGRATE ITS PRIOR ACQUISITIONS In recent years, the Company expanded its operations through the acquisition of complementary businesses. There can be no assurance that the anticipated economic, operational and other benefits of these acquisitions will be realized or that the Company will be able to successfully integrate these acquired businesses. The difficulties of such integration may initially be increased by the need to integrate personnel with different business backgrounds and corporate cultures. Failure to effectively integrate the acquired companies may adversely affect the Company's 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 the reputation of the Company 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. 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 the Company has limited or no direct expertise: The occurrence of some or all of the events described in these risks could have a material adverse effect on the business, operating results and financial condition. The Company's ability to manage the integration of its operations will require the Company to continue to improve its operational, financial and other internal systems and to attract, develop, motivate and retain its employees. The Company's rapid growth in prior years has presented and will continue to present numerous operational challenges, such as the assimilation of financial reporting systems and increased pressure on our senior management and will increase the demands on our 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. 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 the Company will be able to attract and retain the qualified personnel necessary to effectively manage its operations. To the extent the Company is unable to manage its integration effectively and efficiently, its business, financial condition and results of operations could be materially and adversely affected. OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE DEFENSE INDUSTRY Approximately 31% of the Company's revenues were derived from proposal management services from SM&A related to government procurement contracts for the fiscal year ended December 31, 2000. In addition, a significant portion of the Company's revenues are derived from contracts or subcontracts with the U.S. Government. For the foreseeable future, the Company expects that the percentage of revenues attributable to such contracts will continue to be substantial. U.S. Government expenditures for defense products may decline in the future with such reductions having an effect on the Company's clients or, indirectly, on the Company. A number of trends may contribute to such a decline, including: - large weapon systems being replaced with smaller, more precise high technology systems; - multiple procurements for similar weapons being consolidated into joint service procurements, such as the Joint Strike Fighter program; - threat scenarios evolving away from global conflicts to regional conflicts; and - the continuing draw down of U.S. military forces in response to the end of the Cold War. In the event expenditures for products of the type manufactured by the Company's clients are reduced and not offset by other new programs or products, there will be a reduction in the volume of contracts or subcontracts to be bid upon by the Company's clients and, as a result, a reduction in the volume of proposals managed by the Company. Unless offset, such reductions could materially and adversely affect the Company's business, operating results and financial condition. 10 12 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 disbarment from the bidding process for future government contracts could have a material adverse effect on the Company's business, operating results and financial condition. The Company is in the process of integrating the 1998, 1999 and 2000 acquisitions and has not yet put in place all systems and procedures required for the satisfactory compliance with all government regulations. If the Company cannot comply with all government reporting and compliance it may be subject to fines, penalties or the loss of the ability to retain government contract work. The Company relies on the continuance and expansion of our business on a facility security clearance from the U.S. Government and individual security clearances, at various levels, for nearly all members of staff. There can be no assurance that necessary security clearances will continue to be made available by the U.S. Government. In addition, a significant portion of the Company's revenues is derived from contracts or subcontracts with the U.S. Government. The Company's services are performed pursuant to the following types of contracts: - cost reimbursable; - time-and-materials; and - fixed-price contracts and subcontracts. Under fixed-price contracts, the Company bears any risk of increased or unexpected costs that may reduce its 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 upon the Company. 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 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 our business, financial condition and results of operations. Currently the government has not completed their audit of the Company's books and records for 1998, 1999 and 2000. 11 13 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 79%, 80%, and 76%, of total revenues for the years ended December 31, 2000, 1999, and 1998, respectively. Three clients, the U.S. Government, Raytheon Systems Company, and Lockheed Martin Corporation accounted for approximately 56%, 64%, and 58% of total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Raytheon Systems Company is the Company's single largest commercial client, accounting for approximately 17%, 20% and 16% of total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Clients typically retain the Company's services as needed on an engagement basis rather than pursuant to long-term contracts, and a client can usually terminate the engagement at any time without a significant penalty. Moreover, there can be no assurance that existing clients will continue to engage the Company for additional assignments or do so at the same revenue levels. The loss of any significant client could materially and adversely affect our business, financial condition and results of operations. In addition, the level of services required by an individual client may diminish over the life of the relationship, and there can be no assurance the Company will be successful in establishing relationships with new clients as this occurs. THE MARKETS IN WHICH THE COMPANY OPERATES ARE HIGHLY COMPETITIVE The market for proposal management services in the procurement of government and commercial contracts for aerospace and defense is a niche market with a number of competitors. The Company is the largest provider of such services and principally competes with numerous smaller proposal management companies in this highly specialized industry. The Company also competes with some of its clients' internal proposal development resources. 12 14 THE COMPANY RELIES HEAVILY UPON ITS KEY EMPLOYEES The Company's success is highly dependent upon the efforts, abilities, business generation capabilities and project execution of its executive officers, in particular those of Steven S. Myers, our President, Chief Executive Officer and Chairman of the Board, and Ajay K. Patel, our Executive Vice President and Chief Operating Officer. The loss of the services of either of these individuals for any reason could materially and adversely affect our business, operating results and financial condition. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE 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 April 6, 2001, the closing sale price has ranged from a low of $0.75 per share to a high of $31.13 per share. 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 by the Company; - announcements of new services by competitors; - loss of key employees; - changes in the regulatory environment or market conditions affecting the defense and aerospace industry; - changes in earnings estimates and ratings by analysts; - lack of market liquidity resulting from a relatively small amount of public stock float; - changes in generally accepted accounting principles; - sales of common stock by existing holders; - the announcement and market acceptance of proposed acquisitions; and - financial performance for any period which results in the violation of debt covenants with any of the Company's lenders and subsequent loss of available bank lines for working capital. PRINCIPAL SHAREHOLDER HAS SIGNIFICANT CONTROL OVER THE COMPANY Steven S. Myers, the Chief Executive Officer and Chairman of the Board, beneficially owns or controls approximately 39.15% 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 nominated with the approval of Mr. Myers. LOSS OF LIQUIDITY The Company has a revolving credit commitment with three major banks. The commitment expires January 31, 2002. There is risk that the Company may violate covenants associated with this commitment which would result in the loss of the Company's ability to borrow under the revolving credit agreement. There are no assurances that the Company may be able to refinance the current commitment by January 31, 2002. 13 15 As conditions to the revolving credit commitment, the Company is obligated to reduce the $22.7 million commitment by a minimum of $1.0 million per quarter or by the earlier reduction due to the proceeds of tax refunds or the sale of assets. As of March 30, 2001, the Company has met the commitment reduction requirements and no further reductions are required until termination of the facility. ITEM 2--PROPERTIES FACILITIES The Company and its subsidiary, SM&A, occupy its principal executive offices adjacent to the Orange County (John Wayne) Airport in Newport Beach, California. The Company has approximately 19,500 square feet of office space in this location. As of December 31, 2000, the Company's other primary offices housed Emergent-East including an approximately 73,000 square foot facility in Vienna, Virginia. The Company maintains additional offices, each consisting of 20,000 square feet or less, throughout the United States. The Company estimates it has approximately 100,000 square feet in excess real estate due to the discontinued operations of Emergent-Central and the integration of the Company's acquisitions. The Company is actively attempting to sublease its excess facility space. The Company leases all of its facilities, several of which maintain a top secret clearance rating. ITEM 3--LEGAL PROCEEDINGS LEGAL PROCEEDINGS The Company is involved in routine litigation incidental to the conduct of its business. There are currently no material pending litigation proceedings to which the Company is a party or to which any of its property is subject. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 16 PART II ITEM 5--MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Price Range Of Common Stock The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "WINS" from January 29, 1998 through May 3, 2000. On May 4, 2000 the Company changed its name to Emergent Information Technologies, Inc., and changed its symbol to "EITI". On May 30, 2000 the Company began trading under the Nasdaq small capitalization listing following notification from Nasdaq that it did not comply with the requirements for continued listing on the Nasdaq National Market. The following table sets forth, for the quarters indicated, the high and low closing sale prices as reported on Nasdaq.
2000 1999 ---------------------------------------------- HIGH LOW HIGH LOW ------- ------- ------- ------- First Quarter Ending March 31 .......... $ 5.250 $ 5.063 $11.625 $ 9.875 Second Quarter Ending June 30 .......... $ 2.500 $ 2.125 $ 8.00 $ 7.00 Third Quarter Ending September 30 ...... $ 1.719 $ 1.250 $ 7.875 $ 7.531 Fourth Quarter Ending December 31 ...... $ 1.000 $ .750 $ 6.250 $ 6.000
At April 6, 2001, there were approximately 2,250 registered holders of the Company's outstanding shares of Common Stock and on April 6, 2001 the closing sale price of the Common Stock on the Nasdaq Small Cap Market was $1.50 per share. DIVIDENDS On January 27, 1998, immediately prior to consummating its initial public offering, the Company declared an S corporation dividend, in the amount of $711,000, to its then-current shareholders, representing all undistributed earnings of the Company from January 1, 1998 through January 28, 1998 (the "S Corporation Dividend"). Purchasers of Common Stock in the Company's initial public offering did not receive any portion of the S Corporation Dividend. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, capital requirements, the general financial condition of the Company and restrictions that may be contained in the Company's financing agreements. RECENT SALES OF UNREGISTERED SECURITIES On May 29, 1998, the Company acquired SAC. In connection with such acquisition and in exchange for all of the issued and outstanding SAC common stock and options, the Company issued an aggregate of 819,743 shares of its common stock and 175,906 options to purchase its common stock to the shareholders and option holders of SAC, respectively, consisting mainly of SAC employees, executives and directors. The exchange involved 35 or fewer persons not established to the reasonable satisfaction of the Company as "accredited investors" under Rule 501(a) of the Securities Act of 1933, as amended (the "Act"), and was consummated in reliance upon Section 4(2) of the Act, and the rules and regulations thereunder. Pursuant to Rule 506(b), all investors were either accredited investors, reasonably believed by the Company to have such knowledge and experience in financial and business matters that such investor was capable of evaluating the merits and risks of the investment, or retained a purchaser representative not affiliated with the Company in connection with the transaction. Due to certain price protection provisions relating to the shares of common stock issued in connection with the acquisition of SAC and the market price of the Company's stock during 1999, the Company issued 714,000 additional shares of common stock to former shareholders of SAC based upon the market price of the common stock at certain defined liquidation dates. On August 20, 1998, the Company acquired DSA. In connection with such acquisition and in exchange for all of the issued and outstanding DSA common stock, the Company issued an aggregate of 714,839 shares of its common stock and $14,035,419 cash to the shareholders of DSA, consisting mainly of DSA employees, executives and directors. The exchange involved 35 or fewer persons not established to the reasonable satisfaction of the Company as "accredited investors" under Rule 501(a) of the Act and was consummated in reliance upon Section 4(2) of the Act, and the rules and regulations thereunder. Pursuant to Rule 506(b), all investors were either accredited investors, reasonably believed by the Company to have such knowledge and experience in financial and business matters that such investor was capable of evaluating the merits and risks of the investment, or retained a purchaser representative not affiliated with the Company in connection with the transaction. 15 17 The shareholders of common stock issued in the SAC and DSA acquisitions had demand registration rights. Substantially all of the shareholders exercised such demand rights on February 1, 1999 and on April 29, 1999, the Company filed a registration statement with the SEC on Form S-3 to register these common shares (such registration statement was amended on May 13, 1999). The Company entered into a Note and Stock Purchase Agreement (the "Subordinated Debt Agreement") dated as of December 29, 2000, by and among the Company, the subsidiaries of the Company as Guarantors, and various investors including Libra Mezzanine Partners II, L.P. (such investors, the "Purchasers"). In consideration of a $25,000,000 investment, the Company issued to the purchasers (i) 13% Senior Subordinated Notes due in 2005 in the aggregate principal amount of $25,000,000 (the "Notes"), and (ii) 2,250,000 shares of the common stock of the Company ("Common Stock") with a fair value of $1,968,750. The Purchasers have demand registration rights. 16 18 ITEM 6--SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 2000(1) 1999(1) 1998(1) 1997 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues .................................................... $ 120,140 $ 95,533 $ 68,449 $ 36,962 $ 25,699 Cost of revenues ................................................ 72,980 58,592 40,483 20,529 14,512 --------- --------- --------- --------- --------- Gross margin ................................................ 47,160 36,941 27,966 16,433 11,187 Selling, general and administrative expenses(2) ................. 32,921 23,725 13,756 8,184 8,274 Amortization of goodwill and other intangibles .................. 1,716 816 770 -- -- Cancelled secondary offering costs .............................. -- -- 361 -- -- --------- --------- --------- --------- --------- Operating income ............................................ 12,523 12,400 13,079 8,249 2,913 Other income (expense) .......................................... (2,062) (702) 1,520 (292) 136 --------- --------- --------- --------- --------- Income before income taxes .................................. 10,461 11,698 14,599 7,957 3,049 Income tax expense(3) ........................................... 4,289 4,738 6,072 3,183 1,219 --------- --------- --------- --------- --------- Income or pro forma income from continuing operations ........... 6,172 6,960 8,527 4,774 1,830 Loss from operations of discontinued business, net of income tax benefit of $3,364, $2,009, and $137 in 2000, 1999, and 1998, respectively(4) ............................. (5,928) (2,950) (208) -- -- Loss from disposal of discontinued business, net of income tax benefit of $3,509 and $390 in 2000 and 1998, respectively(4) ............................................. (30,607) -- (607) -- -- --------- --------- --------- --------- --------- Net income (loss) or pro forma net income ................... $ (30,363) $ 4,010 $ 7,712 $ 4,774 $ 1,830 ========= ========= ========= ========= ========= Income (loss) or pro forma income per share from continuing operations(5): Basic ....................................................... $ .38 $ .43 $ .55 $ .37 $ .12 Diluted ..................................................... $ .37 $ .42 $ .53 $ .37 $ .12 ========= ========= ========= ========= ========= Loss per share from discontinued operations(5): Basic ....................................................... $ (2.23) $ (.18) $ (.05) $ .00 $ .00 Diluted ..................................................... $ (2.20) $ (.18) $ (.05) $ .00 $ .00 ========= ========= ========= ========= ========= Net income (loss) or pro forma net income per share(5): Basic ....................................................... $ (1.85) $ .25 $ .50 $ .37 $ .12 Diluted ..................................................... $ (1.83) $ .24 $ .48 $ .37 $ .12 ========= ========= ========= ========= ========= Weighted average shares outstanding(5): Basic ....................................................... 16,350 16,257 15,645 12,948 14,893 Diluted ..................................................... 16,579 16,431 15,984 12,948 14,893 ========= ========= ========= ========= ========= CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents ....................................... $ 2,040 $ 1,226 $ 454 $ 150 $ 1,927 Working capital ................................................. 20,841 22,224 15,979 101 (279) Total assets .................................................... 75,849 96,573 66,324 5,331 11,820 Long-term debt, including current portion(6)(7) ................. 36,633 29,017 -- 7,729 6,250 Shareholders' equity (deficit)(6) ............................... 22,910 50,456 55,329 (6,328) 755
17 19 Footnotes (1) The consolidated statements of operations and balance sheet data include the results of operations and acquired net assets of the Company and Space Applications Corporation (SAC) beginning May 15, 1998, Decision Science Applications (DSA) beginning August 1, 1998, Systems Information Solutions, Inc., (SIS), beginning March 1, 1999, Kapos Associates Inc., beginning September 1, 1999, and System Simulation Solutions, Inc., beginning February 1, 2000. (2) Selling, general and administrative expenses for fiscal 1997 and 1996 reflect pro forma adjustments for compensation for the principal executive officers (which have historically been included in SG&A expenses) who are to be paid a maximum of $2.7 million in salaries and bonuses for 1998 under the Executive Compensation Program. (3) Amounts reflect pro forma adjustments for provisions for federal and state income taxes as if the Company had been taxed as a C corporation at an assumed statutory rate of approximately 40% for years prior to 1998. (4) Loss from operations on discontinued business and loss from disposal of discontinued business reflect the operations of StamiNet, Inc., a subsidiary of SAC in 1998, and Emergent-Central in 1999 and 2000. Emergent-Central was comprised of the commercial software development operations of DSA and SIS. On August 2, 2000, management decided to discontinue the Emergent-Central operation. See Note 5 to the Consolidated Financial Statements. (5) Net income (loss) or pro forma net income per share was computed as explained in Note 1 to the Consolidated Financial Statements. (6) In 1999, the Company purchased 1,146,000 of its common shares for approximately $9.3 million in cash using funds borrowed under the Company's currently existing bank facility. In January 1998, the Company sold 2,100,000 shares of Common Stock in the IPO for net proceeds of approximately $22.4 million and repaid all of the Company's then existing indebtedness of $7.4 million. In January 1997, the Company repurchased 1,995,125 shares of Common Stock from certain of its existing shareholders for approximately $5.9 million using borrowings under its then existing bank facility. On December 29, 2000, in consideration of a $25,000,000 investment, the Company issued 2,250,000 shares of the Company's common stock. See Note 6 to the Consolidated Financial Statements. (7) In April 1996, the Company purchased an aircraft for $5.8 million and financed the purchase through a bank. In January 1997, the Company sold the aircraft to a company which is owned by Steven S. Myers, the Company's principal shareholder. 18 20 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACTORS CONCERNING FORWARD-LOOKING STATEMENTS From time to time, the Company, through its management, may make forward-looking public statements, such as statements concerning then expected future revenues or earnings or concerning projected plans, performance, contract procurement as well as other estimates relating to future operations. Forward-looking statements may be in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in press releases or informal statements made with the approval of an authorized executive officer. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. In addition, the Company wishes to advise readers that the factors listed below, as well as other factors not currently identified by management, could affect the Company's financial or other performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods or events in any current statement. The Company will not undertake and specifically declines any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events which may cause management to re-evaluate such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements of the Company made by or on behalf of the Company. 19 21 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following tables presents unaudited quarterly consolidated financial information for each of the Company's last eight fiscal quarters. In the opinion of the Company's management, this quarterly information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Form 10-K and includes all adjustments necessary to present fairly the unaudited quarterly results set forth herein. The Company's quarterly results have in the past been subject to fluctuations, and thus, the operating results for any quarter are not necessarily indicative of results for any future period. The amounts for the quarters ending September 30, June 30, and March 31, 2000 have been restated from the amounts previously presented in the respective Form 10-Q's for certain corrections. The restatements are detailed on page 21.
2000 1999 ----------------------------------------- ----------------------------------------- 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31 -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues .............................. $ 29,987 $ 27,924 $ 31,382 $ 30,847 $ 24,474 $ 23,332 $ 23,076 $ 24,651 Cost of revenues .......................... 19,221 16,460 18,641 18,658 16,186 14,724 13,628 14,054 -------- -------- -------- -------- -------- -------- -------- -------- Gross margin .......................... 10,766 11,464 12,741 12,189 8,288 8,608 9,448 10,597 Selling, general and administrative expenses ................................. 8,433 8,865 7,944 7,679 7,527 5,752 5,093 5,353 Amortization of goodwill and other intangibles ........................ 437 437 437 405 214 214 195 193 -------- -------- -------- -------- -------- -------- -------- -------- Operating income ...................... 1,896 2,162 4,360 4,105 547 2,642 4,160 5,051 Other expense ..................... (522) (608) (550) (382) (175) (175) (176) (176) -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes ........................ 1,374 1,554 3,810 3,723 372 2,467 3,984 4,875 Income tax expense ........................ 563 487 1,638 1,601 287 983 1,614 1,854 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations ..... 811 1,067 2,172 2,122 85 1,484 2,370 3,021 Discontinued operations: Loss from operations of discontinued business, net .......... -- (1,343) (2,457) (2,128) (1,342) (749) (168) (691) Loss from disposal of discontinued business, net ....................... -- (30,607) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ......................... $ 811 $(30,883) $ (285) $ (6) $ (1,257) $ 735 $ 2,202 $ 2,330 ======== ======== ======== ======== ======== ======== ======== ======== Income per share from continuing operations: Basic ................................. $ .05 $ .07 $ .13 $ .13 $ -- $ .09 $ .15 $ .18 Diluted ............................... $ .05 $ .07 $ .13 $ .13 $ -- $ .09 $ .15 $ .18 ======== ======== ======== ======== ======== ======== ======== ======== Loss per share from discontinued operations: Basic ................................. $ -- $ (1.95) $ (.15) $ (.13) $ (.08) $ (.05) $ (.01) $ (.04) Diluted ............................... $ -- $ (1.95) $ (.15) $ (.13) $ (.08) $ (.05) $ (.01) $ (.04) ======== ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share: Basic ................................. $ .05 $ (1.88) $ (.02) $ -- $ (.08) $ .04 $ .14 $ .14 Diluted ............................... $ .05 $ (1.88) $ (.02) $ -- $ (.08) $ .04 $ .14 $ .14 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding: Basic ................................. 16,515 16,324 16,199 16,181 16,093 16,307 16,090 16,515 Diluted ............................... 16,516 16,348 16,238 16,231 16,190 16,371 16,247 16,927 ======== ======== ======== ======== ======== ======== ======== ========
- ----------- 20 22
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 -------------------- -------------------- -------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) AS AS AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- ---------- -------- Net revenues .................................................. $ 30,847 $ 30,847 $ 31,382 $ 31,382 $ 27,924 $ 27,924 Cost of revenues .............................................. 18,658 18,658 18,641 18,641 16,460 16,460 -------- -------- -------- -------- -------- -------- Gross profit .......................................... 12,189 12,189 12,741 12,741 11,464 11,464 Selling, general & administrative expenses (1) ................ 7,464 7,679 7,729 7,944 8,946 8,865 Amortization of goodwill and other intangibles ................ 405 405 437 437 437 437 -------- -------- -------- -------- -------- -------- Total selling, general & administrative expenses .......... 7,869 8,084 8,166 8,381 9,383 9,302 Operating income ......................................... 4,320 4,105 4,575 4,360 2,081 2,162 Other expense ........................................ (382) (382) (550) (550) (608) (608) -------- -------- -------- -------- -------- -------- Income from continuing operations before taxes ................ 3,938 3,723 4,025 3,810 1,473 1,554 Income tax expense (2) ........................................ 1,693 1,601 1,730 1,638 378 487 -------- -------- -------- -------- -------- -------- Income from continuing operations ................... 2,245 2,122 2,295 2,172 1,095 1,067 Discontinued operations: Loss from operations of discontinued business, net of income tax benefit (3) ............................ (1,582) (2,128) (1,853) (2,457) (576) (1,343) Loss from disposal of discontinued business, net of income tax benefit (4) ............................ -- -- -- -- (28,882) (30,607) -------- -------- -------- -------- -------- -------- Net income (loss) ................................... 663 (6) 442 (285) (28,363) (30,883) ======== ======== ======== ======== ======== ======== Income per share from continuing operations: Basic .............................................. $ .14 $ .13 $ .14 $ .13 $ .07 $ .07 Diluted ............................................ $ .14 $ .13 $ .14 $ .13 $ .07 $ .07 ======== ======== ======== ======== ======== ======== Loss per share from discontinued operations: Basic .............................................. $ (.10) $ (.13) $ (.11) $ (.15) $ (1.80) $ (1.95) Diluted ............................................ $ (.10) $ (.13) $ (.11) $ (.15) $ (1.80) $ (1.95) ======== ======== ======== ======== ======== ======== Net income (loss) per share: Basic ..................................................... $ .04 $ .00 $ .03 $ (.02) $ (1.73) $ (1.88) Diluted ................................................... $ .04 $ .00 $ .03 $ (.02) $ (1.73) $ (1.88) ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding: Basic ..................................................... 16,181 16,181 16,199 16,199 16,324 16,324 Diluted ................................................... 16,231 16,231 16,238 16,238 16,348 16,348 ======== ======== ======== ======== ======== ========
- ------------ (1) To recognize additional depreciation expense of $215 in each of the quarters presented and to recognize additional previously unrecorded expenses of $296 as loss from operations of discontinued business in the quarter ended September 30, 2000. (2) To adjust income tax expense for the adjustments noted in (1) in each of the quarters presented and to adjust the effective tax rate to the actual projected annual rate as of September 30, 2000. (3) To reverse commercial software development revenues of $826, $916 and $158, net of income tax benefit, in the quarters ended March 31, June 30 and September 30, 2000, respectively; to write off uncollectible receivables of the discontinued business of $416 at September 30, 2000; and to correct tax benefit for loss from operations of the discontinued business at September 30, 2000. (4) To recognize previously unrecorded liabilities related to the disposal of the discontinued business of $1,607 and to correct the tax benefit for loss from disposal of the discontinued business at September 30, 2000. Certain amounts in prior quarters have been reclassified to conform to current presentation. 21 23 RESULTS OF OPERATIONS The following table sets forth certain historical operating results as a percentage of net revenues for 2000, 1999 and 1998.
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 ------ ------ ------ Net revenues ....................................... 100.0% 100.0% 100.0% Cost of revenues ................................... 60.7 61.3 59.1 ------ ------ ------ Gross margin ..................................... 39.3 38.7 40.9 Selling, general and administrative expenses ....... 27.4 24.8 20.1 Amortization of goodwill and other intangibles ..... 1.4 .9 1.1 Cancelled secondary offering costs ................. -- -- 0.6 ------ ------ ------ Operating income ................................... 10.5 13.0 19.1 ====== ====== ====== Income from continuing operations .................. 5.1 7.3 12.5 Loss from discontinued operations .................. (30.4) (3.1) (1.2) ------ ------ ------ Net income (loss) .................................. (25.3%) 4.2% 11.3% ====== ====== ======
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1999 Net Revenues. Net revenues increased $24.6 million, or 25.8% to $120.1 million for fiscal 2000 compared to $95.5 million for fiscal 1999. The increase resulted primarily from a combination of the acquisition of S3I and a full year of KAI revenues, aggregating $17.1 million, and internal revenue growth. Factors contributing to the Company's internal growth are increased demand in the systems engineering and high-end contract support services market and increased contract awards at Emergent-East. Gross Margin. Gross margin increased $10.2 million, or 27.7%, to $47.1 million, for fiscal 2000 as compared to $36.9 million for fiscal 1999. As a percentage of net revenues, gross margin increased to 39.3% compared to 38.7% for the prior year period. The majority of the gross margin increase is due to the higher margins on revenues generated by S3I and KAI acquisitions and improved pricing on Emergent-East contracts. Selling, General and Administrative Expenses, Amortization of Goodwill and Other Intangibles. Selling, general and administrative expenses increased $9.2 million, or 38.8%, to $33.0 million for fiscal 2000, as compared to $23.7 million for fiscal 1999. As a percentage of revenues, selling, general and administrative expenses increased to 27.4% for fiscal 2000, as compared to 24.8% for the prior year period. This increase was the result of increases in administrative costs related to the implementation of new systems and infrastructure and the increase in the number of personnel as well as facility expenses attributable to the Company's new office facilities in Vienna, Virginia, and increased facility cost of S3I and KAI. Amortization of goodwill and other intangibles increased from $0.8 million in 1999 to $1.7 million in 2000 reflecting a full year of amortization related to the goodwill and intangibles recorded in conjunction with the acquisition of KAI and increased goodwill amortization for the S3I acquisition. Operating Income. Operating income was $12.5 million for 2000 compared to $12.4 million for 1999, an increase of $0.1 million. As a percentage of net revenues, operating income decreased to 10.5% for 2000 from 13.0% in the prior year. Operating income was flat due to the increased administrative cost associated with the acquisitions and increased facility costs of S3I and KAI. In September 2000, the Company began a cost reduction plan to reduce general and administrative costs, including facility costs it incurred due to the acquisitions. The Company expects these costs will continue to decrease as the acquisitions are further integrated and excess real estate is reduced. Other Income (Expense). Other expense, net was $2.1 million for 2000 compared to other expense, net of $0.7 million for 1999. The increase primarily results from increased interest expense of $1.0 million based on increased bank borrowings due to acquisitions. Income From Continuing Operations. Income from continuing operations was $6.2 million for 2000 compared to $7.0 million for 1999, a decrease of $0.8 million or 11.3%. Income from continuing operations declined due to: 1) increase in personnel and facilities costs primarily related to acquisitions; 2) increase in interest expense on increase debt from financing of the acquisitions; 3) an increase in goodwill amortization related to acquisitions and the full year effect of these costs in 2000; 4) a general increase in operating expenses; and 5) the additional cost associated with the implementation of new systems and infrastructure. 22 24 Net Income (Loss). Net loss was ($30.4) million for 2000 compared to net income of $4.0 million for 1999. The 2000 loss was due primarily to a loss from operations and loss on disposal aggregating $36.5 million related to the discontinuance of a business segment, Emergent-Central, on August 2, 2000. Discontinued Operations. On August 2, 2000, the Company's Board of Directors adopted a plan to discontinue the operation of Emergent-Central, a business segment of the Company formed in 1999 from the acquisition of SIS and a portion of DSA. The principal business of the segment was commercial software development. Accordingly, the operating results of Emergent-Central, including provisions for estimated losses during the phase-out period, severance, facility lease costs and other shut down expenses expected to be incurred in connection with the disposal, have been recorded in 2000. Estimated expenses and operating losses from the measurement date, including the write-off of the segment's assets primarily comprised of $22.9 million of goodwill, through the anticipated date of disposal amounted to $30.6 million, net of income tax benefit of $3.5 million. The loss from discontinued operations up to the measurement date was $5.9 million, net of income tax benefit of $3.4 million, in 2000 and $3.0 million, net of income tax benefit of $2.0 million, in 1999. FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1998 Net Revenues. Net revenues increased $27.1 million, or 40.0% to $95.5 million for fiscal 1999 compared to $68.4 million for fiscal 1998. The increase resulted primarily from internal revenue growth both in SM&A and Emergent-East and from the acquisition of KAI. Factors contributing to internal growth rate include: increased demand for the Company's services and the Company's ability to generate increased contract revenues. Gross Margin. Gross margin dollars increased $9.0 million, or 32.1%, to $36.9 million, for fiscal 1999 as compared to $28.0 million for fiscal 1998. As a percentage of net revenues, gross margin decreased to 38.7% compared to 40.9% for the prior year period. 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 SM&A's contribution as a percentage of total revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $23.7 million for fiscal 1999, as compared to $13.8 million for fiscal 1998. As a percentage of revenues, selling, general and administrative expenses increased to 24.8% for fiscal 1999, as compared to 20.1% for the prior year period. This increase was the result of increases in administrative costs associated with the acquisition of DSA and SAC. These increased costs included personnel, facilities, and the increased operating costs associated with the acquisitions. Operating Income. Operating income was $12.4 million for 1999 compared to $13.1 million for 1998, a decrease of $0.7 million. As a percentage of net revenues, operating income decreased to 13.0% for 1999 from 19.1% for the prior year period, which is attributed to the increase in general and administrative costs associated with the acquisitions as well as a $1.0 million increase in interest expense. Other Income (Expense). Other expense, net was $0.7 million for 1999 compared to other income, net of $1.5 million for 1998. The net expense in 1999 results from increased interest expense of $0.9 million based on increased bank borrowings and net other income in 1998 was due to a gain of approximately $0.8 million on the sale of an aircraft and a higher level of interest income earned on proceeds from the initial public offering, which were invested in short-term marketable securities. Income From Continuing Operations. Income from continuing operations was $7.0 million for 1999 compared to $8.5 million for 1998, a decrease of $1.5 million or 18.4%. This decrease is due primarily to the increased cost resulting from acquisitions as detailed above. Net Income. Net income was $4.0 million for 1999 compared to $7.7 million for 1998, a decrease of $3.7 million or 48.0%. This decrease reflects the increased operating costs of the acquisitions and the related increase in interest. 23 25 LIQUIDITY AND CAPITAL RESOURCES Net Cash Provided by Operating Activities. During 2000, net cash provided by operating activities of $15.6 million was improved over a use of cash of $6.2 million in 1999 primarily due to the more timely collection and billing of accounts receivables, a $1.8 million tax refund, and increased accruals at year end. During 1999, net cash used by operating activities of $6.2 million compared with net cash provided in 1998 of $3.2 million. The increased use of cash in 1999 was due to the increase in accounts receivables due to slow collections. Cash Used in Investing Activities. During 2000, 1999 and 1998, net cash used in investing activities was $6.4 million, $9.5 million, and $14.5 million, respectively. The cash used in 2000 was due to the acquisition of S3I of $6.5 million, capital expenditures of $1.6 million, reduced by net proceeds received on a note from affiliate of $1.7 million. The cash used in investing activities in 1999 was due to the acquisitions of KAI and SIS of approximately $6.2 million, $0.7 million of additional consideration on a prior year acquisition, and capital expenditures of approximately $4.1 million. In 1998, the cash used in investing activities was primarily for the acquisitions of DSA and SAC. Net Cash Provided by Financing Activities. During 2000, net cash of $10.3 million was provided by financing activities, compared with $20.1 million in 1999. This decrease is due to the reduced borrowings under the credit facility for acquisitions. During 1999, net cash of $20.1 million was provided by financing activities compared with $12.3 million in 1998. The increase in 1999 is due to increased borrowings for funding the acquisitions and general operations reduced by the repurchase of $9.3 million in Common Stock. Net Cash Used in Discontinued Operations. During 2000, 1999, and 1998 net cash used in discontinued operations was $18.7 million, $3.6 million and $0.7 million, respectively. The cash used in 2000 was to fund operating losses and pay severance and costs related to closing the Emergent-Central operations. The cash used in 1999 and 1998 was to fund operating losses of Emergent-Central and StamiNet, respectively. Debt and Liquidity. The Company's total debt was $36.6 million, net of issuance costs of $3.5 million, and $29.0 million at December 31, 2000 and 1999, respectively. The debt in 2000 consisted of $15.1 million in a revolving credit commitment which is due on January 31, 2002 and 13% Senior Subordinated notes due in 2005, in the aggregate principal amount of $25 million. At December 31, 2000, the Company had $7.6 million of availability under its revolving credit commitment. Definitive agreements with KAI and S3I obligate the Company to make earn out payments contingent upon achievement of certain operating results. The earn outs are payable in cash and payable based on performance in 2000 and 2001. The Company believes no earn out payments were earned in 2000. The Company estimates that any final earn out payments should range between $1.2 million and $1.5 million. The Company expects to pay such earn outs from existing cash flow from operations and available borrowing under the credit agreement. It is expected the Company's operations will generate cash in 2001. However the Company does need working capital available to fund timing differences between receipts and disbursements on long-term contracts. It is anticipated with the internally generated working capital and availability under the revolving credit commitment, the Company will have sufficient liquidity to finance its operations during 2001. In addition, the Company continues to streamline its operations, reducing overhead and facility expenses and improving pricing on its contracts, thereby increasing its ability to generate cash from operations. The Company does not anticipate any cash needs other than to fund ongoing operations through 2001. As of year end, the Company had available under the revolving credit commitment approximately $7.6 million for working capital. There are no assurances the Company will not violate covenants under this commitment and if so the liquidity provided by this facility may not be available to the Company for working capital. 24 26 RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of position and measure those instruments at fair value. SFAS 133 requires that changes in the derivatives fair value be recognized in earnings unless specific hedging criteria are met. Accounting for qualifying hedges allows a derivative's gain and losses to offset related results on the hedged item in the income statement, and requires that an entity must formally document, designate and assess the effectiveness of transitions that receive hedge accounting. The Company adopted SFAS 133 on January 1, 2001. The Company has one interest rate swap agreement which does not qualify as a cash flow hedge as the Company did not prepare the required formal documentation. Accordingly, during the first quarter of fiscal 2001, the Company expects to record a net-of-tax cumulative-effect type adjustment of accumulated other comprehensive loss of $668,000 to recognize the interest swap at fair value at January 1, 2001. Future changes in the fair value will be recorded through current operations. ITEM--7A The Securities and Exchange Commission requires that registrants include information about potential effects of changes in interest rates in their financial statements. The Company's exposure to interest rate changes is primarily related to its variable rate debt based on fluctuations in the Bank's Prime rate. To assess exposure to interest rate changes, the Company has performed a sensitivity analysis assuming a hypothetical 100 basis point increase in interest rates in the first quarter of fiscal year 2001. This analysis indicates that such market movements would reduce fiscal 2001 net income, based on the December 2000 debt balance, by approximately $151,000. Actual gains and losses in the future may differ materially from this hypothetical amount based on changes in the timing and amount of interest rate movements and the Company's actual debt balances. ITEM 8--CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Consolidated Financial Statements of the Company are annexed to the report as pages F-2 through F-22. An index to such materials appears on page F-1. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 25 27 INDEX Independent Auditors' Report........................................................................... F-2 Consolidated Balance Sheets at December 31, 2000 and 1999.............................................. F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998............ F-4 Consolidated Statements of Shareholders' Equity (Deficiency) for the Years Ended December 31, 2000, 1999 and 1998........................................................................................ F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998............. F-6 Notes to Consolidated Financial Statements............................................................. F-8 Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999 and 1998.... F-22
F-1 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Emergent Information Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Emergent Information Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2000. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emergent Information Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. Orange County, California April 11, 2001 F-2 29 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents ....................................................... $ 2,040 $ 1,226 Accounts receivable, net of allowance of $551 and $935, respectively ............ 24,417 22,676 Costs and estimated earnings in excess of billings on contracts in progress ..... 4,464 7,851 Prepaid income taxes ............................................................ 2,846 4,665 Prepaid expenses and other assets ............................................... 1,081 440 Deferred income taxes ........................................................... 1,362 1,197 -------- -------- Total current assets ........................................................ 36,210 38,055 Property and equipment, net ......................................................... 5,408 5,636 Notes receivable--affiliates ........................................................ -- 1,744 Deferred income taxes ............................................................... 164 -- Other assets ........................................................................ 1,426 2,360 Goodwill, net ....................................................................... 32,641 48,778 -------- -------- $ 75,849 $ 96,573 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable .......................................................... $ 5,155 $ 3,475 Accrued compensation and payroll taxes .......................................... 6,823 6,093 Accrued earnout payable ......................................................... -- 6,000 Net liabilities of discontinued operations ...................................... 2,334 -- Other liabilities ............................................................... 1,057 263 -------- -------- Total current liabilities ................................................... 15,369 15,831 Deferred income taxes ............................................................... -- 399 Other liabilities ................................................................... 937 870 Long-term debt ...................................................................... 36,633 29,017 -------- -------- Total liabilities ........................................................... 52,939 46,117 Commitments and contingencies Shareholders' equity: Common stock, no par value; Authorized 50,000,000 shares. Shares issued and outstanding 18,667,000 and 16,167,000, respectively .................... 187 161 Additional paid-in capital ...................................................... 48,076 45,285 Retained earnings (accumulated deficit) ......................................... (25,353) 5,010 -------- -------- Total shareholders' equity .................................................. 22,910 50,456 -------- -------- $ 75,849 $ 96,573 ======== ========
See accompanying notes to consolidated financial statements. F-3 30 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 --------- --------- --------- Net revenues ........................................................................ $ 120,140 $ 95,533 $ 68,449 Cost of revenues .................................................................... 72,980 58,592 40,483 --------- --------- --------- Gross margin ................................................................ 47,160 36,941 27,966 Selling, general and administrative expenses ........................................ 32,921 23,725 13,756 Amortization of goodwill and other intangibles ...................................... 1,716 816 770 Cancelled secondary offering costs .................................................. -- -- 361 --------- --------- --------- Operating income ............................................................ 12,523 12,400 13,079 Other income (expense): Interest expense, net ........................................................... (2,010) (1,053) (148) Other, net ...................................................................... (52) 351 1,668 --------- --------- --------- Income from continuing operations before income taxes ....................... 10,461 11,698 14,599 Income tax expense .................................................................. 4,289 4,738 6,072 --------- --------- --------- Income from continuing operations ........................................... 6,172 6,960 8,527 Discontinued operations: Loss from operations of discontinued business, net of income tax benefit of $3,364, $2,009, and $137 in 2000, 1999, and 1998, respectively .... (5,928) (2,950) (208) Loss from disposal of discontinued business, net of income tax benefit of $3,509 and $390 in 2000 and 1998, respectively ..................... (30,607) -- (607) --------- --------- --------- Net income (loss) ................................................................... $ (30,363) $ 4,010 $ 7,712 ========= ========= ========= Income per share from continuing operations: Basic ........................................................................... $ .38 $ .43 $ .55 Diluted ......................................................................... $ .37 $ .42 $ .53 ========= ========= ========= Loss per share from discontinued operations: Basic ........................................................................... $ (2.23) $ (.18) $ (.05) Diluted ......................................................................... $ (2.20) $ (.18) $ (.05) ========= ========= ========= Net income (loss) per share: Basic ........................................................................... $ (1.85) $ .25 $ .50 Diluted ......................................................................... $ (1.83) $ .24 $ .48 ========= ========= ========= Weighted average shares outstanding: Basic ........................................................................... 16,350 16,257 15,645 Diluted ......................................................................... 16,579 16,431 15,984 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 31 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK --------------------------- RETAINED TOTAL ADDITIONAL EARNINGS SHAREHOLDERS' SHARES PAID-IN DUE FROM (ACCUMULATED EQUITY OUTSTANDING AMOUNT CAPITAL SHAREHOLDER DEFICIT) (DEFICIENCY) ----------- ----------- ----------- ----------- ------------ ------------- BALANCES AT DECEMBER 31, 1997 ...... 12,900,000 $ 5 $ 316 $ (679) $ (5,970) $ (6,328) Net income ......................... -- -- -- -- 7,712 7,712 Collection of shareholder note ..... -- -- -- 679 -- 679 Issuance of common shares in initial public offering .......... 2,100,000 145 22,276 -- -- 22,421 Issuance of common shares in connection with acquisitions ..... 1,535,000 15 31,717 -- -- 31,732 Dividends declared ................. -- -- -- -- (711) (711) Repurchase and retirement of common stock ..................... (13,000) -- (145) -- (31) (176) ----------- ----------- ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1998 ...... 16,522,000 165 54,164 -- 1,000 55,329 Net income ......................... -- -- -- -- 4,010 4,010 Repurchase and retirement of common stock ..................... (1,146,000) (12) (9,330) -- -- (9,342) Shares issued upon exercise of options .......................... 77,000 1 458 -- -- 459 Issuance of common shares in connection with 1998 acquisition ...................... 714,000 7 (7) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1999 ...... 16,167,000 161 45,285 -- 5,010 50,456 Net (loss) ......................... -- -- -- -- (30,363) (30,363) Shares issued for employee stock purchase plan .................... 250,000 3 754 -- -- 757 Stock options issued to consultants -- -- 91 -- -- 91 Issuance of common shares in connection with subordinated debt 2,250,000 23 1,946 -- -- 1,969 ----------- ----------- ----------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 2000 ...... 18,667,000 $ 187 $ 48,076 $ -- $ (25,353) $ 22,910 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 32 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................................... $(30,363) $ 4,010 $ 7,712 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from discontinued operations, net of tax ................................... 5,928 2,950 208 Loss from disposal of discontinued operations, net of tax ....................... 30,607 -- 607 Depreciation and amortization ................................................... 4,115 2,033 1,324 Deferred income taxes ........................................................... (755) (894) 588 Loss (gain) on sale of property and equipment ................................... 22 (5) (772) Non-cash charge -- consultant stock options ..................................... 91 -- -- Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable, net .................................................... (1,101) (7,871) (1,231) Costs and estimated earnings in excess of billings .......................... 3,387 (2,708) (1,873) Prepaid income taxes ........................................................ 1,819 (2,589) (603) Prepaid expenses and other assets ........................................... (179) (778) 644 Trade accounts payable ...................................................... 1,156 877 (956) Accrued compensation and payroll taxes ...................................... 372 (957) (1,650) Other liabilities ........................................................... 500 (296) (776) -------- -------- -------- Net cash provided by (used in) operating activities ..................... 15,599 (6,228) 3,222 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired .................................................. (6,521) (6,198) (12,181) Additional consideration on prior year acquisition .................................. -- (716) -- Payment on stock options in acquisition ............................................. -- -- (2,449) Payment on note receivable from affiliate ........................................... 1,744 -- 92 Proceeds from sale of minority interest in investment ............................... -- -- 200 Purchases of property and equipment ................................................. (1,622) (4,134) (401) Repayments from shareholder ......................................................... -- 1,088 679 Other ............................................................................... 24 445 (445) -------- -------- -------- Net cash used in investing activities ................................... (6,375) (9,515) (14,505) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock .............................................. 757 459 22,421 Borrowings under long-term credit facility .......................................... 15,644 30,050 7,553 Repayments under long-term credit facility .......................................... (29,538) (1,035) (16,793) Issuance of subordinated notes ...................................................... 25,000 -- -- Debt issuance costs ................................................................. (1,521) -- -- Distributions to shareholders ....................................................... -- -- (711) Repurchase of common stock .......................................................... -- (9,342) (176) Payments on capital lease obligations ............................................... (71) -- -- -------- -------- -------- Net cash provided by financing activities ............................... 10,271 20,132 12,294 -------- -------- -------- Net increase in cash and cash equivalents from continuing operations .... 19,495 4,389 1,011 Net decrease in cash from discontinued operations ....................... (18,681) (3,617) (707) -------- -------- -------- Net increase in cash and cash equivalents ............................... 814 772 304 Cash and cash equivalents at beginning of year ...................................... 1,226 454 150 -------- -------- -------- Cash and cash equivalents at end of year ............................................ $ 2,040 $ 1,226 $ 454 ======== ======== ======== SUPPLEMENTAL INFORMATION--CASH PAID (RECEIVED) FOR: Interest ............................................................................ $ 1,883 $ 936 $ 232 ======== ======== ======== Income taxes ........................................................................ $ (500) $ 7,051 $ 5,552 ======== ======== ========
(CONTINUED) F-6 33 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED) (IN THOUSANDS) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: In September 1998, the Company sold its approximate 37% ownership interest in Savant Corporation to an affiliated company. Payment included a $1.8 million note guaranteed by a principal shareholder. In June 1998, the Company sold an aircraft to an affiliated company. Payment included a note for $880,000. In December 1999, the Company accrued $6.0 million to satisfy an earn out obligation related to the acquisition of SIS. On December 29, 2000, the Company issued in the aggregate principal amount $25,000,000 of 13% Senior Subordinated Notes due in 2005 and issued 2,250,000 shares of the common stock of the Company to the purchaser with a fair market value of $1,968,750. The Company acquired equipment with a value of $333,000 under capital leases during 2000. Detail of businesses acquired in purchase transactions (in thousands):
2000 1999 1998 -------- -------- -------- Total consideration ...................................... $ 6,359 $ 5,636 $ 45,767 Less stock consideration issued in acquisitions .......... -- -- (31,732) -------- -------- -------- Cash consideration paid for acquisitions ................. 6,359 5,636 14,035 Plus acquisition expenses ................................ 1,198 661 1,215 Less cash acquired in acquisitions ....................... (1,036) (99) (3,069) -------- -------- -------- Cash paid for acquisitions, net of cash acquired ..... $ 6,521 $ 6,198 $ 12,181 ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 34 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Company's primary business is providing information technology solutions for complex problems and proposal management services. In January 1998, the Company completed an initial public offering ("IPO") of Common Stock. In May 1998 the Company acquired Space Applications Corporation ("SAC"). SAC provides information technology, systems engineering, scientific research, program management support and technical services to the military, civilian space programs, the intelligence community, and the armed services. In August 1998, the Company acquired Decision-Science Applications, Inc. ("DSA"). DSA provides information technology, system engineering, information systems development, scientific research and program management support to the U.S. Government, principally the Department of Defense. The acquisitions of SAC and DSA are collectively referred to as the "1998 Acquisitions." In November 1998, DSA changed its name to SM&A Corporation (East), and in December 1998, SAC merged into SM&A Corporation (East). On May 4, 2000, SM&A Corporation (East) became known as Emergent Information Technologies-East ("Emergent-East"). In March 1999, the Company acquired Systems Integration Software, Inc., ("SIS"). SIS provides systems engineering, information systems development, scientific research and program management support to the U.S. Government, primarily the Department of Defense. In September 1999, the Company acquired Kapos Associates Inc. ("KAI"). KAI provides simulation and test systems engineering services to the U.S. Government. In February 2000, the Company acquired substantially all of the assets and assumed certain liabilities of System Simulation Solutions, Inc. ("S3I"). S3I provides campaign level modeling and simulation services to support quantitative analysis of military operations. In May 2000, the Company changed its name from SM&A Corporation to Emergent Information Technologies, Inc. On August 2, 2000, the Company's Board of Directors adopted a plan to discontinue the operations of Emergent-Central, previously disclosed as a business segment of the Company formed in 1999, and developed from the acquisition of SIS and a portion of DSA. This segment was principally involved in the development of commercial software. Accordingly, the operating results of Emergent-Central, including provisions for estimated losses for severance, facility costs, and expenses to be incurred in connection with the disposal including consulting, legal and accounting, have been accrued for as of December 31, 2000. The operations of Emergent-Central terminated on December 15, 2000. The net liabilities of Emergent-Central as of December 31, 2000 which are approximately $2.3 million, are included in current liabilities. Principles of Consolidation The consolidated financial statements include the accounts of Emergent Information Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. F-8 35 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Long-Lived Assets Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, generally three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or estimated useful life of the asset. 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, not to exceed 30 years. We assess the impairment of other identifiable intangibles and goodwill related to our consolidated subsidiaries, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Enterprise goodwill is evaluated using undiscounted future operating cash flows. Long-lived assets, enterprise goodwill and certain identifiable intangibles and goodwill associated with business units are reviewed for impairment in value based upon undiscounted future operating cash flows, and appropriate losses are recognized and reflected in current earnings, to the extent the carrying amount of an asset exceeds its estimated fair value determined by the use of appraisals, discounted cash flow analysis or comparable fair values of similar assets. Revenue Recognition Systems Engineering--A significant portion of the Company's professional services are performed for the United States Government under various cost reimbursable, time and materials and fixed-price contracts and subcontracts. The Company records revenues from cost-reimbursable contracts, including cost-plus-fixed-fee contracts, on the basis of reimbursable costs plus a pro rata portion of the fee. Revenue from time and materials contracts (government and commercial) are recognized based on the contractual hourly billing rates as the services are performed. For financial reporting purposes, the Company records revenue from fixed-price contracts on the percentage-of-completion method. Accrued income is based on the percentage of estimated total income that costs incurred to date bear on estimated total costs after giving effect to the most recent estimates of cost and estimated contract price at completion. Some contracts contain incentive provisions based upon performance in relation to established targets to which applicable recognition has been given in the contract revenue estimates. Proposal Management Services--The majority of proposal management services activities are provided under "time and expenses" billing arrangements, and revenues are recorded as work is performed. Revenue is directly related to the total number of hours billed to clients and the associated hourly billing rates. A limited amount of revenue is also derived from success fees offered to clients as a pricing option, and recorded as revenue only upon the attainment of the specified incentive criteria. Success fees are billable by the Company when a contract is won by the client. As many contracts extend over a long period of time, revisions in cost and price estimates during the progress of work are accounted for prospectively. When the contract estimate indicates a loss, provision is made for the total anticipated loss. In accordance with these practices, contracts in progress are stated at cost plus estimated profit, but not in excess of realizable value. Contract costs for services supplied to the U.S. Government, including indirect expenses, are subject to audit by the Government's representatives. All contract revenues are recorded in amounts that are expected to be realized upon final settlement. F-9 36 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Fair Value of Financial Instruments The carrying value of cash, accounts receivable, other accounts receivable, trade accounts payable and other accrued liabilities are measured at cost, which approximates their fair value. The aggregate fair value of the Company's total debt at December 31, 2000 was $40,123,000, approximately its carrying value, before reduction for issuance costs. The fair value was based on market quotes for similar terms and maturities. Income Taxes The Company provides for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates. Prior to the initial public offering, the Company and its shareholders elected to be treated as an S corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Under the provisions of the Code, the Company's shareholders included their pro rata share of the Company's income on their personal tax returns. Accordingly, the Company was not subject to federal and most state income taxes. In January 1998, the Company still operated as an S corporation; thus, the consolidated income statement presentation for the year ended December 31, 1998 includes only applicable federal and state income taxes for the period in which the Company was a C corporation. Upon termination of the S corporation status on January 28, 1998, the Company recorded income tax expense resulting from the establishment of net deferred tax liabilities of approximately $510,000, which was based upon temporary book to tax differences existing at the date of termination of the Company's S corporation status. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) 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 is a reconciliation between the number of shares used in the basic and diluted net income (loss) per share calculations (in thousands):
2000 1999 1998 ------ ------ ------ Weighted average number of shares outstanding-basic ........ 16,350 16,257 15,645 Dilutive effect of stock options ........................... 229 174 339 ------ ------ ------ Weighted average number of shares outstanding-diluted ...... 16,579 16,431 15,984 ====== ====== ======
Anti-dilutive shares excluded from the reconciliation above were 1,570,648, 1,602,500, and 114,500, for 2000, 1999 and 1998, respectively. F-10 37 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Stock-Based Compensation The Company measures stock-based compensation for option grants to employees and members of the board of directors using a method, which assumes that options granted at market price at the date of grant have no intrinsic value. Proforma net income (loss) and earnings (loss) per share are presented in Note 9 as if the fair value method had been applied. The Company uses the fair value method to account for stock options and other equity instruments issued to non-employees. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain items in the prior period financial statements have been reclassified to conform to the current period presentation. Recent Accounting Developments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of position and measure those instruments at fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized in earnings unless specific hedging criteria are met. Accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that an entity must formally document, designate and assess the effectiveness of transitions that receive hedge accounting. The Company adopted SFAS 133 on January 1, 2001. The Company has one interest rate swap agreement that does not qualify as a cash flow hedge as the Company did not prepare the required formal documentation as of December 31, 2000. Accordingly, during the first quarter of fiscal 2001, the Company expects to record a net-of-tax cumulative effect-type adjustment of accumulated other comprehensive loss of approximately $668,000 to recognize the interest swap at fair value at January 1, 2001. F-11 38 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 2. ACQUISITIONS In May 1998, the Company issued 819,743 unregistered shares of common stock valued at approximately $14.7 million and stock options with a fair value of $2.7 million for all the outstanding common stock of SAC. This transaction was accounted for as a purchase and, accordingly, the consolidated financial statements include the financial results of SAC from May 18, 1998, the date the definitive agreement was approved by all relevant parties, and the date of the private placement memorandum for SAC. Due to certain price protection provisions relating to the shares of common stock issued in connection with the acquisition of SAC and the market price of the Company's stock during 1999, the Company issued 714,000 additional shares of common stock to former shareholders of SAC based upon the market price of the common stock at certain defined liquidation dates. In August 1998, the Company issued 714,839 unregistered shares of common stock valued at approximately $14.4 million, and $14.0 million cash for all the outstanding common stock and options of DSA. This transaction was accounted for as a purchase and, accordingly, the consolidated financial statements include the financial results of DSA from August 1, 1998, the beginning of the accounting period in which the purchase transaction was finalized. The Company acquired SIS in March 1999 and KAI in September 1999, for an aggregate amount of $5.5 million in cash and additional consideration contingent upon the achievement of certain operating results. The Company paid $7.1 million in April 2000 as an earn out payment under the SIS acquisition agreement. These transactions were accounted for as purchases and accordingly, the consolidated financial statements include the financial results of SIS and KAI from the effective dates of each such acquisition. Results of operations for the years ended December 30, 2000 and 1999 would not have been materially impacted on a pro forma basis if the acquisitions of SIS and KAI had occurred as of the beginning of the respective periods. The Company discontinued the software development operations of Emergent-Central in August 2000. The discontinued segment included the total SIS acquisition and an allocated portion of the DSA acquisition. The write off of intangible assets associated with the acquisitions of SIS and DSA were $10.2 million and $12.7 million, respectively. In February 2000, the Company acquired substantially all of the assets and assumed certain liabilities of S3I for approximately $6.4 million in cash. Net assets acquired was principally cash of approximately $1.0 million. The excess of the cash paid over the fair value of net assets acquired has been recorded as goodwill of approximately $6.6 million. S3I has the right to receive up to approximately $1.0 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. The Company does not anticipate any earnout will be paid for the period ending February 2001. This transaction was accounted for as a purchase and, accordingly, the 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 years ended December 31, 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. F-12 39 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 3. PROPERTY AND EQUIPMENT A summary of property and equipment follows (in thousands):
2000 1999 ------- ------- Computer equipment ................................. $ 4,396 $ 3,209 Furniture and equipment ............................ 2,980 2,211 Leasehold improvements ............................. 2,044 1,887 ------- ------- 9,420 7,307 Less accumulated depreciation and amortization ..... (4,012) (1,671) ------- ------- $ 5,408 $ 5,636 ======= =======
NOTE 4. DUE FROM AFFILIATES AND RELATED PARTY TRANSACTIONS In June 1998, the Company sold an aircraft to an affiliate of the Company's principal shareholder. Terms included a promissory note for the total sales price of $880,000, which was paid in April 1999. As the aircraft was nearly fully depreciated at the time of sale, the majority of the proceeds were recognized as a gain on sale. In September 1998, SAC sold its 37% ownership interest in Savant, an equity investment, to an affiliate of the Company's principal shareholder for its net book value of $2.0 million. The sales proceeds were $200,000 cash and a promissory note for $1.8 million. The note bears interest at 9% and is payable in thirty monthly installments of $30,000 commencing on October 31, 1998 through March 31, 2001. All remaining principal is due and payable on March 31, 2001. The note is guaranteed by the principal shareholder of the Company. No principal payments were received in 1999. As of December 31, 1999 and 1998, $1.7 million remained outstanding on the promissory note. The note was paid in full on September 22, 2000. In November 1998, Savant engaged the Company to perform certain consulting services through December 31, 1998. Included in accounts receivable as of December 31, 1999 is $225,000, due from Savant for this consulting project. This receivable is guaranteed by the principal shareholder of the Company. Terms of the agreement were commensurate with market rates for similar consulting services. The receivable was paid in full in December 2000. The Company charters aircraft from time to time through an air service chartering company controlled by the Company's principal shareholder. The terms of use and charter rates paid by the Company are established by the air service chartering company and are considered by the Company to be competitive with charter rates and on terms as favorable as those from unaffiliated third parties for similar aircraft. Charter fees amounted to approximately $148,700, $396,000, and $300,000 for the years ended December 31, 2000, 1999, and 1998, respectively. F-13 40 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 5. DISCONTINUED OPERATIONS On December 1, 1998, the Company's Board of Directors adopted a plan to discontinue the operations of StamiNet, Inc., a subsidiary of SAC, which was acquired in May 1998. Accordingly, the operating results of StamiNet, including provisions for estimated losses during the phase-out period, severance, facility lease costs and other shut down expenses expected to be incurred in connection with the disposal, were accrued as of December 31, 1998. Estimated expenses and operating losses from the measurement date through the anticipated date of disposal amounted to $997,000. The operations of StamiNet were fully terminated by March 31, 1999. On August 2, 2000, the Company's Board of Directors adopted a plan to discontinue the operations of Emergent-Central, a business segment of the Company formed in 1999 from the acquisitions of SIS and a portion of DSA. The principal business of the segment was commercial software development. Accordingly, the operating results of Emergent-Central, including provisions for estimated losses during the phase-out period, severance, facility lease costs and other shut down expenses expected to be incurred in connection with the disposal, have been accrued for as of December 31, 2000. Estimated expenses and operating losses from the measurement date through the anticipated date of disposal amounted to $34.1 million, which included the write-off of associated goodwill approximating $22.9 million. The operations of Emergent-Central were fully terminated by December 31, 2000. The net liabilities of Emergent-Central as of December 31, 2000, which amounted to approximately $2.3 million, are included in current liabilities. NOTE 6. LONG-TERM DEBT Effective on December 29, 2000, the Company completed a refinancing of its existing indebtedness. The refinancing transactions resulted in the creation of two classes of debt for the Company with both new and existing lenders. In connection with the refinancing, the Company entered into a Second Amended and Restated Credit and Security Agreement (the "Senior Facility"), dated December 29, 2000, by and among the Company and its existing lending group, Mellon Bank, N.A. as agent and Wells Fargo Bank, N.A., as co-agent, whereby that certain Amended and Restated Credit Agreement dated June 7, 1999 (the "Original Facility") was amended and restated to provide in part for an extension of the maturity date to January 31, 2002, to reset financial covenants, to reduce the existing revolving loan lending commitments to $22,700,000, and to permit the subordinated indebtedness discussed below. Borrowings bear interest at the bank's prime rate (9.5% at December 31, 2000) plus 1%. The Senior Facility is guaranteed by all of the Company's subsidiaries and is secured by a lien on all of the assets of the Company and its subsidiaries (including stock of subsidiaries). As of December 31, 2000, the Company was in compliance with the financial covenants. The Company has agreed to reduce the $22,700,000 in borrowing availability under the Senior Facility to no more than $18,700,000 by the end of 2001. As of December 31, 2000, after giving effect to the refinancing transactions, the Company had $7,600,000 in undrawn availability under the Senior Facility. F-14 41 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The Company also entered into a Note and Stock Purchase Agreement (the "Subordinated Debt Agreement") dated as of December 29, 2000, by and among the Company, the subsidiaries of the Company as Guarantors, and various investors including Libra Mezzanine Partners II, L.P. (such investors, the "Purchasers"). In consideration of a $25,000,000 investment, the Company issued to the purchasers (i) 13% Senior Subordinated Notes due in 2005 in the aggregate principal amount of $25,000,000 (the "Notes"), and (ii) 2,250,000 shares of the common stock of the Company ("Common Stock") with a fair value of $1,968,750. The Subordinated Debt Agreement contains financial and other covenants for the benefit of the Purchasers, and requires payment of a premium if the Notes are prepaid within three years of the Closing (including a reduced premium if repayment occurs in connection with a change of control of the Company). As of December 31, 2000, the Company was in compliance with the financial and other covenants. The Notes are not secured. The table below provides details of the Company's long-term debt instruments as of December 31 (in thousands):
2000 1999 -------- -------- Revolving credit facility ($22.7 million, 2000 and $50 million, 1999) Outstanding balance ....................................................... $ 15,123 $ 29,017 Subordinated notes ($25 million face amount) .............................. 25,000 -- Original issue discount on subordinated notes ............................. (1,969) -- Debt issuance costs ....................................................... (1,521) -- -------- -------- Net long-term debt ........................................................ $ 36,633 $ 29,017 ======== ========
The issuance costs will be amortized as interest expense on a straight-line basis over the life of the Notes. NOTE 7. INCOME TAXES Income tax expense attributable to income from continuing operations consists of (in thousands):
CURRENT DEFERRED TOTAL ------- -------- ------- Year ended December 31, 2000: Federal .............................. $ 3,971 $ (648) $ 3,323 State ................................ 1,073 (107) 966 ------- ------- ------- $ 5,044 $ (755) $ 4,289 ======= ======= ======= Year ended December 31, 1999: Federal .............................. $ 4,867 $ (754) $ 4,113 State ................................ 765 (140) 625 ------- ------- ------- $ 5,632 $ (894) $ 4,738 ======= ======= ======= Year ended December 31, 1998: Federal .............................. $ 4,470 $ 484 $ 4,954 State ................................ 1,014 104 1,118 ------- ------- ------- $ 5,484 $ 588 $ 6,072 ======= ======= =======
A reconciliation of the Company's effective tax rate compared to the statutory federal tax rate is as follows:
2000 1999 1998 ------ ------ ------ Income taxes at statutory federal rates ............ 35.0% 35.0% 34.0% State taxes, net of federal income tax benefit ..... 3.6 5.3 5.5 Amortization of non-deductible goodwill ............ 3.0 2.1 3.7 Other, net ......................................... (0.6) (1.9) (1.6) ------ ------ ------ 41.0% 40.5% 41.6% ====== ====== ======
F-15 42 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The Company provides deferred income taxes for temporary differences between assets and liabilities recognized for financial reporting and income tax purposes. The income effects of these temporary differences representing significant portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):
2000 1999 ------- ------- Accrued expenses not currently deductible for tax purposes ..................... $ 855 $ 781 Project reserves ............................................................... 86 222 Allowance for doubtful accounts ................................................ 172 303 Depreciation ................................................................... 684 54 Change of accounting from cash to accrual method for acquired subsidiaries ..... (349) (598) Prepaid expenses ............................................................... (19) (40) Installment sale transaction ................................................... 83 61 State net operating loss carry forward ......................................... 164 -- Other .......................................................................... 14 15 Valuation allowance .................................................... (164) -- ------- ------- Total net deferred income tax asset ........................................ $ 1,526 $ 798 ======= =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. NOTE 8. SHAREHOLDERS' EQUITY The Company completed an initial public offering ("IPO") of common stock during January 1998. Of the 3,150,000 shares of Common Stock sold in the IPO at an offering price of $12.00 per share, 1,050,000 were sold by existing shareholders and 2,100,000 were sold by the Company, generating $22.4 million in net proceeds to the Company, net of offering expenses of $1.0 million. The Company made cash payments of S corporation distributions (the "S Corporation dividend") to shareholders totaling $711,000 which were accrued as of January 28, 1998 and paid February 5, 1998. The S Corporation dividend represented the undistributed earnings of the Company taxed or taxable to the shareholders through the date of the IPO. Cash provided from the operating activities of the Company prior to the IPO was used to fund the dividend payment. In December 1998, the Company repurchased and retired 13,000 shares of common stock pursuant to a Board authorization to reacquire up to 300,000 shares of Company stock. Repurchase prices ranged from $13.31 to $14.00 per share. During 1999, the Company repurchased and retired 1,146,000 shares of common stock pursuant to a Board authorization for approximately $9.3 million in cash. In December 2000, the Company issued 2,250,000 shares of common stock with a fair market value of $1,968,750 to the purchaser of the 13% Senior Subordinated Notes (see Note 6). Additionally, 100,000 stock options with an exercise price of $1.53 per share granted to a consultant fully vested upon the issuance of the 13% Senior Subordinated Notes. The fair value of the options of $91,000 was determined using the Black-Scholes option-pricing model, with the following assumptions: Volatility -- 138%; risk free interest rate -- 6%; expected life -- 3.6 years; and dividend yield -- 0%. F-16 43 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 9. STOCK OPTION PLAN AND EMPLOYEE BENEFIT PLANS In 1997, the Company adopted the 1997 Stock Option Plan (the "Option Plan") under which incentive and non-statutory stock options to acquire shares of the Company's common stock may be granted to officers, employees, and consultants of the Company. The Option Plan is administered by the Board of Directors and permits the issuance of up to 4,000,000 shares of the Company's common stock. Incentive stock options must be issued at an exercise price not less than the fair market value of the underlying shares on the date of grant. Options granted under the Option Plan vest over various terms up to ten years and are exercisable over a period of time, not to exceed ten years, and are subject to other terms and conditions specified in each individual employee option agreement. A summary of employee stock options follows:
WEIGHTED WEIGHTED AVERAGE AVERAGE FAIR VALUE OF NUMBER OF EXERCISE OPTIONS SHARES PRICE GRANTED ---------- -------- ------------- Outstanding as of December 31, 1997 ....... -- -- -- Granted ............................... 1,547,200 $13.05 $ 7.60 Canceled .............................. (86,700) ---------- Outstanding as of December 31, 1998 ....... 1,460,500 Granted ............................... 1,616,709 $ 7.07 $ 3.82 Exercised ............................. (5,000) Canceled .............................. (495,234) ---------- Outstanding as of December 31, 1999 ....... 2,576,975 Granted ............................... 2,117,300 $ 2.43 $ 2.01 Exercised ............................. -- Canceled .............................. (1,921,834) ---------- Outstanding as of December 31, 2000 ....... 2,772,441 ==========
The following table summarizes information concerning stock options outstanding at December 31, 2000:
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - --------------- ----------- ----------- -------- ----------- -------- $1.06-2.86 .............. 1,190,600 6.1 $ 1.93 125,000 $ 1.53 $2.86-5.73 .............. 511,779 3.7 5.15 120,113 5.18 $5.73-8.59 .............. 357,000 3.1 7.63 103,449 7.44 $8.59-11.45 ............. 23,362 1.9 9.63 9,230 9.74 $11.45-14.31 ............ 501,525 2.1 12.04 252,374 12.04 $14.31-17.18 ............ 127,175 2.6 15.72 59,475 15.63 $17.18-20.04 ............ 61,000 2.0 19.04 32,250 19.05 --------- ------ ------ --------- ------ $1.06-20.04 ............. 2,772,441 4.3 $ 6.16 701,891 $ 8.91 ========= ====== ====== ========= ======
As part of the SAC acquisition, SAC's outstanding options were converted into Emergent options for 175,906 shares of the Company's common stock with a weighted average exercise price of $5.67 per share. These options are not part of the Option Plan. The proforma information does not include the effect of these converted options as their fair value has been included in the calculation of goodwill from acquisition. F-17 44 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model, with the following weighted average assumptions:
2000 1999 1998 ------- ------- ------- Stock volatility ..................... 138.05% 77.58% 84.37% Risk-free interest rate .............. 6.00% 5.50% 6.00% Option term in years ................. 3.66 3.01 3.07 Stock dividend yield ................. 0.00 0.00 0.00
The Company's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the stock-based awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $2.5 million, or $0.15 per basic and diluted share in 1999; and $6.4 million, or $0.41 per basic share and $0.40 per diluted share in 1998. Due to the large amount of stock option forfeitures in 2000, pro forma net loss would be unchanged from reported net loss. Employee Stock Purchase Plan In 1999, the Company adopted an Employee Stock Purchase Plan (the "ESPP") with an initial allocation of 250,000 shares. In September 2000, an additional 500,000 shares were allocated to the ESPP. The ESPP allows employees of the Company to purchase common stock, through bi-weekly payroll deductions, at a 15% discount. Employee contributions to the ESPP are limited to 15% of the employee's annual compensation. The Company issued 250,000 shares to participants for year ended December 31, 2000. Defined Contribution Plans The Emergent Information Technologies, Inc., 401(k) Plan and Trust is a defined contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan covers all employees. Contributions are made to the Plan by both the employees and the company. SAC and DSA each maintained 401(k) and profit sharing plans for their employees. Contributions were made to the Plan by both the employees and the Company. The Company's expense under these plans was $110,000 and $479,000 for the years ended December 31, 1999 and 1998, respectively. In March 1999, the defined contribution pension plans of Steven Myers & Associates, SAC, and DSA were merged to form a single 401(k) plan. The new plan, the Emergent Information Technologies, Inc., 401(k) Plan and Trust, provides for employee contributions of up to 15% of eligible compensation with Company matching, supplemental contributions for certain classes of employees based on performance criteria and profit sharing under certain conditions. The Company's matching contribution was $257,170 for the year ended December 31, 2000. The Company's supplemental contribution was $1,050,000 for the year ended December 31, 2000. F-18 45 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 10. COMMITMENT AND CONTINGENCIES The Company leases office facilities and certain equipment under lease agreements classified as operating leases. The Company is obligated under various capital lease obligations for equipment that expire in 2005. Equipment under capital leases at December 31, 2000 was $290,000, net of accumulated depreciation of $43,000. Future minimum lease payments under noncancelable operating leases and future minimum capital lease payments as of December 31, 2000 are summarized as follows (in thousands):
CAPITAL OPERATING YEAR ENDING DECEMBER 31: LEASES LEASES - ------------------------ ------- --------- 2001 ................................................ $ 91 $ 5,046 2002 ................................................ 91 4,869 2003 ................................................ 91 4,925 2004 ................................................ 91 4,616 2005 ................................................ 32 4,480 Thereafter .......................................... -- 9,671 ------- ------- Total minimum lease payments ................... $ 396 $33,607 ======= Less amount representing interest (10.5%) ........... (92) ------- Present value of minimum capital lease payments ..... 304 Less current obligations under capital leases ....... (54) ------- Long-term obligations under capital leases .......... $ 250 =======
The capital lease obligations are included in other liabilities in the accompanying consolidated balance sheet. Rent expense amounted to $5,260,400, $3,943,000 and $1,700,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and has been included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The Company is party to various legal actions which arose in the normal course of business. In the opinion of management, the settlement of these matters will not materially affect the Company's financial position or results of operations. F-19 46 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 11. SEGMENT REPORTING DATA The Company classifies its operations into two lines of business, each offering a distinct set of services. These lines of business are summarized as follows; Steven Myers & Associates, which involves assisting clients with the procurement of government and commercial programs and Emergent-East, which includes systems engineering, scientific research, program management and technical support services. The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income. The revenue recognition policies of the business segments vary according to the type of contract involved. Information as to the operations of the lines of business is set forth below. The information presented for the years ended December 31, 2000, 1999 and 1998 represents historical supplemental data as described on the consolidated balance sheets and on the consolidated statements of operations (in thousands):
2000 1999 1998 --------- --------- --------- Net revenues: Steven Myers & Associates, Inc. ........................ $ 37,304 $ 38,135 $ 39,594 Emergent-East .......................................... 82,836 57,398 28,855 --------- --------- --------- Total net revenues ................................. $ 120,140 $ 95,533 $ 68,449 ========= ========= ========= Depreciation and amortization expense: Steven Myers & Associates, Inc. ........................ $ 143 $ 98 $ 115 Emergent-East .......................................... 3,911 1,568 935 Executive Group ........................................ 61 367 274 --------- --------- --------- Total depreciation and amortization expense ........ $ 4,115 $ 2,033 $ 1,324 ========= ========= ========= Operating income (loss): Steven Myers & Associates, Inc. ........................ $ 11,778 $ 12,820 $ 15,730 Emergent-East .......................................... 11,097 15,869 9,274 Executive Group ........................................ (10,352) (16,289) (11,925) --------- --------- --------- Total operating income ............................. $ 12,523 $ 12,400 $ 13,079 ========= ========= ========= Income (loss) from continuing operations: Steven Myers & Associates, Inc. ........................ $ 11,749 $ 7,628 $ 8,990 Emergent-East .......................................... 11,027 9,442 5,832 Executive Group ........................................ (16,604) (10,110) (6,295) --------- --------- --------- Total income from continuing operations ............ $ 6,172 $ 6,960 $ 8,527 ========= ========= ========= Assets: Steven Myers & Associates, Inc. ........................ $ 11,706 $ 10,146 $ 8,906 Emergent-East .......................................... 59,372 41,148 30,300 Executive Group ........................................ 4,771 6,332 7,485 Emergent-Central ................................... -- 38,947 19,633 --------- --------- --------- Total assets ....................................... $ 75,849 $ 96,573 $ 66,324 ========= ========= =========
F-20 47 EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE 12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The majority of the Company's receivables are from the U.S. Government and large companies in the aerospace and defense industries. The Company's ten largest customers represented 79% of total revenue for fiscal 2000. The Company controls credit risk through credit approvals and monitoring procedures. Credit losses have historically been minimal. The percentage of the Company's net revenues arising from major customers is summarized as follows:
YEARS ENDED DECEMBER 31, ---------------------- 2000 1999 1998 ---- ---- ---- U.S. Government ..................................... 27% 28% 25% Raytheon Systems Company ............................ 17 20 16 Lockheed Martin Corporation ......................... 12 16 17 Litton .............................................. 6 3 5 The Boeing Company .................................. 4 9 8
F-21 48 EMERGENT INFORMATION TECHNOLOGIES, INC., AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS -------------------------- BALANCE AT CHARGES TO RECOVERIES BALANCE AT THE BEGINNING BAD DEBTS AND DEDUCTIONS/ THE END OF THE PERIOD EXPENSE OTHER(1) WRITE-OFFS OF THE PERIOD ------------- ---------- ---------- ---------- ------------- 2000 Allowance for Doubtful Accounts ..... $ 935 $ 29 $ 0 $ (413) $ 551 -------- -------- -------- -------- -------- 1999 Allowance for Doubtful Accounts ..... $ 643 $ 142 $ 210 $ (60) $ 935 -------- -------- -------- -------- -------- 1998 Allowance for Doubtful Accounts ..... $ -- $ 60 $ 625 $ (42) $ 643 ======== ======== ======== ======== ========
- ----------- (1) Represents amounts acquired in the acquisitions of SAC and DSA in 1998 and SIS and KAI in 1999. F-22 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ STEVEN S. MYERS -------------------------------------- Steven S. Myers Chief Executive Officer Dated: April 16, 2001 POWER OF ATTORNEY KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven S. Myers and Cathy L. Wood his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ STEVEN S. MYERS Chairman of the Board, President and April 16, 2001 - ---------------------------------------- Chief Executive Officer Steven S. Myers (Principal Executive Officer) /s/ AJAYKUMAR K. PATEL Executive Vice President and April 16, 2001 - ---------------------------------------- Chief Operating Officer Ajaykumar K. Patel /s/ CATHY L. WOOD Chief Financial Officer and April 16, 2001 - ---------------------------------------- Secretary (Principal Financial Cathy L. Wood Officer and Principal Accounting Officer) /s/ J. CHRISTOPHER LEWIS Director April 16, 2001 - ---------------------------------------- J. Christopher Lewis /s/ LUTHER J. NUSSBAUM Director April 16, 2001 - ---------------------------------------- Luther J. Nussbaum /s/ JOSEPH B. FULLER Director April 16, 2001 - ---------------------------------------- Joseph B. Fuller /s/ VINCENT C. SMITH Director April 16, 2001 - ---------------------------------------- Vincent C. Smith /s/ ALBERT S. NAGY Director April 16, 2001 - ---------------------------------------- Albert S. Nagy
F-23 50 EXHIBIT INDEX (3) Exhibits (numbered in accordance with item 601 of Regulation S-K). 2.1 Agreement and Plan of Reorganization and Merger dated May 18, 1998, by and among the Registrant, Space Applications Corporation, SAC Acquisition, Inc. and the individual shareholders named therein (filed on June 4, 1998 as Exhibit 2 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 2.2 Agreement and Plan of Reorganization and Merger dated July 22, 1998, by and among the Registrant, Decision-Science Applications, Inc., DSA Acquisition, Inc. and the individual shareholders named therein (filed on August 21 1998 as Exhibit 2.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 2.3 Agreement and Plan of Reorganization and Merger dated March 30, 1999, by and among SM&A Corporation, Systems Integration Software, Inc., SIS Acquisition, Inc. and the individuals named therein (filed on May 17, 1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference) 2.4 Stock Purchase Agreement dated as of September 20, 1999, by and among SM&A Corporation (East), Kapos Associates Inc., Ervin Kapos and June Kapos and Verona Oliver and Cordellia Scruggs (filed on November 15, 1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference) 2.5 Agreement of Merger dated November 24, 1998 between Space Applications Corporation and SM&A Corporation (East), effective date December 31, 1998 (filed on March 31, 1999 as Exhibit 2.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference) 3.1 Articles of Incorporation, as amended and restated (filed on January 27, 1998 as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-4075) and incorporated herein by reference) 3.2 Bylaws of the Registrant, as amended and restated (filed on January 5, 1998 as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-4075) and incorporated herein by reference) 3.3 Certificate of Ownership as filed with the California Secretary of State on August 6, 1998 (filed on August 19, 1998 as Exhibit 3.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 3.4 Certificate of Determination of Preferences of Series L Preferred Stock.* 4.1 Registration and Antidilution Rights Agreement, dated December 29, 2000, by and among the Registrant and the Holders listed on the signature pages thereto (filed on January 8, 2001 as Exhibit 99.5 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 4.2 Controlling Shareholder Agreement, dated December 29, 2000, by and among the Registrant, Steven S. Myers as Common Stockholder, and the Purchasers listed on the signature pages thereto (filed on January 8, 2001 as Exhibit 99.6 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 10.1 Amended and Restated 1997 Stock Option Plan* and related form of Stock Option Agreement* 10.2 Amended and Restated Employee Stock Purchase* 10.3 Form of Indemnification Agreement (filed on November 21, 1997 as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 3334075) and incorporated herein by reference) 10.4 Office Facilities Lease (filed on November 21, 1997 as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-4075) and incorporated herein by reference)
51 10.5 Second Amended and Restated Credit and Security Agreement, dated December 29, 2000, by and among the Registrant, Mellon Bank, N.A., as Agent, Wells Fargo Bank, N.A., as Co-Agent, and the Lenders listed on the signature pages thereto (filed on January 8, 2001 as Exhibit 99.2 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 10.6 Note and Stock Purchase Agreement, dated December 29, 2000, by and among the Registrant, and the Guarantors and Purchasers listed on the signature pages thereto (filed on January 8, 2001 as Exhibit 99.3 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 10.7 Subordination and Intercreditor Agreement, dated December 29, 2000, by and among the persons listed on the signature pages thereto as Subordinated Creditors, Libra Mezzanine Partners II-A, L.P. as agent of the Subordinated Creditors, the Registrant, and Mellon Bank, N.A. as agent for all Senior Lenders party to that certain Second Amended and Restated Credit and Security Agreement of even date therewith (filed on January 8, 2001 as Exhibit 99.4 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 10.8 Management Agreement, dated December 29, 2000, by and between Libra Mezzanine Partners II-A, L.P. and the Registrant (filed on January 8, 2001 as Exhibit 99.7 to the Registrant's Current Report on Form 8-K and incorporated by reference herein). 10.9 Registration Rights Agreement dated May 29, 1998 by and among the Registrant and certain shareholders of Space Applications Corporation identified therein (filed on June 4, 1998 as Exhibit 2 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 10.10 Registration Rights Agreement dated August 20, 1998 by and among Registrant and certain shareholders of Decision-Science Applications, Inc. set forth therein (filed on August 21, 1998 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 10.11 Employment Agreement dated August 20, 1998 by and between Decision-Science Applications, Inc. and Gary L. Lucas (filed on August 21, 1998 as Exhibit 10.3 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 10.12 Employment Agreement dated August 20, 1998 by and between Decision-Science Applications, Inc. and Dana R. Raucher (filed on August 21, 1998 as Exhibit 10.4 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 10.13 Employment Agreement dated September 20, 1999, by and between Kapos Associates Inc. and Ervin Kapos (filed on April 7, 2000 as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference) 10.14 Escrow Agreement dated September 20, 1999, among SM&A Corporation (East), Kapos Associates Inc., Ervin Kapos and June Kapos and First American Trust Company (filed on November 15, 1999 as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference) 10.15 Escrow Agreement dated March 30, 1999, among the Registrant, Systems Integration Software, Inc., First American Trust Company and the individuals names therein (filed on May 17, 1999 as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference) 10.16 Escrow Agreement dated August 20, 1998 by and between Decision-Science Applications, Inc., First American Trust Company and certain shareholders identified therein (filed on August 21, 1998 as Exhibit 10.5 to the Registrant's Current Report on Form 8-K and incorporated herein by reference) 10.17 Employment Agreement dated as of February 1, 2000 between the Registrant and Steven S. Myers* 21.1 Subsidiaries of the Registrant* 23.1 Consent of KPMG LLP*
- ----------- * Filed herewith. EX-3.4 2 a71291ex3-4.txt EXHIBITS 3.4 1 EXHIBIT 3.4 CERTIFICATE OF DETERMINATION OF PREFERENCES OF SERIES L PREFERRED STOCK OF EMERGENT INFORMATION TECHNOLOGIES, INC., A CALIFORNIA CORPORATION The undersigned certify that: A. They are the Chief Executive Officer and President, and Secretary, respectively, of Emergent Information Technologies, Inc., a California corporation (the "Corporation"). B. The authorized number of shares of Preferred Stock is 10,000,000, none of which have been issued. The authorized number of shares of Series L Preferred Stock is one (1) share, which has not been issued. C. Pursuant to authority given by the Corporation's Amended and Restated Articles of Incorporation, the Board of Directors of the Corporation (the "Board") duly has approved and adopted the following recitals and resolutions: WHEREAS, the Amended and Restated Articles of Incorporation of the Corporation authorizes a class of Preferred Stock comprising 10,000,000 shares issuable from time to time in one or more series; and WHEREAS, the Board is authorized to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock including but not limited to the dividends rights, dividend rates, conversion rights, voting rights, the liquidation preferences, and the number of shares constituting any such series and the designation thereof, or any of them; and WHEREAS, the Corporation heretofore has not issued or designated any series of Preferred Stock, and it is the desire of the Board, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to Series L Preferred Stock and the number of shares constituting such series; NOW, THEREFORE, be it resolved, that the Board hereby does provide for the issue of a series of Preferred Stock consisting of one (1) share designated as "Series L Preferred Stock", and does hereby fix the rights, privileges, preferences, and restrictions and other matters relating to the Series L Preferred Stock as follows: 1. Dividend Rights. The Series L Share shall not be entitled to receive dividends. 2. Rights on Liquidation. 2 2.1. In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary ("Liquidation"), the holder of a Series L Share (the "Holder") shall be entitled to receive with respect to such Series L Share, after the satisfaction of all distributions to holders of other classes or series of preferred stock, if any, which expressly rank prior to the Series L Share (as provided in Paragraph 5) (collectively, the "Senior Payments"), but before any distribution is made to or set aside for the holders of Common Stock or any other classes or series of preferred stock of the Corporation, if any, which are not then required to be redeemed or whose terms provide specifically that such class or series rank junior to the Series L Share (as provided in Paragraph 5), or fail to specify the ranking of such class or series relative to the Series L Share with respect to rights to receive payment of dividends and distributions upon Liquidation, cash or any other assets of the Corporation in an amount equal to $10.00 per Series L Share (the "Liquidation Preference"). 2.2. If, after the satisfaction of all Senior Payments, the assets of the Corporation available for distribution to the Holder shall be insufficient to permit the payment in full of the amount due the Holder and the holders of other classes or series of preferred stock issued by the Corporation whose terms provide specifically that such series shall rank in parity with the Series L Share (as provided in Paragraph 5), if any, in accordance with their respective liquidation preferences, the entire assets of the Corporation available for distribution to the Holder after the satisfaction of all Senior Payments shall be distributed pari passu among the Holder and the holders of other classes or series of preferred stock issued by the Corporation whose terms provide specifically that such series shall rank in parity with the Series L Share (as provided in Paragraph 5), if any, in accordance with their respective liquidation preferences. The fair market value of any assets of the Corporation and the proportion of cash and other assets distributed by the Corporation to the Holder of the Series L Share shall be reasonably determined in good faith by the Board but only to the Liquidation Preference. 2.3. A merger or consolidation of the Corporation with another corporation or a voluntary sale of all or substantially all the assets of the Corporation principally in exchange for stock and/or securities of another corporation (any of the foregoing being herein referred to as a "Merger") shall not be deemed a Liquidation, but only if any such event occurs other than as part of a proceeding under Title 11 of the United States Code or any federal or state law for the protection of creditors or relief of debtors. 3. Voting Rights. 3.1. Except as otherwise provided by law or in this Paragraph 3, the Holder shall have no voting rights. 3.2. The Corporation has issued notes ("Notes") pursuant to that certain Note and Stock Purchase Agreement dated as of December 29, 2000, by and between the Company, the Holder and others (the "Note Purchase Agreement"), and the Holder has purchased such Notes from the Company. If any Event of Default described in paragraph (a) or (b) of 2 3 Section 8.01 of the Note Purchase Agreement has occurred and such default is not remedied within 180 days (a "Board Rights Event"), then upon the occurrence of a Board Rights Event (A) if there are two (2) vacancies on the Board at the time of the Board Rights Event, the Holder shall be entitled immediately to elect two (2) members to the Board, (B) if there is one (1) vacancy on the Board at the time of the Board Rights Event, the Holder shall be entitled immediately to elect one (1) member to the Board, and (C) if there are no vacancies on the Board at the time of the Board Rights Event, the Holder shall not be entitled to elect any members to the Board, provided, however, that in the case of clauses (B) and (C), at such time as a vacancy or vacancies are created on the Board, by reason of an increase in the size of the Board of Directors approved by the shareholders of the Corporation, or by reason of death, resignation, removal, retirement or otherwise, the Holder shall have the right to elect one (1) or two (2) directors to fill such vacancy or vacancies. Any member elected pursuant to this Paragraph 3(b) shall serve until the Event of Default has been cured or waived, or the Notes are no longer outstanding, at which time the term of such member shall end. If the office of any such additional member becomes vacant by reason of death, resignation, retirement or otherwise, the Holder may select a successor, who shall hold office for the unexpired term in respect of which such vacancy occurred. 3.3. As long as the Notes are outstanding, the Corporation shall not take any of the following actions without the consent or affirmative vote of the Holder of the Series L Share, given in person, by written consent or by proxy, either in writing or by a resolution adopted at a meeting called for that purpose, voting as a separate class: (i) The amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any provision of or the addition of any provision to the Articles of Incorporation or of any amendment or supplement thereto (including any certificate of determination or any similar document relating to any series of preferred stock) or this Certificate of Determination, which would alter or change the preferences, powers or rights of Series L Share to affect the Holder adversely. Matters permitted (with or without a vote) under clause (ii) below of this Paragraph 3(c) shall not be deemed to affect the Holder adversely; nor shall a vote of the Holder be required for the amendment of the Articles of Incorporation or the passing of a resolution so as to authorize, create, designate or issue, or to increase the authorized or outstanding amount of, any shares of any class or series. (ii) A Merger; provided that the provisions of this clause (ii) shall not be applicable to any such Merger if: (A) if the Corporation is the survivor in the Merger, the Series L Share will continue to have the rights, preferences and privileges no worse than those contained herein; (B) if the Corporation is not the survivor in the Merger, either (i) the security of the surviving corporation into which the Series L Share is converted have 3 4 rights, preferences and privileges no worse than those contained herein or (ii) the Notes are to be indefeasibly paid in full in connection with or as a result of the Merger. 3.4. A copy of each notice, proxy statement, annual report and other communication sent to the holders of Common Stock shall be simultaneously sent to the Holder. 4. Redemption Rights. The Corporation may not redeem the Series L Share without the prior written consent of the Holder, except the Corporation may redeem the Series L Share by payment of $10 to the Holder thereof at any time after all amounts owed under the Notes, including, without limitation, principal and interest, have been indefeasibly paid in full. 5. Ranking of Stock of the Corporation. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: a. Prior to the Series L Share, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the Holder of Series L Shares; b. On a parity with the Series L Share, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Series L Share, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the Holder; and c. Junior to the Series L Share, either as to dividends or upon liquidation, if such class shall be Common Stock or if the Holder shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, winding up of the Corporation, or upon redemption as the case may be, in preference or priority to the holders of shares of such class or classes. RESOLVED FURTHER, that the Chief Executive Officer and President and the Secretary of the Corporation are hereby authorized and directed to execute, acknowledge, file and record a Certificate of Determination of Preferences in accordance with the foregoing resolutions and provisions of California law. 4 5 The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on December 27, 2000 in Newport Beach, California. /s/ STEVEN S. MYERS ---------------------------------------- Steven S. Myers, Chief Executive Officer and President /s/ MICHAEL N. OKADA ---------------------------------------- Michael N. Okada, Secretary EX-10.1 3 a71291ex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 [EMERGENT INFORMATION TECHNOLOGIES, INC. LOGO] AMENDED AND RESTATED 1997 STOCK OPTION PLAN 1. Purposes. (a) The purpose of the Plan is to provide a means by which selected employees, Directors and Consultants of the Company and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of Incentive Stock Options and Nonstatutory Stock Options, as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees, Directors or Consultants of the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or the Committee, be either Incentive Stock Options and Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a certificate or certificates will be issued for shares purchased on exercise of such Options. 2. Definitions. (a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means a Committee appointed by the Board in accordance with Section 3(c) of the Plan. (e) "Company" means Emergent Information Technologies, Inc., a California corporation, (formerly known as SM&A Corporation). (f) "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. Page 1 of 10 2 (g) "Continuous Status as an Employee, Director or Consultant" means the employment or relationship as an Employee, Director or Consultant is not interrupted or terminated. Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of any leave of absence, including sick leave, military leave or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any such leave exceeding three (3) months shall be considered an interruption in the Continuous Status as an Employee, Director or Consultant, as applicable, unless reemployment upon the expiration of such leave is guaranteed by contract, Company policies or statute. (h) "Director" means a member of the Board. (i) "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, as of any date, the value of the Common Stock of the Company determined as follows: (i) If the Common Stock is admitted to trading or listed on a national securities exchange, the last reported sale price on that day regular way, or if no such reported sale takes place on that day, the average of the last reported bid and ask prices on that day regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed. (ii) If not listed or admitted to trading on any national securities exchange, the last sale price regular way on that day reported on the Nasdaq National Market ("Nasdaq National Market") of the Nasdaq Stock Market ("NSM") or, if no such reported sale takes place on that day, the average of the closing bid and ask prices regular way on that day. (iii) If not traded or listed on a national securities exchange or included in the Nasdaq National Market, the last reported sale price on that day regular way, or if no such reported sale takes place on that day, the average of the closing bid and ask prices regular way on that day reported by the NSM, or any comparable system on that day. (iv) If the Common Stock is not included in (i), (ii) or (iii) above, the last reported sale price on that day regular way, or if no such reported sale takes place on that day, the closing bid and ask prices regular way on that day as furnished by any member of the National Association of Securities Dealers, Inc. ("NASD") selected from time to time by the Company for that purpose. If the national securities exchange, Nasdaq National Market, NSM, or NASD as applicable, are closed on such date, the "Fair Market Value" shall be determined as of the last preceding day on which the Common Stock was traded or for which bid and ask prices are available. In the case of Page 2 of 10 3 an Incentive Stock Option, "Fair Market Value" shall be determined without reference to any restriction other than one that, by its terms, will never lapse. (l) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (m) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (n) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Option" means a stock option granted pursuant to the Plan. (p) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (q) "Optionee" means an Employee, Director or Consultant who is granted Options. (s) "Plan" means this Amended and Restated 1997 Stock Option Plan. (t) "Rule 16b-3" means Rule 16b-3 under the Exchange Act or any successor to Rule 16b-3. (u) "Securities Act" means the Securities Act of 1933, as amended. 3. Administration. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how Options shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option, the provisions of each Option granted (which need not be identical), including the vesting schedule for the Options, and the number of shares underlying such Options to be granted to each such person; (ii) To interpret the Plan and Options granted under it, and to establish, amend and revoke rules and procedures for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective; Page 3 of 10 4 (iii) To amend the Plan as provided in Section 12; and (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or advisable to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"), provided, however, that the Board may administer the Plan for any grants to Participants who are not subject to Code Section 162(m). The Board may remove members from, or add members to, the Committee at any time. The Board may also abolish the Committee at any time and revest in the Board the administration of the Plan. To the extent possible and advisable, the Committee shall be composed of individuals that satisfy Rule 16b-3 and Code Section 162(m). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. 4. Shares Subject to the Plan. (a) Subject to the provisions of Section 11 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Options shall not exceed in the aggregate Four Million (4,000,000) shares of the Company's Common Stock (or such lesser number of shares as is permitted under Section 260.140.45 of Title 10 of the California Code of Regulations, if applicable, or other comparable or applicable state law, if any). The maximum number of shares of the Company's Common Stock that may be issued to a single Optionee is Five Hundred Thousand (500,000). (b) If any Option shall for any reason expire or otherwise terminates, in whole or in part, without having been exercised in full, the stock not acquired under such Option shall revert to and again become available for issuance under the Plan. (c) If an Optionee surrenders any shares of stock issued pursuant to Options as payment of the purchase price of other shares of stock acquired pursuant to Options, the shares so surrendered shall revert to and again become available for issuance under the Plan. (d) If the Company reacquires any shares of stock issued pursuant to Options or withholds any shares of stock issued pursuant to Options to pay withholding taxes in connection with the exercise of Options, the shares so acquired or withheld shall revert to and again become available for issuance under the Plan. 5. Eligibility. (a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted to Employees, Directors or Consultants. Page 4 of 10 5 (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates ("Ten Percent Owner") unless the exercise price of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the term of such Incentive Stock Option is no more than five (5) years. 6. Option Provisions. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. The date of grant of an Option will be the date on which the Board or the Committee makes the determination to grant such Option, unless a later date is otherwise specified by the Board or the Committee. (b) Price. (i) No Option shall have an exercise price that is less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. (ii) The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Incentive Stock Option on the date the Incentive Stock Option is granted and one hundred ten percent in the case of a Ten Percent Owner. (iii) The exercise price of each Option granted to the Chief Executive Officer of the Company or any employee whose total compensation for the fiscal year in which such Option is granted is required to be reported to shareholders under the Exchange Act by reason of such employee being among the four (4) highest compensated officers (other than the Chief Executive Officer) of the Company for such fiscal year shall be not less than one hundred percent (100%) of the Fair Market Value of the Stock subject to the Option on the date the Option is granted., if it is intended that the Option be exempt from the million dollar compensation deduction limitation of Code Section 162(m). (c) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, (ii) at the discretion of the Board or the Committee, either at the time of the grant or exercise of the Option, by delivering to the Company other shares of Common Stock of the Company (provided that the shares have been held for the period required (if any) to avoid a charge to the Company's reported earnings), (iii) at the time of the exercise of the Option, by delivering to the Company all or any part of an Option granted under this Plan for a cashless exercise (provided that such cashless exchange will not result in a charge to the Company's reported earnings), or (iv) Page 5 of 10 6 by tendering any other form of legal consideration that may be acceptable to the Board. For the purposes of this paragraph, a "cashless exercise" shall be effected by one of the following methods: (i) through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased sufficient to pay the total exercise price for all shares so purchased, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward such total exercise price directly to the Company; or (ii) through a "margin" commitment from the Optionee and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the total exercise price for all shares so purchased, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward such total exercise price directly to the Company. (d) Transferability. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. (e) Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). However, any Optionee who is not an Officer or Director of, or a Consultant to, the Company shall have the right to exercise such Option at the rate of at least twenty percent (20%) per year over the five years from the date the Option is granted, subject to reasonable conditions such as continued employment. The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. Notwithstanding any vesting provided for in the Option Agreement, no Option may be exercised for (i) less than One Hundred (100) shares of Common Stock of the Company or, if less, the remaining number of shares available under the Option, or, if less, or (ii) fractional shares of Common Stock of the Company. (f) Termination of Employment or Relationship as a Director or Consultant. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date ninety (90) days after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable (unvested) portion of the Option shall revert Page 6 of 10 7 to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (g) Disability of Optionee. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date six (6) months following such termination (or such longer period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable (unvested) portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise the vested portion of his or her Option within the time specified herein, the Option shall terminate, and the shares covered by the vested portion of such Option shall revert to and again become available for issuance under the Plan. (h) Death of Optionee. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to Section 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable (unvested) portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by the vested portion of such Option shall revert to and again become available for issuance under the Plan. 7. Cancellation and Regrant of Options. The Board or the Committee shall have the authority to effect, after taking into account the possible adverse accounting consequences, at any time and from time to time, (i) the repricing of any outstanding Options under the Plan, and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of a Ten Percent Owner not less than one hundred ten percent (110%) of the Fair Market Value, determined in accordance with the rules in Code Section 424(h) and the regulations thereunder. Page 7 of 10 8 8. Covenants of the Company. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options. However, this undertaking shall not require the Company to register under the Securities Act either the Plan, any Options, or any stock issued or issuable pursuant to any such Options. If the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 9. Use of Proceeds from Stock. Proceeds from the sale of Common Stock upon exercise of the Options shall constitute the general funds of the Company. 10. Miscellaneous. (a) Neither an Optionee nor any person to whom an Option is transferred under Section 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (b) Nothing in the Plan or any Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Options any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant or other holder of Options with or without cause. (c) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are granted are exercisable for the first time by an Optionee during any calendar year under all plans of the Company and its Affiliates exceeds One Hundred Thousand Dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (d) To the extent provided by the terms of an Option Agreement, the person to whom an Option is granted may, at the discretion of the Board, satisfy any mandatory federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an Option by any of the following means or by a combination of such means: (i) tendering cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionee as a result of the exercise or acquisition of stock under the Option provided that such arrangement will not result in a charge to the Company's reported earnings; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock of the Company that have been held for the period required (if any) to avoid a charge to the Company's reported Page 8 of 10 9 earnings. The exercise of the Option shall be conditioned upon the receipt by the Company of satisfactory evidence of the Optionee's satisfaction of any withholding obligations. 11. Adjustments Upon Changes in Stock. (a) Subject to any required action by shareholders, the number of shares which may be purchased upon the exercise of each outstanding Option shall be proportionately increased or decreased upon the occurrence of any change, increase or decrease in the number and type of issued shares of Common Stock of the Company without receipt of consideration by the Company, that results from a stock split, a reverse stock split, a stock dividend, a merger, consolidation, reorganization or reincorporation, a recapitalization, a combination or reclassification of shares, change in corporate structure or other like capital adjustment, so that upon the exercise of each Option the holders of such Options shall receive the number and type of securities which the holders would have received had the Options been exercised on the date preceding such change, increase or decrease. In the event of any such adjustment, the exercise price for each share shall be likewise adjusted in inverse proportion to the increase or decrease in the number of shares purchasable. (b) In the event of: (i) a dissolution, liquidation or sale of substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving corporation; or (iii) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (A) any surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for those outstanding under the Plan, or (B) such Options shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Options, or to substitute similar options for those outstanding under the Plan, then, with respect to Options held by persons then performing services as Employees, Directors or Consultants, the time during which such Options vest shall be accelerated so that on the third (3rd) business day prior to such event such Options become fully exercisable. Any Options subject to such accelerated vesting shall terminate upon the happening of such event if not exercised prior to such event. 12. Amendment of the Plan. (a) The Board at any time, and from time to time, may amend the Plan, provided that the implementation of such amendment complies with all applicable law. (b) Without the approval of the majority of the shareholders of the Company, the Board may not amend the provisions of this Plan regarding: (i) The class of individuals entitled to receive Incentive Stock Options; or (ii) The maximum number of shares of Common Stock that may be issued under the Plan, except as provided in Section 11 of this Plan. Page 9 of 10 10 (c) Rights and obligations under any Option granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted, and (ii) such person consents in writing. 13. Termination or Suspension of the Plan. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on October 1, 2007. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent to the person to whom the Option was granted. 14. Financial Information. The Company will provide to each Optionee financial statements of the Company at least annually in accordance with Section 260.140.46 of Title 10 of the California Code of Regulations. 15. Notice of Disqualifying Disposition. An Optionee must notify the Company if the Optionee disposes of stock acquired pursuant to the exercise of an Incentive Stock Option issued under the Plan prior to the expiration of the holding periods required to qualify for long-term capital gains treatment on the disposition. Page 10 of 10 11 EXHIBIT 10.1 STOCK OPTION AGREEMENT UNDER THE EMERGENT INFORMATION TECHNOLOGIES, INC. AMENDED AND RESTATED 1997 STOCK OPTION PLAN ("PLAN") The person listed below is granted an option to purchase shares of Common Stock of Emergent Information Technologies, Inc. pursuant to the Emergent Information Technologies, Inc. Amended and Restated 1997 Stock Option Plan ("Plan") as set forth in this Stock Option Agreement ("Option"). - ----------------------------------------------------------------------------------------------- OPTIONEE: - ----------------------------------------------------------------------------------------------- TYPE OF OPTION: INCENTIVE STOCK OPTION NON-QUALIFIED STOCK OPTION - ----------------------------------------------------------------------------------------------- DATE OF GRANT: - ----------------------------------------------------------------------------------------------- EXPIRATION DATE: - ----------------------------------------------------------------------------------------------- NUMBER OF SHARES: - ----------------------------------------------------------------------------------------------- EXERCISE PRICE: - ----------------------------------------------------------------------------------------------- OPTIONS BECOME Optionee Statement -- Exhibit A EXERCISABLE: - ----------------------------------------------------------------------------------------------- EFFECT OF CHANGE OF CONTROL Reference Section 11(b)* - ----------------------------------------------------------------------------------------------- EXERCISE PERIOD CAUSE OF TERMINATION EXERCISABILITY PERIOD FOLLOWING TERMINATION OF EMPLOYMENT - ----------------------------------------------------------------------------------------------- Employment Reference Section 6(f)* ------------------------------------------------------------------ Relationship as a Director Reference Section 6(f)* or Consultant ------------------------------------------------------------------ Disability Reference Section 6(g)* ------------------------------------------------------------------ Death Reference Section 6(h)* ------------------------------------------------------------------
*All "Reference Sections" noted above are found in Exhibit B-Amended and Restated 1997 Stock Option Plan. I understand that this Option is subject to the additional terms set forth on the subsequent pages of this Option as well as the terms of the Plan, which is attached as Exhibit B. I acknowledge that I have also received the General Plan Description relating to the Plan. - ---------------------------------------- SIGNATURE OF OPTIONEE EMERGENT INFORMATION TECHNOLOGIES, INC. Date: ------------------------- BY: ------------------------------------- TITLE: DATE: 12 SUPPLEMENTARY INFORMATION TO STOCK OPTION AGREEMENT 1. EXERCISABILITY. The Option becomes exercisable in cumulative installments, so that the vested portion of the Option may be exercised as to any or all of the shares covered by an installment at any time or times after the installment vests and until this Option terminates. Termination of providing services to the Company (whether by reason of death or otherwise) does not cause the vesting of any additional shares. Similarly, no event that occurs following the termination of the Optionee providing services to the Company shall cause the vesting of additional shares. 2. METHOD OF EXERCISING. Some or all of the vested portion of this Option (but not less than 100 shares) may be exercised by Optionee upon delivery of the following documents to the Company: (a) Written notice specifying the number of whole shares to be purchased; (b) Payment of the entire purchase price therefor in cash, by check, or in such other form of lawful consideration as the Committee may approve from time to time; (c) Such agreements or undertakings that are required by the Committee; and (d) Payment of any taxes (including withholding taxes) which may be required by the Committee. 3. ASSIGNMENTS. This Option shall be exercisable only by Optionee during Optionee's lifetime. The rights of Optionee under this Option may not be assigned or transferred except by will or by the laws of descent and distribution. 4. NO RIGHTS AS A SHAREHOLDER. Optionee shall have no rights as a shareholder of any shares covered by this Option until the date a certificate for the shares has been issued to him or her following the exercise of the Option. 5. PLAN PROVISIONS GOVERN. This Option is made under the provisions of the Plan and shall be interpreted in a manner consistent with it. Any provision in this Option that is inconsistent with the Plan shall be superseded and governed by the Plan. Any capitalized terms that are used in this Option but that are not defined in this document shall have the meaning set forth in the Plan. A copy of the Plan is attached as Exhibit B. 6. LEGENDS ON CERTIFICATES. Optionee acknowledges that the certificates representing the shares issued upon exercise of this Option may bear such legends and be subject to such restrictions on transfer as the Company may deem necessary to comply with all applicable state and federal securities laws and regulations. Also, no shares may be issued if the 13 issuance would not be in compliance with federal and state securities laws. 7. INCENTIVE STOCK OPTION RULES. If the first page of this Option indicates that it is an Incentive Stock Option, then the following rules apply: (a) The Optionee must be an employee on the date of grant. (b) If the Optionee is a Ten Percent Shareholder (as that term is defined in the Plan), then the option period cannot exceed five (5) years and the exercise price must be at least 110% of the Fair Market Value of the shares on the date of the grant. (c) The aggregate Fair Market Value (determined as of the date of Grant) of the number of shares of Common Stock with respect to which all Incentive Stock Options become exercisable for the first time by the Optionee during any calendar year shall not exceed $100,000. If that threshold is exceeded, the surplus shares will be treated as though they had been purchased pursuant to Non-Qualified Stock Options. (d) If the Optionee disposes of the Common Stock acquired pursuant to the exercise of the Option prior to the expiration of the periods required for long-term capital gains treatment, then the Optionee must notify the Company of the disposition. EX-10.2 4 a71291ex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 [EMERGENT INFORMATION TECHNOLOGIES, INC. LOGO] AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN Emergent Information Technologies, Inc., a California corporation (the "Company"), originally adopted an Employee Stock Purchase Plan effective as of March 1, 1999, and amended the plan effective as of July 1, 1999. The Plan was amended again on November 1, 2000. This Amended and Restated Employee Stock Purchase Plan (the "Plan") is effective as of March 21, 2001. ARTICLE 1 PURPOSE OF THE PLAN 1.1 Purpose. The Company has determined that it is in its best interest to provide incentives to attract and retain employees and to increase employee morale by providing a program through which employees of the Company, and the Company's subsidiaries as the Company's Board of Directors (the "Board of Directors" or the "Board") may from time to time designate (each a "Designated Subsidiary," and collectively, "Designated Subsidiaries"), may acquire a proprietary interest in the Company through the purchase of shares of the Common Stock of the Company ("Company Stock"). The Plan is hereby established by the Company to permit employees to subscribe for, and purchase directly from the Company, shares of the Company Stock at a discount from the market price and to pay the purchase price in installments by payroll deductions. The Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). Accordingly, the provisions of the Plan shall be administered, interpreted, and construed in a matter consistent with the requirements of that section of the Code. The Plan is not intended to be an employee benefit plan under the Employee Retirement Income Security Act of 1974, and therefore is not required to comply with that Act. ARTICLE 2 DEFINITIONS 2.1 Compensation. "Compensation" means wages, tips, overtime pay, bonuses, commissions, and other Compensation reported on Form W-2. Compensation shall include any amounts contributed by the Employer pursuant to a salary reduction agreement that is not currently includible in the Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(g)(3), 402(h)(1)(B), 403(b), 414(h)(2), or 457(b). Compensation excludes the sum of all of the following items, even if otherwise includible in gross income: (i) reimbursements or other expense allowances; (ii) cash and noncash fringe benefits; (iii) moving expenses; (iv) deferred compensation; and (v) welfare benefits. 2.2 Eligibility Date. "Eligibility Date" means ninety (90) calendar days from an Employee's initial date of employment with the Company or any of its Designated Subsidiaries. 2.3 Employee. "Employee" means each person currently employed by the Company or any of its Designated Subsidiaries, any portion of whose income is subject to federal withholding of income or employment taxes, but excluding any persons employed by the Company or any Designated Subsidiary on a part-time (less than 20 hours per week) or temporary basis. 1 2 2.4 Enrollment Date. "Enrollment Date" means the first day of each Offering Period (January 1 and July 1) under the Plan. However, for the first Offering Period, the Enrollment Date shall be July 1, 1999 and shall extend through July 31, 1999. 2.5 Five Percent (5%) Owner. "5% Owner" means an Employee who, immediately after the grant of any rights under the Plan, would own Company Stock and/or hold outstanding options to purchase Company Stock possessing five percent (5%) or more of the total combined voting power of all classes of stock of the Company. For purposes of this Section, the ownership attribution rules of Code Section 425(d) shall apply. 2.6 Offering Period. "Offering Period" means either of the six-month periods from January 1 through June 30 and July 1 through December 31 of each year. The first Offering Period shall commence on July 1, 1999 and shall end December 31, 1999. 2.7 Participant. "Participant" means an Employee who has satisfied the eligibility requirements of Section 3.1 and has become a participant in the Plan in accordance with Section 3.2. 2.8 Purchase Date. "Purchase Date" means the last day of each Offering Period (i.e., June 30 or December 31). ARTICLE 3 ELIGIBILITY AND PARTICIPATION 3.1 Eligibility. Subject to limitations imposed by Section 423(b) of the Code, each Employee of the Company or any Designated Subsidiary may become a Participant in the Plan on the Enrollment Date coincident with or next following the Eligibility Date. 3.2 Participation. An Employee who has satisfied the eligibility requirements of Section 3.1 may become a Participant in the Plan upon his completion and delivery to the Company's stock purchase coordinator, as designated by the Company, of an election notice form provided by the Company (the "Election Notice Form") authorizing payroll deductions. Payroll deductions for a Participant shall commence on the Enrollment Date coincident with or next following the filing of the Participant's Election Notice Form and shall remain in effect until revoked by the Participant by the filing of a notice of withdrawal from the Plan under Article 8 or by the filing of a new Election Notice Form providing for a change in the Participant's payroll deduction rate in accordance with Section 5. 3.3 Special Rules. Under no circumstances shall: (a) A 5% Owner be granted a right to purchase Company Stock under the Plan; (b) A Participant be entitled to purchase Company Stock under the Plan which, when aggregated with all other employee stock purchase plans of the Company, exceed an amount equal to the Aggregate Maximum. "Aggregate Maximum" means an amount equal to $21,250 worth of Company Stock (determined using the fair market value of such Company Stock at each applicable Enrollment Date) during each calendar year; or (c) The number of shares of Company Stock purchasable by a Participant on any Purchase Date exceed 5,000 shares, subject to periodic adjustments under Section 10.4. 2 3 ARTICLE 4 OFFERING PERIOD The initial grant of the right to purchase Company Stock under the Plan shall occur on July 1, 1999 and terminate on December 31, 1999. Thereafter, the Plan shall provide for Offering Periods commencing on each Enrollment Date and terminating on the next following Purchase Date. ARTICLE 5 PAYROLL DEDUCTIONS 5.1 Participant Election. Upon completion of the Election Notice Form, each Participant shall designate the amount of payroll deductions to be made from his or her paycheck to purchase Company Stock under the Plan. The amount of payroll deductions shall be designated in whole percentages of Compensation, not to exceed 15%. The amount so designated upon the Election Notice Form shall be effective as of the next payroll period and shall continue until terminated or altered in accordance with Section 5.2 below. 5.2 Changes in Election. A Participant may terminate participation in the Plan at any time prior to the close of an Offering Period as provided in Article 8. A Participant may increase or decrease the rate of payroll deductions once during each Offering Period by completing and delivering to the Company's stock purchase coordinator a new Election Notice Form setting forth the desired change. A Participant may also terminate payroll deductions and have accumulated deductions for the Offering Period applied to the purchase of Company Stock as of the next Purchase Date by completing and delivering to the stock purchase coordinator a new Election Notice Form setting forth the desired change. Any change under this Section shall become effective on the next payroll period (to the extent practical under the Company's payroll practices) following the delivery of the new Election Notice Form. 5.3 Participant Accounts. The Company shall establish and maintain a separate account ("Account") for each Participant. The amount of each Participant's payroll deductions shall be credited to his or her Account. No interest will be paid or allowed on amounts credited to a Participant's Account. All payroll deductions received by the Company under the Plan are general corporate assets of the Company and may be used by the Company for any corporate purpose. The Company is not obligated to segregate such payroll deductions. ARTICLE 6 GRANT OF PURCHASE RIGHTS 6.1 Right to Purchase Shares. On each Purchase Date, each Participant shall have the right to purchase at the price determined under Section 6.2 that number of shares (including fractional shares) of Company Stock that can be purchased or issued by the Company based upon that price with the amounts held in his or her Account, subject to the limits set forth in Section 3.3. In the event that there are amounts held in a Participant's Account that are not used to purchase Company Stock, such amounts shall remain in the Participant's Account and shall be eligible to purchase Company Stock in any subsequent Offering Period. 6.2 Purchase Price. The purchase price for any Offering Period shall be the lesser of: (a) 85% of the Fair Market Value of Company Stock on the Enrollment Date; or (b) 85% of the Fair Market Value of Company Stock on the Purchase Date. 3 4 6.3 Fair Market Value. "Fair Market Value" shall be determined as follows: (a) If the Company Stock is then listed or admitted to trading on the NASDAQ National Market or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on the NASDAQ National Market or principal stock exchange on which the Company Stock is then listed or admitted to trading, or, if no closing sale price is quoted or no sale takes place on such day, then the Fair Market Value shall be the closing sale price of the Company Stock on the NASDAQ National Market or such exchange on the next preceding day on which a sale occurred. (b) If the Company Stock is not then listed or admitted to trading on the NASDAQ National Market or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Company Stock in the over-the-counter market on the date of valuation. (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator (see Section 7.2) using any reasonable method of valuation, which determination shall be conclusive and binding on all interested parties. ARTICLE 7 PURCHASE OF STOCK 7.1 Purchase of Company Stock. A Participant who does not, prior to a Purchase Date, notify the Company that such Participant does not want to purchase any shares of Company Stock pursuant to the Plan or that such Participant wants to purchase fewer than the maximum number of shares available for purchase, shall be deemed to elect to purchase the maximum number of shares of Company Stock (including fractional shares) purchasable with the amounts held in such Participant's Account, at the purchase price determined under Section 6.2 above and, on each Purchase Date, the Plan shall purchase such shares on behalf of such Participant. In the event that there are amounts held in a Participant's Account that are not used to purchase Company Stock, all such amounts shall be held in the Participant's Account and carried forward to the next Offering Period. The Board or a Committee may, in its discretion, limit the purchase of Company Stock to only whole shares and not fractional shares. 7.2 Delivery of Company Stock. (a) Company Stock acquired under the Plan shall be issued directly to a contract administrator (the "Administrator") engaged by the Company to administer the Plan under Article 9. All Company Stock so issued ("Plan Held Stock") shall be held in the name of the Administrator for the benefit of the Plan. The Administrator shall maintain accounts for the benefit of the Participants that shall reflect each Participant's interest in the Plan Held Stock. Such accounts shall reflect the number of shares of Company Stock (including fractional shares) that are being held by the Administrator for the benefit of each Participant. (b) For share withdrawals, only whole shares of Company Stock will be issued to a Participant. The time of issuance and delivery of shares may be postponed for such period as may be necessary to comply with the registration requirements under the Securities Act of 1933, as amended, the listing requirements of any securities exchange on which the Company Stock may then be listed, or the requirements under other laws or regulations applicable to the issuance or sale of such shares. A payment will be made to a Participant for any fractional shares of Company Stock owned by the Participant. This payment shall be computed using the Fair Market Value of a share of Company Stock on the date the withdrawal is processed by the Company's 4 5 stock purchase coordinator. For shares of Company Stock sold by a Participant from his or her account maintained by the Administrator, the Participant shall receive credit for all whole and fractional shares at the actual price for which the shares were sold. ARTICLE 8 WITHDRAWAL 8.1 In Service Withdrawal. At any time prior to the Purchase Date of an Offering Period, a Participant may withdraw the amounts held in his or her Account by executing and delivering to the Company's stock purchase coordinator written notice of withdrawal on the form provided by the Company. In such a case, the entire balance of the Participant's Account shall be paid to the Participant, without interest, as soon as is practicable. Upon such notification, the Participant shall cease to participate in the Plan for the remainder of the Offering Period in which the notice is given. An Employee who has withdrawn under this Section 8.1 at least thirty (30) days prior to the Purchase Date of an Offering Period shall be excluded from participation in the Plan for the remainder of the Offering Period, but may then be reinstated as a participant for a subsequent Offering Period by executing and delivering a new Election Notice Form to the Company's stock purchase coordinator. An Employee who has withdrawn under this Section 8.1 less than thirty (30) days prior to the Purchase Date of an Offering Period shall be excluded from participation in the Plan for the remainder of the Offering Period and for one (1) subsequent Offering Period, but may thereafter be reinstated as a participant for a subsequent Offering Period by executing and delivering a new Election Notice Form to the Company's stock purchase coordinator. 8.2 Termination of Employment. In the event that a Participant's employment with the Company terminates for any reason, the Participant shall cease to participate in the Plan on the date of termination. As soon as is practical following the date of termination, the entire balance of the Participant's Account shall be paid to the Participant, without interest. ARTICLE 9 PLAN ADMINISTRATION 9.1 Plan Administration. (a) The authority to control and manage the operation and administration of the Plan shall be vested in the Board of Directors or a committee ("Committee") thereof. The Board or the Committee shall have all powers necessary to supervise the administration of the Plan and control its operations. (b) In addition to any powers and authority conferred on the Board or Committee elsewhere in the Plan or by law, the Board or the Committee shall have the following powers and authority: (i) To designate agents to carry out responsibilities relating to the Plan; (ii) To administer, interpret, construe and apply the Plan and to answer all questions which may arise or which may be raised under the Plan by a Participant, his beneficiary or any other person whatsoever; (iii) To establish rules and procedures from time to time for the conduct of its business and for the administration and effectuation of its responsibilities under the Plan; and 5 6 (iv) To perform or cause to be performed such further acts as it may deem to be necessary, appropriate, or convenient for the operation of the Plan. (c) Any action taken in good faith by the Board or the Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon a Participant and his beneficiaries. All discretionary powers conferred upon the Board shall be absolute. 9.2 Limitation on Liability. No Employee or member of the Board or Committee shall be subject to any liability with respect to his or her duties under the Plan unless the person acts fraudulently or in bad faith. To the maximum extent permitted by law, the Company shall indemnify each member of the Committee and every other member of the Board, as well as any other Employee with duties under the Plan, against all liabilities and expenses (including any amount paid in settlement or in satisfaction of a judgment) reasonably incurred by the individual in connection with any claims against the individual by reason of the performance of the individual's duties under the Plan. This indemnity shall not apply, however, if: (a) it is determined in the action, lawsuit, or proceeding that the individual is guilty of gross negligence or intentional misconduct in the performance of those duties; or (b) the individual fails to assist the Company in defending against any such claim. The Company shall have the right to select counsel and to control the prosecution or defense of the suit. The Company shall not be obligated to indemnify any individual for any amount incurred through any settlement or compromise of any action unless the Company consents in writing to the settlement or compromise. ARTICLE 10 COMPANY STOCK 10.1 Limitations on Purchase of Shares. The maximum number of shares of Company Stock that shall be made available for sale under the Plan shall be 950,000 shares, subject to adjustment under Section 10.4 below. The shares of Company Stock to be sold to Participants under the Plan will be issued by the Company. If the total number of shares of Company Stock that would otherwise be issuable pursuant to rights granted pursuant to Section 6.1 of the Plan at the Purchase Date exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available in as uniform and equitable manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares to each participant affected thereby and any unused payroll deductions shall be returned to such participant if necessary. 10.2 Registration of Company Stock. Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant. 10.3 Changes in Capitalization of the Company. Subject to any required action by the shareholders of the Company, the number of shares of Company Stock covered by each right under the Plan which has not yet been exercised and the number of shares of Company Stock which have been authorized for issuance under the Plan but have not yet been placed under rights or which have been returned to the Plan upon the cancellation of a right, as well as the Purchase Price per share of Company Stock covered by each right under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Company Stock resulting from a stock split, stock dividend, spin-off, reorganization, recapitalization, merger, consolidation, exchange of shares or the like. Such adjustment shall be made by the Board of Directors for the Company, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Company Stock subject to any right granted hereunder. 6 7 10.4 Merger of Company. In the event that the Company at any time proposes to merge into, consolidate with, or enter into any other reorganization pursuant to which the Company is not the surviving entity (including the sale of substantially all of its assets or a "reverse" merger in which the Company is the surviving entity), then, to the extent permitted by applicable law: (i) any surviving corporation shall assume the rights theretofore granted or substitute for such rights new rights covering the shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and prices, or (ii) the Plan and the rights theretofore granted shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue the Plan, or to substitute similar options for those under the Plan, then the Board of Directors or its committee shall cause written notice of the proposed action to be given to the persons holding rights not less than 10 days prior to the anticipated effective date of the proposed transaction and, concurrent with the effective date of the proposed transaction, such rights shall be exercised automatically in accordance with Section 7.1 as if such effective date were a Purchase Date of the applicable Offering Period unless a Participant withdraws from the Plan as provided in Section 8.1. ARTICLE 11 MISCELLANEOUS 11.1 Amendment and Termination. The Plan shall terminate on December 31, 2008. Since future conditions affecting the Company cannot be anticipated or foreseen, the Company reserves the right to amend, modify, or terminate the Plan at any time. Notwithstanding the foregoing, no such amendment or termination shall affect rights previously granted, nor may an amendment make any change in any right previously granted which adversely affects the rights of any Participant. In addition, no amendment may be made without prior approval of the shareholders of the Company if such amendment would: (a) Increase the number of shares of Company Stock that may be issued under the Plan; (b) Materially modify the requirements as to eligibility for participation in the Plan; or (c) Materially increase the benefits that accrue to Participants under the Plan. 11.2 Benefits Not Alienable. Benefits under the Plan may not be assigned or alienated, whether voluntarily or involuntarily. Any attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Article 8. 11.3 No Enlargement of Employee Rights. The Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. Nothing contained in the Plan shall be deemed to give the right to any Employee to be retained in the employ of the Company or to interfere with the right of the Company to discharge any Employee at any time. 11.4 No Additional Rights. Neither the adoption of the Plan nor the granting of any right to purchase stock hereunder shall affect or restrict in any way the power of the Company to undertake any corporate action otherwise permitted under applicable law. Furthermore, no Employee shall have any rights as a Stockholder with respect to shares to be purchased under the Plan until time at which the Fair Market Value of the Common Stock is determined on the Purchase Date. Finally, except as provided in 7 8 Section 10.4, no adjustments will be made for cash or stock dividends or other rights relating to Company Stock for which the record date is prior to the Purchase Date. 11.5 Governing Law. To the extent not preempted by Federal law, all legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of California. 11.6 Non-business Days. When any act under the Plan is required to be performed on a day that falls on a Saturday, Sunday or legal holiday, that act shall be performed on the next succeeding day which is not a Saturday, Sunday or legal holiday. Notwithstanding the above, Fair Market Value shall be determined in accordance with Section 6.3. 11.7 Compliance With Securities Laws. Notwithstanding any provision of the Plan, the Committee shall administer the Plan in such a way to ensure that the Plan at all times complies with any requirements of Federal Securities Laws. 8 EX-10.17 5 a71291ex10-17.txt EXHIBIT 10.17 1 EXHIBIT 10.17 SM&A CORPORATION EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of , 2000, by and between SM&A CORPORATION, a California corporation ("SM&A"), and STEVEN S. MYERS ("Employee"), with reference to the following: A. SM&A desires to employ Employee on the terms and conditions set forth herein; B. Employee desires to perform services for SM&A as an employee of SM&A on the terms and conditions set forth herein. NOW, THEREFORE, in consideration for the promises and obligations set forth below, SM&A and Employee agree as follows: 1. Employment and Term. 1.1 SM&A agrees to employ, and Employee agrees to be employed by SM&A, on the terms and conditions described below (the "Employment"). 1.2 This Agreement shall be effective as of February 1, 2000 (the "Effective Date") and shall, unless sooner terminated pursuant to the terms set forth below, terminate on January 31, 2003. 2. Duties. 2.1 Employee agrees that during the Employment, Employee shall devote his full-time efforts to his duties as an employee of SM&A, now or in the future assigned to Employee by SM&A. From and after the date of this Agreement, Employee shall serve as Chief Executive Officer and Chairman of the Board of SM&A. The parties further acknowledge that the Employee is ultimately responsible to the Board of Directors of SM&A. Employee agrees to continue to serve without additional compensation, if, from time to time he is elected or appointed thereto, in one or more offices as a Director or member of any committee of the Board of Directors of SM&A or of any direct or indirect subsidiary of SM&A. 3. Compensation. 3.1 As consideration for said performance and duties of adherence to the covenants in this Agreement, Employee shall be entitled to the compensation set forth on Exhibit A attached hereto and incorporated herein by this reference (the "Compensation"). 3.2 Employee understands and acknowledges that, except as otherwise set forth in this Agreement, the Compensation will constitute the full and exclusive consideration to be received by Employee for all services performed by Employee in connection with SM&A's employment of Employee, and for the performance of all his promises and obligations under this Agreement. 1 2 3.3 Aside from the Compensation, SM&A may adopt, or continue in force, benefit plans for the benefit of its employees or certain of its employees which may include, but not be limited to, group life insurance, medical insurance, etc. SM&A may terminate any or all such plans at any time and may choose not to adopt any additional or replacement plans. Employee's rights under any benefit plans now in force or later adopted by SM&A shall be governed solely by the terms of such plans; provided, however, that in no event shall Employee's rights under any such benefit plans be less than those of any other executive officer SM&A. 4. Duty to Devote Full Time and Avoid Conflict of Interest. Employee agrees that during the Employment he shall devote his full-time efforts to his duties as an employee of SM&A. Employee further agrees that during the Employment he shall not, directly or indirectly, engage or participate in any activities which are in conflict with the best interests of SM&A. 5. Compliance with Rules and Regulations. Employee agrees to comply with SM&A's rules, regulations and practices, including but not limited to those rules concerning vacation and sick leave, as they may from time to time be adopted or modified, so long as they are uniformly applied to all employees. 6. Non-competition and Non-solicitation by Employee. 6.1 Employee agrees that, during the Employment, Employee will not engage in any activity competitive with or adverse to SM&A's business or welfare, whether alone, as a partner, or as an officer, director, employee or shareholder of any other corporation and shall not otherwise undertake planning for or the organization of any business activity competitive with SM&A's business or combine or conspire with other employees or representatives of SM&A for the purpose of organizing any such competitive business activity. This prohibition shall not include ownership of less than five percent (5%) of the outstanding stock by Employee in a publicly traded corporation. 6.2 For a period of two (2) years following the termination of the Employment, Employee shall not induce, solicit or influence or attempt to induce, solicit or influence any person who is engaged as an employee or otherwise by SM&A or any client of SM&A, to terminate his or her employment or other engagement with SM&A. 7. Trade Secrets of SM&A. Employee acknowledges and understands that during the Employment, Employee will have access to and will utilize and review information which constitutes valuable, important and confidential trade secrets, as that term is interpreted under the Uniform Trade Secrets Act (California Civil Code Section 3426 et seq.) and/or confidential and proprietary material and information of or relating to the business of SM&A necessary for the successful conduct of SM&A's business. This information includes, but is not limited to: (a) listings of and data regarding the Clients (past and current); (b) information regarding potential customers and clients; (c) data relating to the identity of the Clients of SM&A; (d) information regarding bidding, billing and pricing practices; (e) information regarding the nature and type of services rendered to the Clients; (f) other methodologies, computer programs, databases, processes, compilations of information, results of proposals, job notes, reports and records, and (g) information regarding the nature and type of software products sold to or under development with Clients of SM&A (all of which information is sometimes referred to in this Agreement as 2 3 the "Secrets"). The foregoing notwithstanding, Secrets shall not include information or data which is (i) in the public domain, (ii) generally known in the information technology staffing services industry, (iii) already known to Employee as of the date he began his employment with SM&A, or (iv) rightfully disclosed to Employee outside of the scope of his employment with SM&A by a third party not under a duty of confidentiality to SM&A. Employee understands further that the Secrets have been and will be accumulated, by Employee and other personnel at SM&A at considerable expense to SM&A (including but not limited to compensation paid to SM&A personnel dealing with the Secrets and the Clients), and that SM&A has and will continue to expend its resources in order to maintain actively and vigorously the confidentiality of the Secrets, as such information is extremely valuable to SM&A, and well worth the expense of enforcement and preservation of such confidentiality. Accordingly, Employee agrees as follows: (a) All of the Secrets shall be safeguarded and treated as confidential by Employee. (b) Any and all data, notes, letters, computer programs, email records, reports, telephone records and all other written documentation relating to the business of SM&A (including but not limited to the Secrets) that may be collected, compiled, written, reviewed or conceived by Employee, whether set forth in tangible media or intangible, from or by reason of services performed by Employee for SM&A shall become the absolute property of SM&A, and Employee shall not assert or establish a claim for any statutory or common law right or any other possessory or proprietary right with respect to any of the above. The foregoing notwithstanding, upon the termination of the Employment, Employee may (i) at his own expense, make and retain copies of records pertaining to investment banking contacts (including analysts and mergers and acquisitions), commercial banking contacts, independent public accounting contacts, legal contacts or other contacts in the investment community (buy-side and sell-side) to the extent that such records do not constitute trade secrets of SM&A and (ii) retain closing binders for financings and acquisitions previously furnished to him; provided, however, that Employee shall ensure that SM&A retains a copy of all such records and closing binders; and provided further, that Employee shall be obligated to maintain the information contained in any closing binder retained by him as confidential to the extent that such information constitutes Secrets. (c) Employee shall hold the Secrets in strictest confidence and shall not (i) disclose any Secrets to any person, corporation, firm, or other entity, either during the Employment or afterward, or (ii) use any Secrets in Employee's subsequent business or employment, without the prior express written authorization of SM&A; provided, however, that Employee may disclose Secrets to the extent required to do so by a subpoena lawfully issued in a judicial proceeding or arbitration. (d) Employee shall not otherwise commit any act which shall compromise the confidentiality of any Secrets, including but not limited to making a copy of such property (whether electronic, paper or otherwise) without the prior express written authorization of SM&A, except as permitted by Section 7(b) above. 3 4 8. Confidential Information of Clients. All ideas, concepts, information and written material disclosed to Employee by SM&A, or acquired from any of the Clients, and all financial, accounting, statistical, personnel, and business data and plans of the Clients, are and shall remain the sole and exclusive property and proprietary information of SM&A, or said Client, and are disclosed in confidence by SM&A or permitted to be acquired from the Clients in reliance on Employee's agreement to maintain them in confidence and not to use or disclose them to any other person except in furtherance of SM&A's business. 9. Return of Information. At the time of the termination of the Employment, except as permitted by Section 7(b) above, Employee agrees to deliver promptly to SM&A all notes, books, electronic data (regardless of storage media), correspondence and other written or graphical records (including all copies thereof) in Employee's possession or under Employee's control relating to any business, work, the Clients or any other aspect of SM&A, whether or not containing any Secrets, including but not limited to each original and all copies of all or any part thereof. 10. Cooperation. Employee agrees that, both during the Employment and afterward, he will sign all papers, give evidence and testimony and, at SM&A's expense, perform all acts which, in SM&A's opinion, are necessary, proper or expedient to carry out and fulfill the purposes and intents of this Agreement. 11. Remedies; Injunctive Relief. In the event of a breach or threatened breach by Employee of any of the provisions of this Agreement, Employee agrees that SM&A, in addition to and not in limitation of any other rights, remedies, or damages available to SM&A at law or in equity, shall be entitled to a preliminary and a permanent injunction in order to prevent or restrain any such breach by Employee or by Employee's partners, agents, representatives, servants, employers, employees, and/or any and all persons directly or indirectly acting for or with Employee. 12. Termination of Employment. 12.1 The Employment may be terminated by SM&A at any time with "Cause" (as defined below). Except as otherwise agreed in writing or as otherwise provided by this Agreement as due and payable (or as required by law), upon termination of the Employment by SM&A with Cause, SM&A shall have no further obligation to Employee under this Agreement by way of compensation or otherwise, but Employee's duties under Sections 6 through 10, inclusive, shall continue after said termination of Employment. Notwithstanding the foregoing, to the extent the grounds for any proposed termination with Cause are capable of being cured or remedied by Employee, SM&A shall not terminate Employee with Cause unless the representative of the Board of Directors of SM&A has first counseled Employee as to how he could effect such cure or remedy and Employee is given at least thirty (30) days to do so. A determination of whether Employee has satisfactorily effected such cure or remedy shall be promptly made by a majority of the disinterested (i.e., not the Employee) directors of the Board of Directors at the end of the period provided to Employee for such cure or remedy and such determination shall be final. 4 5 12.2 The Employment may be terminated at any time (i) by SM&A without Cause (as defined below) by giving Employee thirty (30) days' advance written notice of such termination or (ii) by Employee for Good Reason (as defined below) by giving SM&A thirty (30) days' advance written notice of such termination. In the event that SM&A terminates the Employment without Cause, or Employee terminates the Employment for Good Reason, SM&A shall (i) pay to Employee the base salary of the Compensation, (ii) provide the same health and life insurance benefits, and (iii) pay the lease payments with respect to the automobile lease described in Exhibit A attached hereto, in each case until the earlier to occur of (A) the last day of the term of this Agreement specified in Section 1.2 above, (B) the expiration of twelve (12) calendar months after the effective date of such termination of the Employment, (C) the date upon which Employee becomes employed on a full-time basis (including but not limited to self-employment, but only if Employee holds himself out to the public as being a self-employed consultant or other businessman), or (D) the date upon which Employee violates any of Sections 6 through 10, inclusive. In addition, SM&A shall pay Employee the pro-rated Incentive Bonus described in Exhibit A attached hereto to which Employee was entitled during the Employment (which proration shall be based on a fraction, the numerator of which is the number of calendar days during the fiscal year during which Employee was employed prior to the effective date of the termination of the Employment and the denominator of which is 365). If SM&A's medical and/or life insurance plans do not allow Employee's continued participation in such plan or plans during the period described above, then SM&A shall pay to Employee, in monthly installments, from the date on which Employee's participation in such medical and/or life insurance, as applicable, is prohibited for the remainder of the time period described in the second sentence of this Section 12.2, the monthly premium or premiums which had been payable by SM&A with respect to Employee for such discontinued medical and/or life insurance, as applicable. 12.3 Employee may terminate the Employment without Good Reason at any time by giving SM&A thirty (30) days' advance written notice of such termination. Upon Employee's termination of the Employment without Good Reason, SM&A shall have no further obligation to Employee under this Agreement by way of compensation or otherwise (except for the obligation to pay the Compensation to which Employee may be entitled at the time of such termination), but Employee's duties under Sections 6 through 10, inclusive, shall continue after said termination of the Employment. 12.4 The Employment will terminate immediately upon Employee's death. In such event, SM&A shall (i) pay to Employee's estate the base salary and family health benefits components of the Compensation until the earlier to occur of (A) the last day of the term of this Agreement specified in Section 1.2 above or (B) the expiration of twelve (12) calendar months after the effective date of such termination. In addition, SM&A shall pay to Employee's estate the pro-rated Incentive Bonus described in Exhibit A attached hereto to which Employee was entitled during the Employment (which proration shall be based on a fraction, the numerator of which is the number of calendar days during the fiscal year during which Employee was employed prior to his death and the denominator of which is 365). Except for the payments expressly provided in this Section 12.4, SM&A shall have no further obligation to Employee's estate under this Agreement by way of compensation or otherwise. 12.5 SM&A may terminate the Employment at any time if Employee becomes Disabled (as defined below) by giving Employee thirty (30) days' advance written notice of such 5 6 termination. In the event that SM&A terminates the Employment because Employee has become Disabled, SM&A shall (i) pay to Employee the base salary of the Compensation and (ii) provide the same health and life insurance benefits, in each case until the earlier to occur of (A) the last day of the term of this Agreement specified in Section 1.2 above, (B) the expiration of twelve (12) calendar months after the effective date of such termination of the Employment, (C) the date upon which Employee becomes employed on a full-time basis (including but not limited to self-employment, but only if Employee holds himself out to the public as being a self-employed consultant or other businessman), or (D) the date upon which Employee violates any of Sections 6 through 10, inclusive. In addition, SM&A shall pay Employee the pro-rated Incentive Bonus described in Exhibit A attached hereto to which Employee was entitled during the Employment (which proration shall be based on a fraction, the numerator of which is the number of calendar days during the fiscal year during which Employee was employed prior to the effective date of the termination of the Employment and the denominator of which is 365). If SM&A's medical and/or life insurance plans do not allow Employee's continued participation in such plan or plans during the period described above, then SM&A shall pay to Employee, in monthly installments, from the date on which Employee's participation in such medical and/or life insurance, as applicable, is prohibited for the remainder of the time period described in the second sentence of this Section 12.5, the monthly premium or premiums which had been payable by SM&A with respect to Employee for such discontinued medical and/or life insurance, as applicable. 12.6 As used in this Agreement, the following terms shall have the meanings indicated: (a) "Cause" shall mean an action or actions by Employee during the Employment (including but not limited to inactions) which constitute either (i) gross insubordination, gross negligence, unethical or criminal behavior constituting a felony under federal or state law and which involves moral turpitude, or a breach of fiduciary duty of Employee as an officer and/or director of SM&A, or (ii) a violation of any of Sections 4 through 10, inclusive. (b) "Disabled" shall mean Employee's ability to perform his duties under this Agreement is impaired, due to sickness, physical or mental impairment or injury, by more than twenty-five (25%) for a period of six (6) consecutive months or for nine (9) months in any consecutive twelve (12) month period. In the event Employee disputes SM&A's determination that he is Disabled, Employee shall give written notice of such dispute to SM&A during the thirty (30) day notice period prior to the proposed effective date of such termination, and Employee and SM&A shall thereupon each select, within thirty (30) days of such notice from Employee, a physician to evaluate whether Employee is Disabled. Such physicians shall complete their evaluation and report to the Board of Directors within thirty (30) days. If such physicians do not agree as to whether Employee is Disabled, they shall promptly select a third physician to further evaluate Employee, whose conclusion on such matter shall be rendered within ten (10) days of his or her selection and shall be final and binding on Employee and SM&A. (c) "Good Reason" shall mean any of the following: (i) (A) the assignment to Employee of duties inconsistent with Employee's current position, duties, or responsibilities which is sufficient to 6 7 constitute a diminution of status with SM&A, (B) a material change in Employee's titles or offices or diminution of reporting relationships (such that Employee is reporting to Company personnel other than the Board of Directors) adverse to Employee, or (C) any removal of Employee from or any failure to reelect Employee to any of his positions as a senior officer of SM&A, except, in any such case, with Employee's consent or in connection with the termination of his employment for disability, retirement (at age 70), death or resignation (other than resignation for Good Reason), provided, however, that Good Reason shall not include the assignment to Employee of any duties or responsibilities of one or more management positions within his competence to the extent that any such position is not filled at any time and it is necessary to perform the duties and responsibilities of such position pending the hiring of a person to hold such position, provided that any such assignment does not exceed six (6) months, and provided that SM&A is actively seeking to fill such position during the period of such assignment; (ii) a purported reduction by SM&A in the Compensation in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement or any failure by SM&A to reimburse Employee or provide the benefits set forth in Exhibit A; (iii) any material failure by SM&A to continue in effect any significant and material benefit plan or arrangement (including, without limitation, SM&A's incentive bonus plan, profit sharing plan, stock option plans, medical insurance plans, disability insurance plans, life insurance plans or vacation pay plans, with such generally applicable amendments thereto as may be approved from time to time in good faith by SM&A's Board of Directors) in which Employee is participating or other plans providing Employee with substantially similar benefits (collectively, the "Benefit Plans"), or any action by SM&A which would materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any Benefit Plan; (iv) a relocation of the office to which Employee is required to report to a location outside of a twenty-five (25) mile radius of the then existing SM&A corporate headquarters, or a requirement that Employee relocate his residence from Irvine, California; (v) any failure by SM&A to obtain the assumption of this Agreement by any successor or assign of SM&A, if such successor or assigns asserts the position that it is not bound by the provisions hereof, (vi) any failure by SM&A to comply with any material provision of this Agreement; or (vii) a failure to provide support services, staff, office space and accouterments necessary to perform any duties assigned to Employee or a material reduction in the level of support services and staff, office space or 7 8 accouterments made available to Employee, unless such reduction is generally effective for all other officers of equal rank or junior to Employee; provided, however, that no such action shall be considered to constitute Good Reason unless and until Employee has given SM&A written notice of, and thirty (30) days' opportunity to cure or remedy the specific action which Employee alleges would constitute Good Reason if not so cured or remedied and SM&A has failed to effect such cure or remedy. 12.7 The rights and remedies provided in this Section 12 shall constitute the exclusive rights and remedies available to Employee relating to or arising from the termination of the Employment, including claims for breach of contract; provided, however, that Employee shall be entitled to pursue any and all available legal remedies based on any claim that such termination constituted a violation of applicable federal or state law. 12.8 No policies or procedures of SM&A or benefits provided by SM&A, whether oral or written, express or implied, formal or informal, are intended, nor shall they be construed to limit the right or ability of SM&A or Employee to terminate the Employment as set forth above. Except as otherwise agreed in writing or as otherwise provided by this Agreement, upon termination of the Employment, neither SM&A nor Employee shall have any further obligation to each other by way of compensation or otherwise. 12.9 SM&A will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of SM&A, by agreement in form and substance reasonably satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that SM&A would be required to perform this Agreement if no such succession or assignment had taken place. In any such event, the term "SM&A" as used in this Agreement shall mean any such successor or assign which executes and delivers the agreement provided for in the immediately preceding sentence or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law. 12.10 Employee shall make a reasonable good faith effort to find new employment during any period during which payments are paid to Employee following Employee's termination of employment with SM&A. Except as expressly provided herein, no payment or benefit provided for under this Agreement shall be reduced by any compensation earned by Employee as the result of employment by another employer after the date of termination with SM&A. Except as expressly provided herein, the provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any SM&A benefit plan, employment agreement or other contract, plan or arrangement. Except as required in connection with the determinations contemplated by Section 12.6, the amount of any payment provided under this Agreement shall not be reduced by reason of any present value calculation. 13. Change of Control of SM&A. Notwithstanding anything to the contrary in any Stock Option Agreement or Incentive Stock Option Agreement previously entered into by SM&A and Employee, upon the occurrence of a "change of control" during the Employment, any and all 8 9 stock options granted to Employee under SM&A's stock option plans shall, whether or not the Employment is terminated as a result of such change of control, become immediately vested and exercisable for a period not to exceed the lesser of (a) two (2) years, or (b) the date on which such stock options would otherwise have terminated (other than by reason of the termination of the Employment). The term "change of control" shall mean (i) any merger or consolidation where SM&A is not the continuing or surviving corporation or pursuant to which all or substantially all of the shares of SM&A's Common Stock are converted into cash, other property or securities of another corporation, other than, in either case, a merger or consolidation in which the shares of SM&A's Common Stock outstanding immediately prior to such merger or consolidation represent or are converted into securities representing more than 50% of the voting power of the surviving corporation in such merger or consolidation or the parent of such corporation, (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of SM&A, (iii) the approval by the shareholders of SM&A of any plan or proposal for the liquidation or dissolution of SM&A, (iv) any " person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 35% or more of SM&A's outstanding Common Stock after the date hereof, (v) during any period of two consecutive years, individuals who, at the beginning of such period constitute the entire Board of Directors, together with persons whose nomination was approved by a vote of at least two thirds of such directors (or directors so approved) shall cease for any reason to constitute a majority of the members of the Board of Directors, or (vi) there shall be any change of control of a nature which would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act or any successor regulation of substantially similar import, regardless of whether SM&A is subject to such reporting requirement at such time. 14. Miscellaneous Provisions. 14.1 In the event that any of the provisions of this Agreement shall be held to be invalid or unenforceable, then all other provisions shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement. In the event that any provision relating to the time period of any restriction imposed by this Agreement shall be declared by a court of competent jurisdiction to exceed the maximum time period which such court deems reasonable and enforceable, then the time period of restriction deemed reasonable and enforceable by the court shall become and shall thereafter be the maximum time period. 14.2 This Agreement shall be binding upon the heirs, executors, administrators, and successors-in-interest of the parties hereto. 14.3 This Agreement shall be construed and enforced according to the laws of the State of California, excluding its choice of law rules. 14.4 This Agreement supersedes all previous correspondence, promises, representations, and agreements, if any, either written or oral, between SM&A and Employee. No provision of this Agreement may be modified except by a writing signed by both SM&A and Employee. 9 10 14.5 All notices, demands, requests, consents, approvals or other communications (collectively "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally served or deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, addressed as set forth below, or such other address as such party shall have specified most recently by written notice. Notices shall be deemed given on the date of service if personally served. Notices mailed as provided herein shall be deemed given on the third business day following the date so mailed: To SM&A: SM&A Corporation 4695 MacArthur Blvd., Suite 800 Newport Beach, CA 92660 Attention: Chairman, Compensation Committee Board of Directors with a copy to: Rutan & Tucker, LLP 611 Anton Boulevard, 14th Floor Costa Mesa, CA 92626 Attention: Thomas J. Crane To Employee: Steven S. Myers 5 Summit Irvine, CA 92612 with a copy to: ----------------------------- ----------------------------- ----------------------------- Attention: ------------------- 14.6 Should any party institute any action or proceeding to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys', accountants' and experts' fees, incurred by the prevailing party in connection with such action or proceeding. 15. Acknowledgment by Employee. Employee has carefully read and considered the provisions of this Agreement and agrees that all of the above-stated restrictions, obligations and promises are fair and reasonable and reasonably required for the protection of the interests of SM&A. Employee further acknowledges that the goodwill and value of SM&A is enhanced by these provisions and that said enhancement is desired by Employee. Finally, Employee indicates his acceptance of this Agreement by signing and returning the enclosed copy of this Agreement where indicated below. 16. Counsel. The parties hereto have requested that counsel to the Company, Rutan & Tucker, LLP, prepare this Agreement and acknowledge that in so doing that such counsel is 10 11 acting on behalf of the Company. Myers acknowledges that Rutan & Tucker, LLP has previously served as and continues to serve as counsel to the Company in other matters. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. SM&A CORPORATION By: /s/ J. CHRISTOPHER LEWIS ------------------------------------ J. Christopher Lewis Chairman, Compensation Committee of the Board of Directors 11 12 EXHIBIT A COMPENSATION OF STEVEN S. MYERS The following summarizes the compensation to which Employee shall be entitled under the foregoing terms of this Employment Agreement. 1. BASE SALARY Effective February 1, 2000, Employee's base annual salary shall be $600,000 per year, paid in at bi-weekly installments. In no event, and under no circumstances, shall Employee's annual salary be reduced below the most recent annual salary. For example, in no event can Employee's base annual salary ever be reduced below $600,000. 2. LEAVE CREDIT During the Employment, and in addition to the company observed and posted holidays of 10 per year, Employee shall accrue paid leave at a rate of 25 days per annum; provided, however, that any such leave time, if not used, will be subject to SM&A's limitations on carrying forward unused leave time; and, provided further, that Employee shall use his best efforts to coordinate with the President and COO of SM&A the dates upon which Employee shall use his aforesaid vacation so as to minimize the negative impact upon SM&A occasioned by Employee's absence. 3. CELLULAR PHONE: SM&A shall reimburse Employee for the periodic cost of a cellular telephone including but not limited to phone equipment rental. 4. OTHER BENEFITS: Employee shall be entitled to participate in and receive benefits under all profit-sharing plans, pension plans, group medical plans and other benefit plans for the payment of additional compensation or benefits to employees of SM&A which SM&A at any time maintains for executive employees. 5. AUTOMOBILE LEASE: In lieu of an automobile allowance, SM&A shall lease an automobile of Employee's choice. In addition, the reasonable cost of annual insurance, fuel, maintenance, cleaning and repairs shall be borne by SM&A. 12 13 6. BUSINESS EXPENDITURES: Employee may be authorized to incur reasonable expenses for promoting and conducting the business of SM&A, including but not limited to expenditures for entertainment and travel. SM&A shall reimburse Employee monthly for all such approved business expenses upon presentation of reasonable documentation establishing the amount, date, place and essential character of the expenditures. 7. INCENTIVE BONUS: Employee's incentive bonus for each fiscal year shall provide for a maximum bonus of up to $400,000 of his base salary for such year and shall be subject to such terms and conditions as shall be determined in good faith by the Board of Directors, with the recommendation of and in consultation with the Compensation Committee of the Board of Directors. The incentive bonus may be based on financially oriented components or upon Employee's individual accomplishments or both. The incentive bonus earned for a fiscal year of SM&A shall be paid not later than three (3) business days following the review and approval by the Board of Directors of SM&A of the final financial statement results of the audit for said fiscal year by SM&A's independent auditors. Employee may draw up to $70,000 through quarterly payments, a gross amount equal to $17,500 as a non-guaranteed advance against the Incentive Bonus. 8. INDEMNI FICATION: SM&A has entered into a directors and officers Indemnification Agreement with Employee, under which SM&A is required to indemnify Employee against personal liability for acts of SM&A, to the extent such indemnification is permitted by law. 13 EX-21.1 6 a71291ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 EMERGENT INFORMATION TECHNOLOGIES, INC. WHOLLY OWNED SUBSIDIARIES STEVEN MYERS & ASSOCIATES, INC. a California corporation EMERGENT INFORMATION TECHNOLOGIES-WEST a California corporation EMERGENT INFORMATION TECHNOLOGIES-CENTRAL a California corporation (discontinued operations 8/2/00) EMERGENT INFORMATION TECHNOLOGIES-EAST a California corporation KAPOS ASSOCIATES INC. a Virginia corporation wholly owned subsidiary of Emergent Information Technologies-East STAMINET, INC. (discontinued operations 3/31/99) a California corporation wholly owned subsidiary of Emergent Information Technologies-East EMERGENT INFORMATION TECHNOLOGIES-INTL, INC. a Delaware corporation
EX-23.1 7 a71291ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors, Emergent Information Technologies, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-40614, 333-50887, 333-51174, 333-84107, 333-84109 and 333-84111) on Form S-8 and registration statement (No. 333-77311) on Form S-3 of Emergent Information Technologies, Inc. of our report dated April 11, 2001, relating to the consolidated balance sheets of Emergent Information Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2000, and the related schedule, which report appears in the December 31, 2000 annual report on Form 10-K of Emergent Information Technologies, Inc. Orange County, California April 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----