UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 20042005
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 0-5404
ANALEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 71-0869563 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5904 Richmond Highway Suite 300 Alexandria, Virginia | 22303 | |
(Address of principal executive offices) | (Zip Code) |
5904 Richmond Highway(703) 329-9400
Suite 300
Alexandria, Virginia 22303
(Address of principal executive offices)
Registrant’s Telephonetelephone number including area code
(703) 329-9400
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ¨ No x
Title of Class | Number of shares outstanding on July 29, 2005 | |
Common Stock, $0.02 par value per share | 16,046,625 |
As of November 12, 2004, 15,307,512 shares of the common stock of the registrant were outstanding.
TABLE OF CONTENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBERAs of June 30, 2004 AND DECEMBER2005 and December 31, 20032004
Unaudited
September 30, 2004 (unaudited) | December 31, 2003 | June 30, 2005 | December 31, 2004 | |||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Current assets | ||||||||||||||
Cash and cash equivalents | $ | 2,204,600 | $ | 14,177,500 | $ | 3,097,200 | $ | 1,034,200 | ||||||
Accounts receivable, net | 17,671,800 | 10,068,100 | 24,061,700 | 18,350,400 | ||||||||||
Deferred tax asset | 421,100 | 150,000 | 457,700 | — | ||||||||||
Prepaid expenses and other | 1,343,700 | 483,600 | 4,143,100 | 4,037,800 | ||||||||||
Current assets of business held for sale | 1,113,800 | 658,100 | ||||||||||||
Raw material inventory | 400,300 | — | ||||||||||||
Total current assets | 22,755,000 | 25,537,300 | 32,160,000 | 23,422,400 | ||||||||||
Fixed assets, net | 1,587,100 | 546,100 | 2,402,700 | 1,434,700 | ||||||||||
Contract rights and other intangibles, net | 6,862,500 | 1,753,000 | ||||||||||||
Goodwill | 41,614,100 | 15,281,600 | 78,027,500 | 43,175,200 | ||||||||||
Contract rights and other intangible assets, net | 12,326,200 | 6,363,500 | ||||||||||||
Other assets | 842,200 | 514,100 | 716,000 | 526,300 | ||||||||||
Total other assets | 50,905,900 | 18,094,800 | ||||||||||||
Total assets | $ | 73,660,900 | $ | 43,632,100 | $ | 125,632,400 | $ | 74,922,100 | ||||||
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY | ||||||||||||||
Current liabilities | ||||||||||||||
Accounts payable | $ | 957,400 | $ | 1,486,100 | ||||||||||
Notes payable – line of credit | 21,590,800 | 6,590,100 | ||||||||||||
Notes payable – other | 538,100 | 904,200 | ||||||||||||
Deferred tax liability | 1,633,800 | 927,400 | ||||||||||||
Other current liabilities | 15,260,000 | 8,919,500 | ||||||||||||
Total current liabilities | 39,980,100 | 18,827,300 | ||||||||||||
Notes payable – other | 137,300 | 329,600 | ||||||||||||
Deferred tax liability | 4,400,500 | 2,123,500 | ||||||||||||
Deferred rent | 42,300 | — | ||||||||||||
Series A convertible note | 5,593,600 | 4,689,500 | ||||||||||||
Total liabilities | 50,153,800 | 25,969,900 | ||||||||||||
Commitments and contingencies | — | — | ||||||||||||
Series A Convertible Preferred Stock; 6,726,457 shares issued and outstanding at June 30, 2005 and December 31, 2004 | 5,861,300 | 3,986,300 | ||||||||||||
Series B-1 Convertible Preferred Stock; 3,428,571 shares issued and outstanding at June 30, 2005 and December 31, 2004 | 12,000,000 | 12,000,000 | ||||||||||||
Series B-2 Convertible Preferred Stock; 7,142,856 shares issued and outstanding at June 30, 2005; 0 shares issued and outstanding at December 31, 2004 | 15,234,500 | — | ||||||||||||
Shareholders’ equity | ||||||||||||||
Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding June 30, 2005, 16,046,625 shares and December 31, 2004, 15,421,619 shares | 320,900 | 308,400 | ||||||||||||
Additional paid-in capital | 49,578,400 | 40,070,300 | ||||||||||||
Warrants outstanding | 9,228,300 | 6,803,300 | ||||||||||||
Accumulated deficit | (16,744,800 | ) | (14,216,100 | ) | ||||||||||
Total shareholders’ equity | 42,382,800 | 32,965,900 | ||||||||||||
Total liabilities, convertible preferred stock and shareholders’ equity | $ | 125,632,400 | $ | 74,922,100 | ||||||||||
See Notes to Consolidated Financial Statements
ANALEX CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
September 30, 2004 (unaudited) | December 31, 2003 | |||||||
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,019,600 | $ | 736,200 | ||||
Note payable - line of credit | 6,565,600 | — | ||||||
Note payable - bank term note | — | 700,000 | ||||||
Notes payable – other | 953,900 | 1,487,400 | ||||||
Other current liabilities | 9,794,500 | 5,387,500 | ||||||
Current liabilities of business held for sale | 81,600 | 116,000 | ||||||
Total current liabilities | 19,415,200 | 8,427,100 | ||||||
Note payable - bank term note | — | 1,341,700 | ||||||
Notes payable – other | 511,600 | 1,209,300 | ||||||
Deferred tax liability | 2,325,300 | — | ||||||
Convertible note | 4,237,500 | 2,881,400 | ||||||
Other | 7,700 | 43,800 | ||||||
Total long-term liabilities | 7,082,100 | 5,476,200 | ||||||
Total liabilities | 26,497,300 | 13,903,300 | ||||||
Commitments and contingencies | ||||||||
Series A convertible preferred stock | 3,049,800 | 236,300 | ||||||
Series B convertible preferred stock | 12,000,000 | — | ||||||
Shareholders’ equity: | ||||||||
Common stock $.02 par; authorized 65,000,000 shares; issued and outstanding - September 30, 2004, 15,307,512 shares and December 31, 2003, 13,036,666 shares | 306,200 | 260,700 | ||||||
Additional paid in capital | 38,972,500 | 28,519,100 | ||||||
Warrants outstanding | 6,803,300 | 5,762,900 | ||||||
Accumulated other comprehensive loss | (7,700 | ) | (43,800 | ) | ||||
Accumulated deficit | (13,960,500 | ) | (5,006,400 | ) | ||||
Total shareholders’ equity | 32,113,800 | 29,492,500 | ||||||
Total liabilities, convertible preferred stock and shareholders’ equity | $ | 73,660,900 | $ | 43,632,100 | ||||
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBERFor the Three and Six Months Ended June 30, 2005 and 2004 AND 2003
Unaudited
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Revenues | $ | 27,852,000 | $ | 15,877,700 | $ | 66,698,900 | $ | 46,581,200 | ||||||||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||||
Costs of revenue | 22,477,600 | 13,428,700 | 53,886,200 | 39,160,200 | ||||||||||||||||||||||||||||
Revenue | $ | 38,148,600 | $ | 22,215,200 | $ | 66,586,800 | $ | 38,846,600 | ||||||||||||||||||||||||
Operating costs and expenses | ||||||||||||||||||||||||||||||||
Cost of revenue | 30,975,300 | 17,357,200 | 54,687,900 | 31,408,600 | ||||||||||||||||||||||||||||
Selling, general and administrative | 2,791,100 | 1,374,800 | 7,147,600 | 4,125,300 | 3,418,500 | 2,552,500 | 5,609,700 | 4,353,900 | ||||||||||||||||||||||||
Amortization of intangible assets | 541,000 | 104,200 | 967,500 | 308,700 | 989,100 | 277,300 | 1,479,600 | 426,500 | ||||||||||||||||||||||||
Total operating costs and expenses | 25,809,700 | 14,907,700 | 62,001,300 | 43,594,200 | 35,382,900 | 20,187,000 | 61,777,200 | 36,189,000 | ||||||||||||||||||||||||
Operating income | 2,042,300 | 970,000 | 4,697,600 | 2,987,000 | 2,765,700 | 2,028,200 | 4,809,600 | 2,657,600 | ||||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||
Interest income | 4,500 | 200 | 49,900 | 1,200 | 2,500 | 29,600 | 4,800 | 42,900 | ||||||||||||||||||||||||
Interest expense | (5,631,800 | ) | (83,200 | ) | (8,031,800 | ) | (279,800 | ) | (998,700 | ) | (1,698,900 | ) | (1,764,100 | ) | (2,400,000 | ) | ||||||||||||||||
Total other expense, net | (5,627,300 | ) | (83,000 | ) | (7,981,900 | ) | (278,600 | ) | ||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | (3,585,000 | ) | 887,000 | (3,284,300 | ) | 2,708,400 | ||||||||||||||||||||||||||
Income from continuing operations before income taxes | 1,769,500 | 358,900 | 3,050,300 | 300,500 | ||||||||||||||||||||||||||||
Provision for income taxes | 1,455,900 | 253,000 | 1,840,700 | 771,900 | 1,286,800 | 459,500 | 1,901,600 | 384,700 | ||||||||||||||||||||||||
Income (loss) from continuing operations | (5,040,900 | ) | 634,000 | (5,125,000 | ) | 1,936,500 | 482,700 | (100,600 | ) | 1,148,700 | (84,200 | ) | ||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 76,100 | (53,000 | ) | (3,200 | ) | 54,000 | 6,700 | (50,700 | ) | 30,300 | (79,200 | ) | ||||||||||||||||||||
Gain (loss) on disposal of discontinued operations, net of income taxes | 214,700 | — | (307,100 | ) | — | |||||||||||||||||||||||||||
Loss on disposal of discontinued operations, net of income taxes | — | (521,800 | ) | — | (521,800 | ) | ||||||||||||||||||||||||||
Net income (loss) | (4,750,100 | ) | 581,000 | (5,435,300 | ) | 1,990,500 | 489,400 | (673,100 | ) | 1,179,000 | (685,200 | ) | ||||||||||||||||||||
Dividends on Series A convertible preferred stock | (225,000 | ) | — | (675,000 | ) | — | ||||||||||||||||||||||||||
Dividends on Series B convertible preferred stock | (29,600 | ) | — | (29,600 | ) | — | ||||||||||||||||||||||||||
Dividends on convertible preferred stock | (781,900 | ) | (225,000 | ) | (1,181,300 | ) | (450,000 | ) | ||||||||||||||||||||||||
Accretion of convertible preferred stock | (937,600 | ) | — | (2,814,200 | ) | — | (1,588,800 | ) | (939,100 | ) | (2,526,300 | ) | (1,876,600 | ) | ||||||||||||||||||
Net income (loss) available to common shareholders | $ | (5,942,300 | ) | $ | 581,000 | $ | (8,954,100 | ) | $ | 1,990,500 | ||||||||||||||||||||||
Net loss available to common shareholders | $ | (1,881,300 | ) | $ | (1,837,200 | ) | $ | (2,528,600 | ) | $ | (3,011,800 | ) | ||||||||||||||||||||
Net income (loss) available to common shareholders per share: | ||||||||||||||||||||||||||||||||
Net loss available to common shareholders per share: | ||||||||||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Basic | $ | (0.41 | ) | $ | 0.04 | $ | (0.61 | ) | $ | 0.13 | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||||||||
Diluted | $ | (0.41 | ) | $ | 0.03 | $ | (0.61 | ) | $ | 0.11 | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||||||||
Discontinued operations | ||||||||||||||||||||||||||||||||
Basic | $ | 0.02 | $ | 0.00 | $ | (0.02 | ) | $ | 0.00 | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | |||||||||||||
Diluted | $ | 0.02 | $ | 0.00 | $ | (0.02 | ) | $ | 0.00 | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | |||||||||||||
Net income (loss) available to common shareholders: | ||||||||||||||||||||||||||||||||
Net loss available to common shareholders: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.39 | ) | $ | 0.04 | $ | (0.63 | ) | $ | 0.13 | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||||||||
Diluted | $ | (0.39 | ) | $ | 0.03 | $ | (0.63 | ) | $ | 0.11 | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||||||||
Weighted average number of shares: | ||||||||||||||||||||||||||||||||
Basic | 15,295,773 | 14,971,765 | 14,134,314 | 14,750,464 | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||||||||||||||
Diluted | 15,295,773 | 17,811,841 | 14,134,314 | 17,601,869 | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||||||||||||||
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBERFor the Six Months Ended June 30, 2005 and 2004 AND 2003
Unaudited
September 30, 2004 | September 30, 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (5,435,300 | ) | $ | 1,990,500 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation | 196,700 | 68,800 | ||||||
Amortization of intangible assets | 967,500 | 308,700 | ||||||
Amortization of deferred financing costs and debt discount | 6,417,800 | — | ||||||
Loss on disposal of discontinued operations | 307,100 | — | ||||||
Stock-based compensation expense | — | 7,700 | ||||||
Deferred tax benefit | (271,100 | ) | — | |||||
Changes in operating assets and liabilities net of effect of business combination: | ||||||||
Accounts receivable, net | (2,669,200 | ) | (316,800 | ) | ||||
Prepaid expenses and other | (22,700 | ) | (24,700 | ) | ||||
Other assets | (385,300 | ) | (368,100 | ) | ||||
Accounts payable | 1,015,800 | (933,800 | ) | |||||
Other current liabilities | 2,351,100 | 1,982,100 | ||||||
Net cash provided by operating activities | 2,472,400 | 2,714,400 | ||||||
Cash flows from investing activities: | ||||||||
Property additions | (557,000 | ) | (325,900 | ) | ||||
Intangible additions | — | (25,700 | ) | |||||
Cash paid for BAI, net of cash acquired | (27,106,500 | ) | — | |||||
Net cash used in investing activities | (27,663,500 | ) | (351,600 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings on bank and other loans | 8,254,700 | 1,829,000 | ||||||
Proceeds from stock options and warrants exercised | 305,800 | 97,000 | ||||||
Proceeds from employee stock purchase plan | 130,400 | 74,000 | ||||||
Proceeds from issuance of Senior Subordinated Notes and warrants | 12,000,000 | — | ||||||
Payments on bank and other loans | (6,725,000 | ) | (4,896,300 | ) | ||||
Net cash provided by (used in) financing activities | 13,965,900 | (2,896,300 | ) | |||||
Net cash from discontinued operations | (747,700 | ) | 324,200 | |||||
Net decrease in cash and cash equivalents | (11,972,900 | ) | (191,100 | ) | ||||
Cash and cash equivalents at beginning of period | 14,177,500 | 301,800 | ||||||
Cash and cash equivalents at end of period | $ | 2,204,600 | $ | 110,700 | ||||
June 30, 2005 | June 30, 2004 | |||||||
Reconciliation of net income (loss) to cash provided by (used in) operating activities | ||||||||
Net income (loss) | $ | 1,179,000 | $ | (685,200 | ) | |||
Net income (loss) from discontinued operations | 30,300 | (79,200 | ) | |||||
Net income (loss) from continuing operations | 1,148,700 | (606,000 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | ||||||||
Depreciation | 276,400 | 96,300 | ||||||
Amortization of intangible assets | 1,479,600 | 426,500 | ||||||
Amortization of debt discounts | 904,000 | — | ||||||
Amortization of deferred financing costs | 90,700 | 1,762,400 | ||||||
Loss on disposal of discontinued operations | — | 521,800 | ||||||
Deferred tax benefit | — | (556,100 | ) | |||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 2,761,600 | (5,101,100 | ) | |||||
Prepaid expenses and other | 1,956,800 | 962,600 | ||||||
Inventory | 58,700 | — | ||||||
Other assets | (1,164,500 | ) | (168,900 | ) | ||||
Accounts payable | (760,100 | ) | (88,100 | ) | ||||
Other current liabilities | 1,488,300 | 1,956,000 | ||||||
Other long-term liabilities | 1,100 | (10,200 | ) | |||||
Net cash provided by (used in) continued operating activities | 8,241,300 | (804,800 | ) | |||||
Net cash provided by (used in) discontinued operating activities | 30,300 | (295,900 | ) | |||||
Net cash provided by (used in) operating activities | 8,271,600 | (1,100,700 | ) | |||||
Cash flows from investing activities | ||||||||
Purchase of fixed assets | (218,400 | ) | (144,600 | ) | ||||
Cash paid for BAI, net of cash acquired | — | (27,049,200 | ) | |||||
Cash paid for ComGlobal, net of cash acquired | (45,391,500 | ) | — | |||||
Net cash used in investing activities | (45,609,900 | ) | (27,193,800 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from net borrowings on bank and other loans | 14,442,300 | 3,411,400 | ||||||
Proceeds from stock sale of common stock | 945,000 | — | ||||||
Proceeds from stock options and warrants exercised | 422,000 | 305,800 | ||||||
Proceeds from employee stock purchase plan | 196,300 | 126,700 | ||||||
Proceeds from issuance of Series B-1 Senior Subordinated Notes and Warrants | — | 12,000,000 | ||||||
Proceeds from issuance of Series B-2 Preferred Stock and Warrants | 24,965,400 | — | ||||||
Payments of dividends on preferred stock | (1,569,700 | ) | (450,000 | ) | ||||
Net cash provided by financing activities | 39,401,300 | 15,393,900 | ||||||
Net increase (decrease) in cash and cash equivalents | 2,063,000 | (12,900,600 | ) | |||||
Cash and cash equivalents at beginning of period | 1,034,200 | 14,177,500 | ||||||
Cash and cash equivalents at end of period | $ | 3,097,200 | $ | 1,276,900 | ||||
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unaudited
1.Business Groups
Analex Corporation (the(“Analex” or the “Company”) providesis a provider of mission-critical professional services to federal government clients. The Company specializes in providing information technology, and systems engineering, security services toand intelligence support services in support of the United States governmentU.S. Government. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, and designing, developing and testing aerospace systems. The Company provides its services through its two groups:strategic business units: the Homeland Security Group, supporting intelligence systems; and the Systems Engineering Group, supporting the development of space-based systems, the operation of terrestrial assets, and the launch of unmanned rockets by NASA under the Company’s Expendable Launch Vehicle Integrated Support (“ELVIS”) contract. In addition, its discontinued subsidiary, Advanced Biosystems, Inc. (“ABS”), is engaged in biomedical research for broad spectrum defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox. During the second quarter of 2004, the Company decided to divest ABS. Therefore, the results of operations of ABS are reported as discontinued operations for all periods presented herein (see note 12).
The Homeland Security Group accounted for approximately 53.5%67% of the Company’s 20042005 year-to-date revenues.revenue. This group provides engineering, scientific, security, intelligence support and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to the intelligence community, including the National Reconnaissance Office, the Missile Defense Agency, the National Security Agency, the Department of Defense, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.
The Systems Engineering Group accounted for approximately 46.5%33% of the Company’s 20042005 year-to-date revenues.revenue. This group provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle engineering, space systems development, and ground support for space operations.
On April 1, 2005, Analex acquired ComGlobal Systems, Incorporated (“ComGlobal”). ComGlobal is reported as a part of the Homeland Security Group. ComGlobal specializes in command, control, communications, computers and intelligence (C4I) programs for the military, and its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program.
On May 28, 2004, Analex acquired Beta Analytics, Inc. (“BAI”). BAI is reported as a part of the Homeland Security Group. BAI provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. BAI’s services cover a range of life cycle protection and physical security services specifically in the areas of information protection, physical security, intelligence threat assessment and analysis, technology protection, security management and security education and training.
During the second quarter of 2004, the Company concluded that Advanced Biosystems, Inc. (ABS), a then wholly owned subsidiary of the Company, did not fit with the Company’s long-term strategic plan and decided to divest ABS. The Company disposed of ABS on November 16, 2004 and has presented the results of operations of ABS as a discontinued operation for all periods presented herein.
2.Basis of Presentation
The interim consolidated financial statements for the Company are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 20032004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20032004 (“20032004 Form 10-K”) filed with the Securities and Exchange Commission on March 30, 2004.
The Company pursues acquisitions to complement its business. In accordance with the provisions of Statement of Financial Accounting Standards No. 141,Business Combinations, the direct costs associated with these acquisitions are accounted for as additional purchase consideration. Costs associated with transactions for which we discontinue our pursuit are expensed28, 2005. Certain amounts in the period in whichprior year financial statements and related notes have been reclassified to conform to the transaction is abandoned.current year presentation.
3.Acquisition of Beta Analytics, IncComGlobal Systems, Incorporated.
Analex acquired ComGlobal on April 1, 2005. Under the terms of an Agreement and Plan of Merger dated April 1, 2005, by and among Analex, Alpha-N Acquisition Corp., a wholly-owned subsidiary of Analex (“Merger Sub”), ComGlobal and certain designated ComGlobal stockholder representatives, Analex acquired ComGlobal by merging the Merger Sub with and into ComGlobal, with ComGlobal as the surviving corporation (the “Merger”). As a result of the Merger, ComGlobal has become a wholly owned subsidiary of Analex.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
ComGlobal is a software engineering and information technology firm primarily serving federal government agencies and organizations. ComGlobal specializes in command, control, communications, computers and intelligence (C4I) programs for the Military. Its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program. ComGlobal has offices in California, Mississippi, Nevada and Virginia.
The financial consideration for the acquisition of the ComGlobal business was $47 million in cash, with no assumption of debt. Analex funded the transaction with a combination of senior debt from Bank of America, N.A. in the amount of $22 million and through an issuance of additional Series B Convertible Preferred Stock (“Series B-2”) in the amount of $25 million (see Note 10).
The acquisition of ComGlobal was accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is first allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill. The Agreement and Plan of Merger contains certain financial representations, which will survive after the closing date.
ComGlobal’s results of operations are included as part of Analex’s unaudited Consolidated Statement of Operations for the three months ended June 30, 2005, reported herein. The following table provides the unaudited pro forma results of the Company for the three and six months ended June 30, 2004 as if ComGlobal had been acquired on January 1, 2004 and also for the six months ended June 30, 2005, as if ComGlobal had been acquired on January 1, 2005. These combined result are not necessarily indicative of future operating results of the Company.
Pro Forma Three Months Ended June 30, 2004 | Pro Forma Six Months Ended | Three Months June 30, 2005 | Pro Forma Six Months Ended | |||||||||||||
Revenue | $ | 33,396,900 | $ | 59,794,000 | $ | 38,148,600 | $ | 76,297,200 | ||||||||
Income from continuing operations | 1,215,200 | 1,337,600 | 482,700 | 642,100 | ||||||||||||
Net (loss) income | (364,400 | ) | (487,800 | ) | 489,400 | 672,400 | ||||||||||
Net loss available to common shareholders | (2,624,000 | ) | (5,005,400 | ) | (1,881,300 | ) | (4,130,800 | ) | ||||||||
Basic earnings per share available to common shareholders | $ | (0.19 | ) | $ | (0.37 | ) | $ | (0.12 | ) | $ | (0.26 | ) | ||||
Diluted earnings per share available to common shareholders | $ | (0.19 | ) | $ | (0.37 | ) | $ | (0.12 | ) | $ | (0.26 | ) | ||||
4.Acquisition of Beta Analytics, Inc.
Analex acquired BAI on May 28, 2004. Under the terms of a Stock Purchase Agreement, dated May 6, 2004, Analex acquired all of the issued and outstanding stock of BAI for approximately (i) $27.7 million in cash, and (ii) 1,832,460 unregistered shares of Analex common stock. These shares wereCommon Stock. The Common Stock was valued at $3.332 per share.$3.80, which was the closing price on the day prior to the announcement of the acquisition. Analex financed the cash portion of the consideration for the acquisition through its cash on hand, senior debt from Bank of America, N.A. and new debt in the initial principal amount of $12 millionSeries B Senior Subordinated Notes (see note 9)Note 10). The Stock Purchase Agreement contains an earn-out provision contingent upon award of a certain contract by a specific date. The Company does not believe the contract will be awarded within the required time limit and therefore has not included the earn-out in the computation of the purchase price.
Management believes thatThe total cost of the acquisition of BAI will yield additional significant yearly revenues and operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within the government services industry. Value associated with BAI’s intangible assets including contract rights and customer relationships was the primary factor contributing to a purchase price in excess of net assets acquired. These intangible assets have an estimated useful life of five years.
The acquisition of BAI, which was valued at approximately $35.3$37.9 million, including the assumption of BAI’s debt of $1.7 million, was accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is first allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with theany excess recorded as goodwill. The Stock Purchase Agreement contains certain financial statementsrepresentations, which will survive after the closing date.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
5.Goodwill, Contract Rights And Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. Under SFAS 142, goodwill is to be reviewed at least annually for impairment. The Company has have elected to perform this review annually during the third quarter each calendar year. The Company has recorded goodwill of $78.0 million and $43.2 million as of SeptemberJune 30, 2004 reflect preliminary estimates2005 and 2004. There were no events or conditions existing through the six months ended June 30, 2005 that would result in an impairment of goodwill.
Identifiable intangible assets, which have finite useful lives, consist of customer rights and non-compete agreements. The following table provides the details of the fair market value for the purchasednet carrying amounts of these intangible assets. The allocation of the purchase price is summarizedassets as follows:of:
Cash purchase price | $ | 27,726,500 | ||
Stock purchase price | 6,102,100 | |||
Transaction fees | 1,440,500 | |||
35,269,100 | ||||
Cash | 2,060,500 | |||
Accounts receivable | 4,934,500 | |||
Fixed assets | 776,300 | |||
Intangible assets | 6,078,000 | |||
Other assets | 669,500 | |||
Accounts payable | (267,600 | ) | ||
Line of credit | (1,700,000 | ) | ||
Other current liabilities | (152,600 | ) | ||
Other liabilities | (1,136,600 | ) | ||
Deferred tax liability | (2,325,300 | ) | ||
Goodwill | $ | 26,332,400 |
June 30, 2005 | December 31, 2004 | |||||||||||||||||||
Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||
Amortizable intangible assets | ||||||||||||||||||||
Contract rights | $ | 14,346,300 | $ | (2,486,100 | ) | $ | 11,860,200 | $ | 7,082,300 | $ | (1,184,100 | ) | $ | 5,898,200 | ||||||
Non-compete agreements | 1,105,500 | (639,500 | ) | 466,000 | 1,495,500 | (1,030,200 | ) | 465,300 | ||||||||||||
Total amortizable intangible assets | $ | 15,451,800 | $ | (3,125,600 | ) | $ | 12,326,200 | $ | 8,577,800 | $ | (2,214,300 | ) | $ | 6,363,500 | ||||||
The unaudited pro forma financial information reflectsgross carrying values of customer rights and non-compete agreements increased by $7.3 million and $0.2 million, respectively, from December 31, 2004 to June 30, 2005 due to the resultsacquisition of ComGlobal on April 1, 2005.
The following table provides the estimated amortization expense for each of the Company fornext five years ending December 31 based on the three and nine months ended Septembercarrying amount of amortizable intangible assets existing as of June 30, 2004, as if BAI had been acquired on January 1, 2004, and for the three and nine months ended September 30, 2003, as if BAI had been acquired on January 1, 2003. This combined result is not necessarily indicative of future operating results of the Company.2005:
Three Months Ended September 30, 2004 | Nine Months Ended September 30, 2004 | Three Months Ended September 30, 2003 | Nine Months Ended September 30, 2003 | |||||||||||
Revenues | $ | 27,852,000 | $ | 81,854,400 | $ | 23,800,300 | $ | 69,775,600 | ||||||
Income (loss) from continuing operations | (5,040,900 | ) | (4,312,000 | ) | 1,045,700 | 2,897,600 | ||||||||
Net income (loss) | (4,750,100 | ) | (4,622,200 | ) | 992,700 | 2,897,600 | ||||||||
Net loss available to common shareholders | (5,942,300 | ) | (8,141,000 | ) | 992,700 | 2,951,600 | ||||||||
Basic earnings per share available to common shareholders | $ | (0.39 | ) | $ | (0.61 | ) | $ | 0.06 | $ | 0.15 | ||||
Diluted earnings per share available to common shareholders | $ | (0.39 | ) | $ | (0.61 | ) | $ | 0.06 | $ | 0.15 |
Year | Estimated Amortization Expense | ||
2005 | $ | 1,865,500 | |
2006 | 3,448,000 | ||
2007 | 2,660,200 | ||
2008 | 2,004,200 | ||
2009 | 785,000 |
4.6.Debt
The Company has a credit agreement with Bank of America, N.A. (“the Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, the Credit Facility was amended and restated to provide a $20,000,000$20 million revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1,750,000$1.7 million was consolidated into the Credit Facility. An uncommitted annual guidance facility notOn April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to exceed an additional $20,000,000 isincrease the amount available under the Credit Facility from $20.0 million to fund future acquisitions upon application by$40.0 million. As of June 30, 2005, the Companyoutstanding balance of the Credit Facility was $21.6 million and approval by Bank of America.the interest rate was 5.83%. The Credit Facility has an annual renewal occurring April 30a maturity date of each year. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of September 30, 2004, the Credit Facility outstanding balance was $6,565,600. The interest rate at September 30, 2004 was 4.33% for the Credit Facility.May 31, 2007.
The Credit Facility contains financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of SeptemberJune 30, 2004,2005, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of properties other than ABS, incur additional indebtedness, pay dividends (except to holders of the Series A and Series BB-1 and B-2 Preferred Stock) or other distributions, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates. The Credit Facility is secured by the accounts receivable and other assets of the Company.
In January 2002, the Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt now totaling $1,300,000, was swapped into a fixed rate obligation at 4.25%. The purpose of the swap was to protect the Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effectivefrom potential rising interest rates on debt with variable interest rate onfeatures. During periods of rising interest rates, the swapped portionCompany will benefit from the protection of the revolving credit facility amountedswap, during periods of declining interest rates the Company will incur additional interest expense due to 6.75% at September 30,the fixed interest rate component of the swap agreement. During the term of the swap agreement, comprehensive income or loss related to the swap agreement was recorded as a current liability with an offset to accumulated other comprehensive income (loss), which is a component of shareholders’ equity. The swap agreement matured on December 1, 2004.
The Company’s comprehensive loss available to common shareholders for the three months ended SeptemberJune 30, 2004 was $5,932,300$1,822,000 which includes the net loss available to common shareholders of $5,942,300$1,837,200 and other comprehensive income of $10,000 $15,200
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
arising from the interest rate swap. The Company’s comprehensive loss for the ninesix months ended SeptemberJune 30, 2004 was $8,918,000,$2,985,700, which includes the net loss available to common shareholders of $8,954,100$3,011,800 and other comprehensive income of $36,100$26,100 arising from the interest rate swap.
The Company also has outstanding a $10,000,000$10.0 million Series A Convertible Note issued on December 9, 2003 in connection with the Pequot Transaction (see note 8). In connection with the BAI acquisition and the Series B Financing, the Company issued $12,000,000 Senior Subordinated Notes on May 28, 2004 (see note 9)Note 10).
5.7.Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
Income (loss) from continuing operations | (5,040,900 | ) | 634,000 | (5,125,000 | ) | 1,936,500 | $ | 482,700 | $ | (100,600 | ) | $ | 1,148,700 | $ | (84,200 | ) | |||||||||||||||
Dividends on Series A convertible preferred stock | (225,000 | ) | — | (675,000 | ) | — | |||||||||||||||||||||||||
Dividends on Series B convertible preferred stock | (29,600 | ) | — | (29,600 | ) | — | |||||||||||||||||||||||||
Dividends on convertible preferred stock | (781,900 | ) | (225,000 | ) | (1,181,300 | ) | (450,000 | ) | |||||||||||||||||||||||
Accretion of convertible preferred stock | (937,600 | ) | — | (2,814,200 | ) | — | (1,588,800 | ) | (939,100 | ) | (2,526,300 | ) | (1,876,600 | ) | |||||||||||||||||
Net income (loss) available to common shareholders from continuing operations | (6,233,100 | ) | 634,000 | (8,643,800 | ) | 1,936,500 | |||||||||||||||||||||||||
Net loss from continuing operations | (1,888,000 | ) | $ | (1,264,700 | ) | (2,558,900 | ) | $ | (2,410,800 | ) | |||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 76,100 | (53,000 | ) | (3,200 | ) | 54,000 | 6,700 | (50,700 | ) | 30,300 | (79,200 | ) | |||||||||||||||||||
Gain (loss) on disposal of discontinued operations, net of income taxes | 214,700 | — | (307,100 | ) | — | ||||||||||||||||||||||||||
Net income (loss) available to common shareholders | $ | (5,942,300 | ) | $ | 581,000 | $ | (8,954,100 | ) | $ | 1,990,500 | |||||||||||||||||||||
Loss on disposal of discontinued operations, net of income taxes | — | (521,800 | ) | — | (521,800 | ) | |||||||||||||||||||||||||
Net loss available to common shareholders | $ | (1,881,300 | ) | $ | (1,837,200 | ) | $ | (2,528,600 | ) | $ | (3,011,800 | ) | |||||||||||||||||||
Weighted average shares outstanding | 15,295,773 | 14,971,765 | 14,134,314 | 14,750,464 | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | |||||||||||||||||||||||
Warrants | — | 1,590,539 | — | 1,703,315 | — | — | — | — | |||||||||||||||||||||||
Employee stock options | — | 1,249,537 | — | 1,147,300 | — | — | — | — | |||||||||||||||||||||||
Diluted weighted average shares outstanding | 15,295,773 | 17,811,841 | 14,134,314 | 17,601,079 | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | |||||||||||||||||||||||
Net income (loss) available to common shareholders per share: | |||||||||||||||||||||||||||||||
Continuing operations: | |||||||||||||||||||||||||||||||
Net loss available to common shareholders per share | |||||||||||||||||||||||||||||||
Continuing operations | |||||||||||||||||||||||||||||||
Basic | $ | (0.41 | ) | $ | 0.04 | $ | (0.61 | ) | $ | 0.13 | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | |||||||||
Diluted | $ | (0.41 | ) | $ | 0.03 | $ | (0.61 | ) | $ | 0.11 | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | |||||||||
Discontinued operations: | |||||||||||||||||||||||||||||||
Discontinued operations | |||||||||||||||||||||||||||||||
Basic | $ | 0.02 | $ | 0.0 | $ | (0.02 | ) | $ | 0.00 | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||||||||
Diluted | $ | 0.02 | $ | 0.0 | $ | (0.02 | ) | $ | 0.00 | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||||||||
Net income (loss) available to common shareholders: | |||||||||||||||||||||||||||||||
Net loss available to common shareholders | |||||||||||||||||||||||||||||||
Basic | $ | (0.39 | ) | $ | 0.04 | $ | (0.63 | ) | $ | 0.13 | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | |||||||||
Diluted | $ | (0.39 | ) | $ | 0.03 | $ | (0.63 | ) | $ | 0.11 | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | |||||||||
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
Shares issuable upon the exercise of stock options or warrants or upon conversion of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive. As of SeptemberJune 30, 2004,2005, shares issuable upon conversion of such instruments are as follows:
Instrument | Common Shares Issuable Upon Conversion | Exercise Price/ Conversion Price | Proceeds From Conversion | Common shares issuable upon conversion | Exercise price | Proceeds from conversion | ||||||||
Series A Preferred Stock | 6,726,457 | $2.23 | $ | — | ||||||||||
Series A Preferred Stock Warrants | 664,341 | $3.28 | 2,179,838 | |||||||||||
Series A Convertible Preferred Stock | 6,726,457 | $2.23 | $ | — | ||||||||||
Series A Convertible Note Warrants | 664,341 | $3.28 | 2,179,038 | |||||||||||
Series A Convertible Notes | 3,321,707 | $3.01 | — | 3,321,707 | $3.01 | — | ||||||||
Series A Convertible Notes Warrants | 1,345,291 | $3.28 | 4,412,554 | |||||||||||
Series B Preferred Stock | 4,285,714 | $2.80 | — | |||||||||||
Series B Senior Subordinated Notes Warrants | 857,143 | $4.32 | 3,702,858 | |||||||||||
Series A Common Stock Warrants | 1,345,291 | $3.28 | 4,412,554 | |||||||||||
Series B-1 Convertible Preferred Stock | 4,285,714 | $2.80 | — | |||||||||||
Series B-1 Common Stock Warrants | 857,142 | $4.32 | 3,702,853 | |||||||||||
Series B-2 Convertible Preferred Stock | 8,928,569 | $2.80 | — | |||||||||||
Series B-2 Common Stock Warrants | 1,785,713 | $4.29 | 7,660,709 | |||||||||||
Warrants issued under 2000 financing agreement | 32,500 | $0.75 | 24,375 | 32,500 | $0.75 | 24,375 | ||||||||
Options issued under Incentive Stock Option Plans | 1,202,225 | $ 0.50 - $1.37 | 1,559,388 | 996,358 | $ 0.50 - $1.99 | 1,327,836 | ||||||||
Options issued under Incentive Stock Option Plans | 1,342,545 | $ 1.60 - $2.49 | 3,061,677 | 1,248,413 | $ 2.20 - $2.49 | 2,848,882 | ||||||||
Options issued under Incentive Stock Option Plans | 1,087,500 | $ 2.54 - $4.04 | 3,847,675 | 1,609,166 | $ 2.54 - $4.49 | 5,815,406 | ||||||||
Total | 20,866,086 | $ | 18,787,565 | 31,801,371 | $ | 27,971,653 | ||||||||
6.8.Stock-based compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The following table is a computation of the pro forma earnings had the Company accounted for stock option grants based on their fair value as determined under SFAS No. 123:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Net income (loss) available to common shareholders, as reported | $ | (5,942,300 | ) | $ | 581,000 | $ | (8,954,100 | ) | $ | 1,990,600 | ||||
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax effects | — | — | — | 6,900 | ||||||||||
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects | 39,400 | 67,200 | 754,700 | 689,600 | ||||||||||
Pro forma net income (loss) available to common shareholders | $ | (5,981,700 | ) | $ | 513,800 | $ | (9,708,800 | ) | $ | 1,307,900 | ||||
Earnings per share: | ||||||||||||||
Basic as reported | $ | (0.39 | ) | $ | 0.04 | $ | (0.63 | ) | $ | 0.13 | ||||
Diluted as reported | (0.39 | ) | 0.03 | (0.63 | ) | 0.11 | ||||||||
Basic proforma | (0.39 | ) | 0.03 | (0.69 | ) | 0.09 | ||||||||
Diluted proforma | (0.39 | ) | 0.03 | (0.69 | ) | 0.07 |
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net loss available to common shareholders, as reported | $ | (1,881,300 | ) | $ | (1,837,200 | ) | $ | (2,528,600 | ) | $ | (3,011,800 | ) | ||||
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects | 125,000 | 244,300 | 624,000 | 343,200 | ||||||||||||
Pro forma net loss available to common shareholders | $ | (2,006,300 | ) | $ | (2,081,500 | ) | $ | (3,152,600 | ) | $ | (3,355,000 | ) | ||||
Earnings per share: | ||||||||||||||||
Basic, as reported | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
Diluted, as reported | $ | (0.12 | ) | (0.13 | ) | $ | (0.16 | ) | (0.22 | ) | ||||||
Basic, pro forma | $ | (0.13 | ) | (0.15 | ) | $ | (0.20 | ) | (0.25 | ) | ||||||
Diluted, pro forma | $ | (0.13 | ) | (0.15 | ) | $ | (0.20 | ) | (0.25 | ) | ||||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following assumptions were used for grants: dividend yield of 0%; expected volatility of 40 to 76%; expected life of the option term of 5 years; and risk-free interest rate of 2.25% to 5.85%.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
7.In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123(R)—Share-Based Payment, which replaces SFAS No. 123—Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25—Accounting for Stock Issued to Employees. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective as of the beginning of the first fiscal year that begins after June 15, 2005. The company plans on adopting the provisions of SFAS No. 123(R) during the first quarter of 2006. The approach towards adoption of the new pronouncement is still under consideration and the effects of adoption have yet to be determined.
To avoid recognizing additional compensation expense following the adoption of SFAS No. 123(R) the Company has accelerated vesting of certain options for certain option holders when the exercise price of the option is more than the fair market value. SFAS The table below summarizes the accelerated vesting of options during the six months ended June 30, 2005.
Number of options | Exercise price | Original vesting date | Accelerated vesting date | ||||
100,000 | $ | 3.42 | 02/17/06 | 03/02/05 | |||
90,002 | $ | 3.80 | 04/08/06 | 01/26/05 | |||
25,000 | $ | 3.69 | 02/02/06 | 01/31/05 | |||
6,668 | $ | 3.90 | 03/01/06 | 01/19/05 | |||
1,667 | $ | 3.80 | 02/25/06 | 01/26/05 |
9.Concentration of Business
Almost all of the Company’s revenues arerevenue is derived either directly from the U.S. government as prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately 52%67% of the Company’s 20042005 year-to-date revenues haverevenue has been derived from various Department of Defense and intelligence agencies. Approximately 46%33% of the Company’s 20042005 year-to-date revenues haverevenue has been derived, directly or indirectly, from NASA.
8.10.Pequot TransactionConvertible Preferred Stock and Convertible Notes
On December 9, 2003, the Company consummated the transactions (the “Pequot Transaction”) contemplated by the Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement by and betweenConvertible Notes
In December 2003, the Company and Pequot Private Equity Fund III, L.P., a Delaware limited partnership, and Pequot Offshore Private Equity Partners III, L.P., a Cayman Islands limited partnership (“Pequot”). The Company:
Upon issuance and sale of the Series A Preferred Stock, issued warrants (the “Preferred Warrants”)the Company allocated relative fair value of approximately $3.8 million to purchase 1,345,291 sharesthe Common Stock Warrants and recorded a beneficial conversion charge of the Company’s common stock, par value $.02 per share, at an exercise price of $3.28 per share at a ratio of one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series A Preferred Stock;
Series A Preferred Stock
The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in an event of default under the Company’s Credit Facility, in additional shares of Series A Preferred Stock. Holdersapproximately $11.1 million. These amounts are being recorded as accretion of Series A Preferred Stock are entitledover the period to vote together with all other classesthe earliest redemption date, which is September 15, 2008. For the three and series of voting stock ofsix months ended June 30, 2005 and 2004, the Company on all actionsrecorded $0.9 million and $1.9 million, respectively, of accretion related to be taken by the stockholdersthese charges. The unamortized discount as of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not take numerous actions without obtaining the written consent of the holders of a majority of the Series A Preferred Stock.June 30, 2005 was $9.1 million.
The Series A Preferred Stock is convertible into common stockCommon Stock at any time at the election of its holders, initially at a ratio of one share of common stockCommon Stock for every share of Series A Preferred Stock. The Series A Preferred Stock will automatically convert into Common Stock if, any time following June 9, 2005, the average closing price of the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the conversion price of $2.23then in effect for the Series A Preferred Stock. In addition, the Series A Preferred Stock held by holders that do not accept an offer by the Company to purchase the Series A Preferred Stock for at least 2.5 times the conversion price then in effect also will automatically convert into Common Stock. The Series A Preferred Stock will also automatically convert into Common Stock upon the agreement of the holders of a majority of the Series A Preferred Stock.
Upon issuanceHolders of the Series A Preferred Stock may require the Company allocated relative fair valueto redeem their shares in four equal quarterly installments any time on or after September 15, 2008, at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued but unpaid dividends.
In December of $3,857,600 to2003, the Preferred Warrants and recorded a beneficial conversion charge of $11,142,400. These amounts are being recorded as accretionCompany also issued, in aggregate, $10,000,000 principle amount of Series A Preferred Stock over the period to the earliest redemption date, which is December 9, 2007. For the three months and nine months ended September 30, 2004, the Company recorded $0.9 million and $2.8 million, respectively, of accretion related to these charges. The unamortized discount as of September 30, 2004 was $11.95 million.Secured Subordinated Convertible Promissory Notes (the “Series A Convertible Notes”).
ANALEX CORPORATION
Convertible NotesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Convertible Notes mature on December 9, 2007. The Convertible Notes bear interest at an annual rate of 7%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in an event of default under the Company’s Credit Facility, such interest will be accrued and added to the outstanding principal.
The Convertible Notes may not be prepaid prior to June 9, 2005 without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any subsequent prepayment will be made, at the option of the Convertible Note holders, either in cash in an amount equal to the outstanding principal plus the net present value of interest to maturity discounted at 7% per annum; or by conversion of the principal into shares of Series A Preferred Stock and the payment of interest in cash or in shares of Series A Preferred Stock. Holders of the Convertible Notes may convert the outstanding principal and accrued interest on the Notes into Series A Preferred Stock at any time. The conversion price for the Convertible Notes is $3.01 per share.
The Company’s obligations under the Convertible Notes are secured by a lien on substantially all of the assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. Such obligations are subordinated to the rights of the Company’s present and future senior secured lenders.Unaudited
Upon issuance of the Series A Convertible Notes, the Company allocated fair value of $1,905,300approximately $1.9 million to the Series A Note Warrants and recorded a beneficial conversion charge of $5,327,200.approximately $5.3 million. The discount created by these charges is being amortized to interest expense over the life of the Series A Convertible Notes. For the three months and ninesix months ended SeptemberJune 30, 2005 and 2004, the Company recognized $0.5 million and $1.4$0.9 million respectively, of amortization of that discount. The unamortized discount as of SeptemberJune 30, 20042005 was $5.8$4.4 million.
WarrantsSeries B-1 and B-2 Convertible Preferred Stock
The Warrants are exercisable at any time before December 9, 2013. The Preferred Warrants are exercisable to purchase one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series A Preferred Stock. The Note Warrants are exercisable to purchase one share of common stock for every five shares of common stock issued or issuable upon conversion of the Convertible Notes. The initial exercise price of the Warrants is $3.28.
9.Series B Financing
Pursuant to a Stock Purchase Agreement amongIn May 2004, the Company and General Electric Pension Trust (“GEPT”), New York Life Capital Partners II, L.P. (“NYL”), Pequot Private Equity Fund III, L.P., and Pequot Offshore Private Equity Partners III, L.P., (collectively, “Pequot,” together with GEPT and NYL, collectively, the “Investors”), dated May 28, 2004 (the “Series B Purchase Agreement”), the Company:
A significant portion of the funds obtained on the First Closing Date was used to pay the cash portion of the consideration for the acquisition of BAI.
Subject to certain approval rights by the holders of the Series A Preferred Stock and the Series B Preferred Stock, the Series B Purchase Agreement also provides that the Company has an option to require the Investors to purchase up to an additional $25 million of Senior Subordinated Notes or Series B Preferred Stock, with additional Common Stock Warrants (the “Company Option”), at any one or more times on or prior to May 27, 2005 for the purpose of paying the cost of acquisition of the stock or assets of one or more other companies in each case with an acquisition value of at least $10 million.
Senior Subordinated Notes
The outstanding principal of $12,000,000 on the Senior Subordinated Notes was converted into 3,428,517 shares of Series B Convertible Preferred Stock upon stockholders’ approval(“Series B-1 Preferred Stock”).
The Series B-1 Preferred Stock is convertible into Common Stock at any time at the Company’s annual meeting on September 15, 2004. Theelection of its holders at a per share conversion price of the Senior Subordinated Notes is $3.50$2.80 (the “Series BB-1 Conversion Price”). The Series B-1 Preferred Stock will automatically convert into Common Stock if, any time following 18 months after, (i) the average closing price of the Common Stock over the immediately preceding 20 consecutive trading day period exceeds 2.5 times the Series B-1 Original Issue Price”Price of $3.50 (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B-1 Preferred Stock); or (ii) with respect to any holder’s shares of Series B-1 Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series B-1 Preferred Stock for at least 2.5 times the Series B-1 Original Issue Price of $3.50. The Series B-1 Preferred Stock will automatically convert into Common Stock upon the agreement of the holders of 75% of the then outstanding Series B-1 Preferred Stock.
Holders of two-thirds of the Series B-1 Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Series B-1 Issue Date at the Series B-1 original issue price plus accrued but unpaid dividends.
In April 2005, the Company issued an additional 7,142,856 shares of Series B Convertible Preferred Stock (“Series B-2 Preferred Stock”). for $25.0 million.
Upon issuance of the Senior Subordinated Notes,Series B-2 Preferred Stock, the Company allocated relative fair value of $720,000$2.4 million to the Common StockPreferred Warrants based on a preliminary valuation, and recorded a beneficial conversion charge of $3,720,000. Upon receipt$8.0 million. These amounts are being recorded as accretion of a final valuation, it was determined that $1,040,400 wasSeries B-2 Preferred Stock over the fair value ofperiod to the Common Stock Warrants resulting in a beneficial conversion charge of $4,040,400. The discount created by these charges was fully amortized to interest expense upon the conversion of the Senior Subordinated Notes.earliest redemption date, which is September 15, 2008. For the three months and ninesix months ended SeptemberJune 30, 2004,2005 the Company recognized $4.6recorded $0.6 million and $5.5 million, respectively, of that discount.
Series B Preferred Stock
An aggregateaccretion related to these charges. The unamortized discount as of 3,428,571 shares of Series B Preferred Stock were issued to the Investors upon stockholders’ approval of the conversion of the $12 million Senior Subordinated Notes into the Series B Preferred Stock at the Annual Meeting of Stockholders on September 15, 2004. The Series B Preferred Stock ranks senior to the Company’s Series A Preferred Stock. The Series B Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s Credit Facility, in additional shares of Series B Preferred Stock.
Upon any liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Stock will be entitled to receive, in preference to holders of Series A Preferred Stock and common stock, out of the Company’s assets available for stockholder distributions, an amount per share equal to the Series B Original Issue Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of 66 2/3% of the then outstanding Series B Preferred Stock and Series A Preferred Stock voting together as a class elect not to treat such transactions as liquidation events.June 30, 2005 was $9.8 million.
The Series BB-2 Preferred Stock will beis convertible into common stock at any time at the election of its holders. The per share conversion price (the “Conversion Price”) of the Series BB-2 Preferred Stock of $2.80 was calculated usingwill be the lowest of (i) $3.10; (ii) the price that reflects a 20% discount to the trailing average closing price of the Company’s common stock for the 20 consecutive trading days immediately preceding the date of the conversion or the Series BB-2 Issue Date, but in no event less than $2.80; and (iii) the closing price of the Company’s common stock on the day immediately preceding the Series BB-2 Issue Date.Date; provided that if stockholder approval for the conversion of the Senior Subordinated Notes occurs during certain uncured events of default, the Conversion Price will not be subject to the $2.80 floor price under (ii) above.
The Series BB-2 Preferred Stock will automatically convert into common stock if, any time following 18 months after the Series BB-2 Issue Date, (i) the average closing price of the common stock over the immediately preceding 20 consecutive trading day period exceeds 2.5 times the Series B Original Issue Price of $2.80 (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series BB-2 Preferred Stock); or (ii) with respect to any holder’s shares of Series BB-2 Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series BB-2 Preferred Stock for at least 2.5 times the Series BB-2 Original Issue Price of $2.80.Price. The Series BB-2 Preferred Stock will automatically convert into common stock upon the agreement of the holders of 75% of the then outstanding Series BB-2 Preferred Stock.
Holders of two-thirds of the Series BB-2 Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Series B Issue Date at the Series B Original Issue Price plus accrued but unpaid dividends.
Holders of Series BB-2 Preferred Stock arewill be entitled to vote together with all other classes and series of voting stock of the Company as a single class, on all actions to be taken by the stockholders of the Company. As long as at least 25% of the shares of the Series BB-2 Preferred Stock issued pursuant to the Series BB-2 Purchase Agreement remain outstanding, the Company may not take
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
numerous specified actions (including certain changes to the Company’s Certificate of Incorporation) without first obtaining the written consent of holders of at least a majority of the then outstanding shares of Series BB-2 Preferred Stock voting separately as a class. In addition, as long as the Company Option is in effect, holders of 100% of the Series A Preferred Stock and the Series BB-2 Preferred Stock, voting together as a single class, shall have the right to veto (i) any Company Acquisition, and (ii) the issuance of any securities ranking senior to or pari passu with the Series A Preferred Stock or the Series B Preferred Stock, with respect to voting, dividend, liquidation or redemption rights, including the issuance of subordinated debt.
All Series B Convertible Preferred Stocks accrue dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series B-1 Preferred Stock for the three and six months ended June 30, 2005 was $0.2 million and $0.4 million, respectively. Dividend expense for the Series B-2 Preferred Stock for the three and six months ended June 30, 2005 was $0.4 million.
Common Stock Warrants
The Common Stock Warrants to purchase 857,143 shares of Common Stock, issued in connection with the Series B FinancingB-2 financing will expire on May 28, 2014.April 1, 2015. They wereare not exercisable at the time of issuance. Upon stockholders’ approval at the Annual Meeting of Stockholders on September 15, 2004,annual meeting, the Common Stock Warrants becamewill become exercisable at the option of the Investors.Investors to purchase one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series B-2 Preferred Stock. The exercise price of the Common Stock Warrants is $4.32 per share.
10.GuaranteesSummary of Charges
The following provides the details of the Series A and Series B-1 and B-2 Preferred Stock and the associated quarterly accretion for 2005.
Quarterly Dividends and Accretion | |||||||||||||||||
Face Value | Carrying Value At June 30, 2005 | Remaining Amount to be Accreted | Cash | Non - Cash Preferred | Remaining Period of Amortization | ||||||||||||
Series A Preferred Stock | $ | 15,000,000 | $ | 5,861,300 | $ | 9,138,700 | $ | 225,000 | $ | 937,500 | 2.5 years | ||||||
Series B-1 Preferred Stock | $ | 12,000,000 | $ | 12,000,000 | — | $ | 177,500 | — | — | ||||||||
Series B-2 Preferred Stock | $ | 25,000,000 | $ | 15,234,500 | $ | 9,765,500 | $ | 375,000 | $ | 651,300 | 3.75 years |
The table below details the Series A convertible debt and remaining amortization expense that will be recognized in subsequent quarters as interest expense:
Quarterly Expenses | |||||||||||||||||
Face Value | Carrying Value At June 30, 2005 | Remaining Amount to be Amortized | Cash | Non – Cash Interest Accretion | Remaining Period of Amortization | ||||||||||||
Series A Convertible Notes | $ | 10,000,000 | $ | 5,593,600 | $ | 4,406,400 | $ | 172,600 | $ | 482,000 | 2.5 years |
11.Commitments and Contingencies
Pursuant to the November 2, 2001 acquisition of the former Analex, the Company issued 3,572,143 shares of the Company’s common stockCommon Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied. As of SeptemberJune 30, 2004,2005, the maximum amount payable under the terms of the guaranteed shares was $1,628,600. As the fair market value of the Company’s common stockCommon Stock was in excess of the guaranteed share prices as of SeptemberJune 30, 2004,2005, no amounts were accrued under the guarantee.
Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed without the approval of the contracting officer. Cost-reimbursement contracts are suitable for use when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract. Cost reimbursement contracts covered by the Federal Acquisition Regulation require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs.
11.12.Segment Reporting
The Although the Company hasis organized by strategic business units, the Company considers each of its government contracting units to have similar economic characteristics, provide similar types of services, and have a similar customer base. Accordingly, the Company aggregates the operations of all of its government contracting units into one reportable segment consisting of two strategic business units: the Homeland Security Group and the Systems Engineering Group. Both Homeland Security Group and Systems Engineering Group provide engineering, information technology, medical researchsecurity, intelligence support or technical services to federal government agencies or major defense contractors. BAI is reported as part of the Homeland Security Group. In prior reporting periods, ABS was reported as a reportable segment. Results for ABS are now reported as discontinued operations.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
12.13.Discontinued Operations
During the second quarter of 2004, the Company concluded that ABS, a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company is in the process of disposingdisposed of ABS and intends to conclude either a sale or another form of disposition by December 31,on November 16, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144,Accounting for the Impairment of Disposal of Long-Lived Assets. Proceeds from the sale of ABS were two non-recourse notes for $1 million. The Company has written downreviewed the assetsfuture viability of ABS toand its underlying credit worthiness and determined a full reserve against the fair value of the expected proceeds to be received from the disposition of ABS.notes was necessary.
The Company’s historical financial statements have been restated to reflect ABS as discontinued operations for the periods presented.
Operating results of the discontinued business are as follows:
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||
Revenues | $ | 661,300 | $ | 712,100 | $ | 1,639,900 | $ | 3,242,700 | ||||||||||||||||||||
Revenue | $ | — | $ | 500,000 | $ | — | $ | 978,700 | ||||||||||||||||||||
Income (loss) from discontinued operations | 124,000 | (74,100 | ) | (5,100 | ) | 75,500 | 8,900 | (99,000 | ) | 47,200 | (128,900 | ) | ||||||||||||||||
Income tax expense (benefit) | 47,800 | (21,100 | ) | (2,000 | ) | 21,500 | 2,200 | (48,300 | ) | 16,900 | (49,700 | ) | ||||||||||||||||
Income (loss) from discontinued operations, net of tax | $ | 76,200 | $ | (53,000 | ) | $ | (3,100 | ) | $ | 54,000 | $ | 6,700 | $ | (50,700 | ) | $ | 30,300 | $ | (79,200 | ) |
The income reflected in discontinued operations is recognition of payments made against the non-recourse notes that were fully reserved. Tax rates vary between discontinued operations and the Company’s effective tax rate due to the non-deductibility of certain non-cash amortization expenses for tax purposes.
The major classes of assets and liabilities for this discontinued business were as follows:
September 30, 2004 | December 31, 2003 | |||||
Accounts receivable, net | $ | 1,113,800 | $ | 651,300 | ||
Fixed assets, net | — | 6,800 | ||||
Total assets of business held for sale | $ | 1,113,800 | $ | 658,100 | ||
Accounts payable | $ | 8,600 | 40,000 | |||
Other current liabilities | 73,000 | 76,000 | ||||
Total liabilities of business held for sale | $ | 81,600 | $ | 116,000 | ||
13.14.Litigation and Claims
The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) in the Maryland Circuit Court for Prince George’s County alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. Under the complaint, Swales sought damages of $4 million. To minimize the expense, effort, uncertainty and inconvenience entailed in proceeding with the litigation, theThe Company entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount has beenwas billed to NASA and payment has beenwas received by the Company. Legal fees are expected to be approximately $325,000.$290,000. Based on a legalan opinion of the Company’s outsideby counsel, the Company believes that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. ATherefore, a receivable in the amount of $860,000$984,000 has been recorded in other assets.recorded. However, on July 28, 2004, the Company received from NASA a Notice of Intent to Disallow Costs. Discussions with NASA are still ongoing. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Therefore, no amounts have been accrued for disallowance of this claim as of September 30, 2004.Discussions with NASA are continuing. However, there can be no assurance that the Company will in fact be reimbursed in part or in full by NASA in the foreseeable future.
On April 29, 2005 the Company was served on with a compliant filed by H&K Strategic Business Solutions, LLC (“HKSBS”) alleging breach of contract relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004 that was later terminated by the Company on February 14, 2005. Under the complaint, HKSBS is seeking damages of $830,000 together with legal fees and expenses. We believe the complaint is without merit, however, we cannot predict the outcome of the proceeding at this time.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This management’s discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of the Company’s past performance, its financial condition and its prospects. We will discuss and provide our analysis of the following:
Overview of Business
Analex specializes in developing intelligence, systemproviding information technology, systems engineering, technology protection, operations security services and intelligence analysissupport services in support of our nation’s security.the U.S. Government. All of our sales are generated using written contractual arrangements. The contracts require us to deliver technical, security and intelligence support services to the intelligence community,U.S. Government, analyze and support defense systems, design, develop and test aerospace systems according to the specifications provided by our customers. In
On April 1, 2005, Analex acquired ComGlobal Systems, Incorporated (“ComGlobal”). ComGlobal is reported as a part of the caseHomeland Security Group. ComGlobal specializes in command, control, communications, computers and intelligence (C4I) programs for the military, and its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program. We believe that our acquisition of ABS, the contracts require usComGlobal will yield additional significant yearly revenue and strong operating income, enhanced attractiveness to develop medical defensesinstitutional investors and treatments for infectious agents such as anthrax and smallpox used in biological warfare and terrorism.an enhanced ability to compete effectively within our industry.
On May 28, 2004, Analex acquired Beta Analytics, Inc. (“BAI”). BAI is reported as a part of the Homeland Security Group. BAI provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. BAI’s services cover a range of life cycle protection and physical security services specifically in the areas of information protection, physical security, intelligence threat assessment and analysis, technology protection, security management and security education and training. We believe that our acquisition of BAI will yield additional significant yearly revenuesrevenue and strong operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within our industry.industry
During the second quarter of 2004, the Company concluded that Advanced Biosystems, Inc., (“ABS”), a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company is in the process of disposingdisposed of ABS and intends to conclude either a sale or another form of disposition by December 31,on November 16, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144,Accounting for the Impairment of Disposal of Long-Lived Assets. The Company has written down the assets of ABS to the fair value of the expected proceeds to be received from the disposition of ABS.
SalesNew Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R)—Share-Based Payment, which replaces SFAS No. 123—Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25—Accounting for Stock Issued to U.S. federal government agenciesEmployees. SFAS No.123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be re-measured each reporting period and their prime contractors represented approximately 99%compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective as of our total net salesthe beginning of the first fiscal year that begins after June 15, 2005. The company plans on adopting the provisions of SFAS No. 123(R) during the nine months ended September 30, 2004first quarter of 2006. The approach towards adoption of the new pronouncement is still under consideration and during the nine months ended September 30, 2003. The Departmenteffects of Defense accounted for approximately 52% and 42% of our revenues in the nine months ended September 30, 2004 and 2003, respectively. NASA is our largest customer, generating 46% and 57% of our revenues for the nine months ended September 30, 2004 and 2003, respectively. Approximately 17% of our revenues and 70% of our operating income for the nine months ended September 30, 2004 came from one prime contract with an agency within the Department of Defense. Approximately 29% of our revenues for the nine
months ended September 30, 2004 came from one prime contract with NASA, which will continue until September 2011 if all options are exercised. We expect that federal government contracts will continueadoption have yet to be the source of substantially all of our revenue for the foreseeable future.determined.
In the nine months ended September 30, 2004, a majorityResults of our revenues were generated as a prime contractor to the federal government. We intend to focus on retainingOperations and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships. The following table shows our revenues as prime contractor and as subcontractor as a percentage of our total revenues for the following periods:Related Information
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Prime contract revenues | 72 | % | 67 | % | 54 | % | 56 | % | ||||
Subcontract revenues | 28 | 33 | 46 | 44 | ||||||||
Total revenues | 100 | % | 100 | % | 100 | % | 100 | % |
We have one reportable segment, which is engaged in professional services related to information technology and systems engineering for the U.S. government, primarily NASA and the Department of Defense.Defense, certain intelligence agencies, and NASA. This segment consists of two business groups: the Homeland Security Group and the Systems Engineering Group. The Homeland Security Group
provides information technology services, systems integration, hardware and software engineering and independent quality assurance, security and intelligence services in support of the U.S. intelligence community and Department of Defense. With BAI included as a part of the Homeland Security Group, the latter also provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. We expect that our Homeland Security Group will continue to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. The Systems Engineering Group provides engineering, information technology and program management support to NASA, the Department of Defense, and major aerospace contractors such as Lockheed Martin and Northrop Grumman. In previous reporting periods, ABS was disclosed as a separate segment.contractors.
Our services are provided under three types of contracts: cost-plus-fees, time-and-materials, and fixed price contracts.
The following table shows our revenuesrevenue from each of these types of contracts as a percentage of our total revenue for the following periods:
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Cost-plus-fees | 31 | % | 50 | % | 38 | % | 50 | % | 45 | % | 40 | % | 38 | % | 43 | % | ||||||||
Time-and-materials | 51 | 34 | 46 | 35 | 32 | 43 | 35 | 41 | ||||||||||||||||
Fixed price | 18 | 16 | 16 | 15 | 23 | 17 | 27 | 16 | ||||||||||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Revenue generated from contracts to U.S. federal government agencies and their prime contractors represented approximately 99% of our total net sales during the six months ended June 30, 2005 and 98% during the six months ended June 30, 2004. The Department of Defense accounted for approximately 67% and 47% of our revenues in the six months ended June 30, 2005 and 2004, respectively. NASA is our largest customer, generating 33% and 52% of our revenues for the six months ended June 30, 2005 and 2004, respectively. Approximately 12% of our revenues and 43% of our operating income for the six months ended June 30, 2005 came from one prime contract with an agency within the Department of Defense. Approximately 22% of our revenues for the six months ended June 30, 2005 came from one prime contract with NASA, which will continue until September 2011 if all options are exercised. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.
For the six months ended June 30, 2005, a majority of our revenue was generated as a prime contractor to the federal government. We intend to focus on retaining and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships. The following table shows our revenue as prime contractor and as subcontractor as a percentage of our total revenue for the following periods:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Prime contract revenue | 70 | % | 67 | % | 71 | % | 55 | % | ||||
Subcontract revenue | 30 | 33 | 29 | 45 | ||||||||
Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Our objective is to grow sales both organically and through acquisitions. In order to assist in accomplishing this objective, we have continued to increase our selling, general and administrative expenditures so as to increase our efforts in new business development and to provide the necessary infrastructure to support a larger organization resulting from organic growth and acquisitions.
We plan to selectively acquire companies that complement and enhance our existing businesses, and are currently reviewing potential targets. We anticipate that we will need to obtain additional financing through sale of equity and debt securities to fund our acquisitions.
The Company’s backlog of orders, based on remaining contract value, believed to be firm as of SeptemberJune 30, 20042005 was approximately $281$352 million. Funded backlog as of SeptemberJune 30, 20042005 was approximately $30$64 million. Included in the backlog approximation are amounts from future years of government contracts under which the government has the right to exercise an option for the Company to perform services.
All of our U.S. government contracts are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multi-year U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable.
COMPARISON OF THE THREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 20042005
TO THE THREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 20032004
Three Months Ended | June 30, 2005 | % of Revenue | June 30, 2004 | % of Revenue | ||||||||||
Revenue | $ | 38,148,600 | 100.0 | % | $ | 22,215,200 | 100.0 | % | ||||||
Operating costs and expenses | ||||||||||||||
Cost of revenue | 30,975,300 | 81.2 | 17,357,200 | 78.1 | ||||||||||
Selling, general and administrative | 3,418,500 | 9.0 | 2,552,500 | 11.5 | ||||||||||
Amortization of intangible assets | 989,100 | 2.6 | 277,300 | 1.2 | ||||||||||
Total operating costs and expenses | 35,382,900 | 92.8 | 20,187,000 | 90.9 | ||||||||||
Operating income | 2,765,700 | 7.3 | 2,028,200 | 9.1 | ||||||||||
Other income and expense | ||||||||||||||
Interest income | 2,500 | 0.0 | 29,600 | 0.1 | ||||||||||
Interest expense | (998,700 | ) | (2.6 | ) | (1,698,900 | ) | (7.6 | ) | ||||||
Income from continuing operations before income taxes | 1,769,500 | 4.6 | 358,900 | 1.6 | ||||||||||
Provision for income taxes | (1,286,800 | ) | (3.4 | ) | (459,500 | ) | (2.1 | ) | ||||||
Income (loss) from continuing operations | 482,700 | 1.3 | (100,600 | ) | (0.5 | ) | ||||||||
Income (loss) from discontinued operations, net of tax | 6,700 | 0.0 | (50,700 | ) | (0.2 | ) | ||||||||
Loss on disposal of discontinued operations, net of income taxes | — | 0.0 | (521,800 | ) | (2.3 | ) | ||||||||
Net income (loss) | 489,400 | 1.3 | (673,100 | ) | (3.0 | ) | ||||||||
Dividends on convertible preferred stock | (781,900 | ) | (2.0 | ) | (225,000 | ) | (1.0 | ) | ||||||
Accretion of convertible preferred stock | (1,588,800 | ) | (4.2 | ) | (939,100 | ) | (4.2 | ) | ||||||
Net loss available to common shareholders | $ | (1,881,300 | ) | (4.9 | )% | $ | (1,837,200 | ) | (8.3 | )% | ||||
REVENUES
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 - continued
Six Months Ended | June 30, 2005 | % of Revenue | June 30, 2004 | % of Revenue | ||||||||||
Revenue | $ | 66,586,800 | 100.0 | % | $ | 38,846,600 | 100.0 | % | ||||||
Operating costs and expenses | ||||||||||||||
Cost of revenue | 54,687,900 | 82.1 | 31,408,600 | 80.9 | ||||||||||
Selling, general and administrative | 5,609,700 | 8.4 | 4,353,900 | 11.2 | ||||||||||
Amortization of intangible assets | 1,479,600 | 2.2 | 426,500 | 1.1 | ||||||||||
Total operating costs and expenses | 61,777,200 | 92.8 | 36,189,000 | 93.2 | ||||||||||
Operating income | 4,809,600 | 7.2 | 2,657,600 | 6.8 | ||||||||||
Other income and expense | ||||||||||||||
Interest income | 4,800 | 0.0 | 42,900 | 0.1 | ||||||||||
Interest expense | (1,764,100 | ) | (2.6 | ) | (2,400,000 | ) | (6.2 | ) | ||||||
Income from continuing operations before income taxes | 3,050,300 | 4.6 | 300,500 | 0.8 | ||||||||||
Provision for income taxes | (1,901,600 | ) | (2.9 | ) | (384,700 | ) | (1.0 | ) | ||||||
Income (loss) from continuing operations | 1,148,700 | 1.7 | (84,200 | ) | (0.2 | ) | ||||||||
Income (loss) from discontinued operations, net of tax | 30,300 | 0.0 | (79,200 | ) | (0.2 | ) | ||||||||
Loss on disposal of discontinued operations, net of income taxes | — | 0.0 | (521,800 | ) | (1.3 | ) | ||||||||
Net income (loss) | 1,179,000 | 1.8 | (685,200 | ) | (1.8 | ) | ||||||||
Dividends on convertible preferred stock | (1,181,300 | ) | (1.8 | ) | (450,000 | ) | (1.2 | ) | ||||||
Accretion of convertible preferred stock | (2,526,300 | ) | (3.8 | ) | (1,876,600 | ) | (4.8 | ) | ||||||
Net loss available to common shareholders | $ | (2,528,600 | ) | (3.8 | )% | $ | (3,011,800 | ) | (7.8 | )% | ||||
REVENUE AND PERCENT OF REVENUESREVENUE BY GROUP
Three Months Ended September 30 | |||||||||||||||||||||||
2004 | 2003 | ||||||||||||||||||||||
Three Months Ended | June 30, 2005 | % of Total | June 30, 2004 | % of Total | |||||||||||||||||||
Homeland Security Group | $ | 17,066,000 | 61 | % | $ | 6,607,400 | 42 | % | 27,024,800 | 71 | % | $ | 11,404,800 | 51 | % | ||||||||
Systems Engineering Group | 10,786,000 | 39 | % | 9,270,300 | 58 | % | 11,123,800 | 29 | 10,810,400 | 49 | |||||||||||||
Total | $ | 27,852,000 | 100 | % | $ | 15,877,700 | 100 | % | 38,148,600 | 100 | % | 22,215,200 | 100 | % | |||||||||
Six Months Ended | June 30, 2005 | % of Total | June 30, 2004 | % of Total | |||||||||||||||||||
Homeland Security Group | 44,502,500 | 67 | % | $ | 18,626,200 | 48 | % | ||||||||||||||||
Systems Engineering Group | 22,084,300 | 33 | 20,220,400 | 52 | |||||||||||||||||||
Total | 66,586,800 | 100 | % | 38,846,600 | 100 | % | |||||||||||||||||
PERCENTAGE REVENUE GROWTH QUARTER OVER QUARTER BY GROUP
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Three Month Ended 2005 vs. 2004 | Six Months Ended 2005 vs. 2004 | |||||
Homeland Security Group | 137 | % | 139 | % | ||
Systems Engineering Group | 3 | 9 | % | |||
Total | 72 | % | 71 | % | ||
RevenuesRevenue for the three months ended SeptemberJune 30, 2004 were $27.92005 was $38.1 million, which represented an increase of $12.0$15.9 million, or 71.7% from the $15.9same period in the previous year. Revenue for the six months ended June 30, 2005 was $66.6 million, which represented an increase of $27.7 million, or 71.4% from the same period in revenuesthe prior year. Revenue growth attributable to acquisitions was $15.5 million for the three months ended SeptemberJune 30, 2003. This increase is primarily due to increases in revenues in2005 and $24.4 million for the six months ended June 30, 2005.
The Homeland Security Group provided $27.0 million or 71% and $44.5 million or 67% of the Company’s revenue during the three and six months ended June 30, 2005. Homeland Security revenue grew 137% and 139% in the three and six months ended June 30, 2005, respectively, compared to the same periods in the prior year. Homeland security revenue grew through the combination of acquisitions and increased independent validation and verification services provided in support of launches of expendable launch vehicles by the United States Air Force and the Systems Engineering Group. Revenues of the Homeland Security Group increased 158% or approximately $10.5 million. This increase was primarily due to the acquisition of BAI, which contributed $8.3 million in revenues, and the remainder is due to growth in services provided to the intelligence community and related agencies. RevenuesNational Reconnaissance Office (“NRO”).
Revenue of the Systems Engineering Group increased 16%approximately $0.3 million, 2.9%, in the second quarter of 2005 compared to the same period in the previous year. Year-to-date, the System Engineering Group’s revenue has increased $1.9 million, or approximately $1.5 million,9.2% from the same period last year. This was primarily due to a $1.8 million increase in revenuesadditional tasking from the customer under both the ELVIS contract, as compared to the third quarter of 2003.and Glenn Engineering Support Services contracts with NASA. This increase was offset by a reduction in revenuesthe continuation of $0.4 million due to the planned step-down in activities under the MicrogravityMicorgravity Research Development and Operations subcontract providingsubcontract. This contract provides services to NASA related to designing and building experiments to be run on the International Space Station.
Costs
Cost of revenue for the quarter ended September 30, 2004 were $22.5 million, an increase of $9.0 million from the same period of the prior year. Costs of revenue for recently acquired BAI accounted for $6.1 million of the increase. Growth in services provided to the customers of the Homeland Security Group and the Systems Engineering Group as noted in the preceding paragraph, accounted for $1.2 million and $1.7 million of the increase, respectively. Costs of revenue as a percentage of revenues were approximately 81% for the quarter ended September 30, 2004 and 85% for the same period of the prior year.
Selling, general and administrative expenses totaled $2.8 million for the quarter ended September 30, 2004, compared with $1.4 million for the same period of the prior year. This 100% increase is also due to investments made to expand the Company’s infrastructure and management team to accommodate an expected increase in the scope of business operations from acquisitions. These investments include upgrading our financial accounting system and additional staff members in the accounting, contracts, marketing and corporate management departments.
Operating income for the three months ended SeptemberJune 30, 20042005 was $2.0$31.0 million, compared to operating incomean increase of $1.0$13.6 million for the period ended September 30, 2003. The increased operating income is attributable to the growth of the Homeland Security Group of $1.9 million, of which $1.1 million is attributable to BAI, and $0.8 million is attributable to growth in services provided to the intelligence community and related agencies. Offsetting these increases was a $0.4 million decrease in operating income of the Systems Engineering Group. This is attributable to the planned step-down under the Microgravity Research Development and Operations contract as well as increased business development expenses within the group. In addition, $0.4 million of amortization expense was recognized related to the BAI acquisition.
Interest expense totaled $5.6 million for the quarter ended September 30, 2004, compared with $0.1 million forfrom the same period in the prior year. The $5.5 million increase is primarily due to cash and non-cash interest expense related to the convertible debt issued as partCost of the Pequot Transaction and the Series B Financing. Cash interest payments on the convertible debt were $0.3 million and non-cash amortization recorded as interest expense was $5.1 million.
Income tax expenserevenue for the quartersix months ended SeptemberJune 30, 20042005 was $1.5$54.7 million, compared with $0.2an increase of $23.3 million forfrom the same period in the prior year. The Company will experience an increaseIn addition to added cost of revenue associated with the acquisitions, costs increased in relation to revenue primarily due to higher medical and worker’s compensation expenses and investments made in business development to grow the business. Cost of revenue as a percentage of revenue was approximately 81.2% and 82.1% for the three and six months ended June 30, 2005, compared with 78.1% and 80.9% from the same periods in the effective tax rateprior year.
SG&A expenses increased by $0.9 million or 35.0% and $1.3 million or 29.5% for the three and six months ended June 30, 2005, respectively. This growth was primarily due to additional SG&A expenses from the acquisitions of ComGlobal and BAI and also additional costs incurred in the investor relations area. SG&A as a percentage of revenue was 9.0% for the second quarter of 2005, down from 11.5% in the second quarter of the prior year, and was 8.4% for the six-month period ending June 30, 2005 compared to 11.2% for the same period in 2004.
Intangible amortization expense totaled $1.0 million and $1.5 million for the three and six months ended June 30, 2005, respectively, compared with $0.3 million and $0.4 million for the same periods in the prior year. This increase is due to approximately $7.0 million of identifiable intangible assets related to the ComGlobal acquisition being amortized over nine years and amortization on the $6.1 million of identifiable intangible assets related to the BAI acquisition being amortized over four years.
Operating income increased $0.7 million and $2.2 million for the three and six months ended June 30, 2005, respectively, compared to the same period in 2004. Operating margin for the three months ended June 30, 2005 declined to 7.3% from 9.1% in the same period of the prior year, while the operating margin for the six month period ending June 30, 2005 increased to 7.2% from 6.8% for the comparable period of 2004. The operating margin levels are a reflection of increased costs related to insurance, business development and amortization expenses of intangible assets associated with acquisitions.
Interest expense totaled $1.0 million and $1.8 million for the three and six months ended June 30, 2005, compared with $1.7 million and $2.4 million for the same periods in the prior year. In the prior year, interest expense of $1.0 million was recorded for the three and six months ended June 30 related to the Series B Senior Subordinated Note. This expense was recorded until the Note converted into the Series B-1 Preferred Stock in September 2004. No such interest was recorded in 2005. The elimination of the interest on the Series B Note was partially offset by increased interest on the Credit Facility for the $22 million borrowed for the ComGlobal acquisition.
The provision for income taxes for the three and six months ended June 30, 2005 was $1.3 million and $1.9, respectively, compared with tax expense provisions of $0.5 million and $0.4 million for the same periods in the prior year. The Company expects to experience a tax provision for calendar year 2005 due to certain amortization costs related to the Pequot TransactionSeries A and the Series B Financing which are not deductible for tax purposes, in addition to the Company consuming all net operating loss carry forwards during 2003.purposes.
In the quarter ended September 30, 2004, the Company recorded a net loss from continuing operations of approximately $5.0 million and EBITDA, as defined below, was $3.9 million for the three months ended June 30, 2005 after adding back depreciation of $2.7$0.2 million and amortization of $1.0 million to operating income of $2.8 million. For the six months ended June 30, 2005, EBITDA was $6.6 million after add-backs for interest of $5.6 million,adding back depreciation of $0.1$0.3 million and amortization of $0.5$1.5 million andto operating income tax expense of $1.5$4.8 million. EBITDA as a percent of revenuesrevenue was 9.8%10.4% and 9.9% for the quarterthree and six months ended SeptemberJune 30, 2004,2005, respectively, compared to 7.0%10.6% and 8.2% for the quarter ended September 30, 2003.
EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a company’sCompany’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles.
EBITDA is a widely used measure of operating performance. It is presented as supplemental information that management of the Company believes is useful to investors to evaluate the Company’s results because it excludes certain items that are not directly related to the Company’s core operating performance. EBITDA is calculated by adding back net interest expense, income taxes, discontinued operations, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as measures of the Company’s liquidity. In addition, because EBITDA is not calculated identically by all companies do not calculate EBITDA identically, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES AND PERCENT OF REVENUES BY GROUP
Nine Months Ended September 30 | ||||||||||||
2004 | 2003 | |||||||||||
Homeland Security Group | $ | 35,692,400 | 54 | % | $ | 19,892,700 | 43 | % | ||||
Systems Engineering Group | 31,006,500 | 46 | % | 26,688,500 | 57 | % | ||||||
Total | $ | 66,698,900 | 100.0 | % | $ | 46,581,200 | 100.0 | % |
PERCENTAGE REVENUE GROWTH NINE MONTHS OVER NINE MONTHS BY GROUP
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Revenues for the nine months ended September 30, 2004 were $66.7 million, an increase of $20.1 million from the $46.6 million in revenues for the nine months ended September 30, 2003. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group. Revenues of the Homeland Security Group increased 80%, or approximately $15.8 million, of which $11.5 million was attributable to the acquisition of BAI and $4.3 million was due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 16.3%, or approximately $4.3 million primarily due to a $4.0 million increase in revenues under the ELVIS contract, as compared to the first nine months of 2003. In addition, under the Glenn Engineering Support Services subcontract providing services to NASA, revenues increased approximately $1.1 million as compared to the same period of 2003 due to additional tasking from the customer. These increases were offset by a reduction in revenues of $0.9 million due to the planned step-down in activities under the Microgravity Research Development and Operations subcontract providing services to NASA related to designing and building experiments to be run on the International Space Station.
Costs of revenue for the nine months ended September 30, 2004 were $53.9 million, an increase of $14.7 million from the same period of the prior year. The primary reason for this increase was costs of revenue for the recently acquired BAI, which accounted for $8.5 million of the increase. In addition, growth in services to the customers of the Homeland Security Group and Systems Engineering Group as noted in the preceding paragraph, accounted for $2.2 million and $3.9 million of the increase, respectively. Costs of revenue as a percentage of revenues were approximately 81% for the nine months ended September 30, 2004 and 84% for the same period of 2003.
Selling, general and administrative expenses totaled $7.1 million for the nine months ended September 30, 2004, compared to $4.1 million for the same period of the prior year. This 73% increase is attributable to investments made to expand the Company’s infrastructure and management team to accommodate an expected increase in the scope of business operations from acquisitions. These investments include upgrading our financial accounting system and additional staff members in the accounting, contracts, marketing and corporate management departments.
Operating income for the nine months ended September 30, 2004 was $4.7 million, compared to operating income of $3.0 million for the period ended September 30, 2003. This $1.7 million increase is primarily attributable to growth in the Homeland Security Group of $3.2 million, of which $1.7 million is attributable to BAI and $1.5 million is attributable to growth in the services provided to the intelligence community and related agencies. Offsetting this increase was a reduction in operating income of the Systems Engineering Group of $0.3 million due to the planned step-down under the Microgravity Research Development and Operations contract. In addition to $0.4 million in merger and acquisition expenses, $0.6 million of amortization expense was recognized related to the BAI acquisition.
Interest expense totaled $8.0 million for the nine months ended September 30, 2004, compared with $0.3 million for the same period in the prior year. The $7.7 million increase is due to cash and non-cash interest expense related to the convertible notes issued. Cash interest payments on the convertible notes were $0.8 million and non-cash amortization recorded as interest expense was $6.9 million.
Income tax expense for the nine months ended September 30, 2004 was $1.8 million, compared with $0.8 million for the same period in the prior year. The Company will experience an increase in the effective tax rate in 2004. This increase is due to the recognition of certain amortization costs related to the Pequot Transaction and the Series B Financing, which are not deductible for tax purposes, in addition to the Company consuming all net operating loss carryforwards during 2003.
For the nine months ended September 30, 2004, the Company recorded a net loss from continuing operations of approximately $5.1 million and EBITDA, as defined above, of $5.9 million, after add-backs for interest of $8.0 million, depreciation of $0.2 million, amortization of $1.0 million, and income tax expense of $1.8 million. EBITDA as a percent of revenue was 8.9% for the nine months ended September 30, 2004, compared to 7.2% for the nine months ended September 30, 2003.
CAPITAL RESOURCES AND LIQUIDITY
While theThe Company experienced a net loss on a quarterly comparison to a net income for the same periodthree and six months ended June 30, 2005 of 2003, the majority$0.5 million and $1.2 million, respectively, compared to net losses of $0.7 million for each of the net loss can be attributed to non-cash amortization and accretion charges associatedsame periods in 2004. The improvement in both periods reflects a reduction in interest expense through the first two quarters of 2005 compared with the Pequot Transactionsame periods in 2004. Also, the Company recorded losses $0.5 million $0.6 million related to discontinued operations during the three and six months ended June 30, 2004. No such losses were recorded during the same periods of 2005.
For the three and six months ended June 30, 2005, net losses available to common shareholders were $1.9 million and $2.5 million. Included in these losses were $0.8 million and $1.2 million of convertible preferred stock dividend expense and $1.6 million and $2.5 million of non-cash accretion related to the convertible preferred stock and notes.
The table below details the Series A and Series B Financing. Borrowing availability underB-1 and B-2 Convertible Preferred Stocks and the Company’s Credit Facility continues to be sufficient to fund normal operations. associated dividends and non-cash preferred stock accretion.
Quarterly Dividends and Accretion | |||||||||||||||||
Face Value | Carrying Value At June 30, 2005 | Remaining Amount to be Accreted | Cash | Non - Cash Preferred | Remaining Period of Amortization | ||||||||||||
Series A Preferred Stock | $ | 15,000,000 | $ | 5,861,300 | $ | 9,138,700 | $ | 225,000 | $ | 937,500 | 2.5 years | ||||||
Series B-1 Preferred Stock | $ | 12,000,000 | $ | 12,000,000 | — | $ | 177,500 | — | — | ||||||||
Series B-2 Preferred Stock | $ | 25,000,000 | $ | 15,234,500 | $ | 9,765,500 | $ | 375,000 | $ | 651,300 | 3.75 years |
The table below details the convertible debt and remaining amortization expense that will be recognized in subsequent quarters as interest expense.
Quarterly Expenses | Remaining Period of Amortization | ||||||||||||||||
Convertible Debt | Face Value | Carrying Value At September 30, 2004 | Remaining Amount to be Amortized | Cash | Non –Cash Interest Accretion | ||||||||||||
Convertible Notes | $ | 10,000,000 | $ | 4,237,500 | $ | 5,762,500 | $ | 175,000 | $ | 480,000 | 3 1/4 Years |
The table below details the Series A and Series B Preferred Stock and the associated dividends and accretion.
Quarterly Dividends and Accretion | |||||||||||||||||
Preferred Stock | Face Value | Carrying Value At September 30, 2004 | Remaining Amount to be Accreted | Cash | Non -Cash Preferred Stock Accretion | Remaining Period of Amortization | |||||||||||
Series A | $ | 15,000,000 | $ | 3,049,800 | $ | 11,950,200 | $ | 225,000 | $ | 937,500 | 3 1/4 Years | ||||||
Series B | $ | 12,000,000 | $ | 12,000,000 | — | $ | 180,000 | — | — |
For the nine months ended September 30, 2004, net loss available to common shareholders of $9.0 million included $1.0 million of non-cash amortization, $5.1 million of non-cash interest accretion, and $2.8 million of non-cash preferred stock accretion. Available borrowing capacity on the Company’s Credit Facility amounted to $13.4 million. The Company had a standby financing capacity for acquisitions of $45 million, consisting of an annual guidance bank facility of $20 million and the option to draw down on a second round of Series B Preferred Stock financing of $25 million.
Working capital at September 30, 2004 decreased by $13.8 million from December 31, 2003 primarily due to the purchase of BAI which included the use of $12 million of cash from the Pequot Transaction, a draw from our Credit Facility of $8.3 million and the issuance of the Senior Subordinated Notes for $12 million. In addition, accounts receivable increased $7.6 million over the prior year due to accounts receivable acquired in the acquisition of BAI and the timing of receipt of certain accounts receivable.
Quarterly Expenses | |||||||||||||||||
Face Value | Carrying Value At June 30, 2005 | Remaining Amount to be Amortized | Cash | Non – Cash Interest Accretion | Remaining Period of Amortization | ||||||||||||
Series A Convertible Notes | $ | 10,000,000 | $ | 5,593,600 | $ | 4,406,400 | $ | 172,600 | $ | 482,000 | 2.5 years |
Net cash provided by operating activities was $2.5$8.3 million for the ninesix months ended SeptemberJune 30, 2004,2005, compared to $2.7net cash used of $1.1 million for the same period of the prior year. Working capital at June 30, 2005 was negative $7.8 million compared to $4.6 million as of December 31, 2004. This decrease of $12.4 million is primarily due to a $15.0 million increase in the outstanding line of credit, primarily caused by the draw associated with the ComGlobal acquisition. This was offset slightly by an approximate $5.8 million increases in net Accounts Receivable resulting from the acquisition of ComGlobal. Net cash used in investing activities during the ninesix months ended SeptemberJune 30, 20042005 was $27.7$45.6 million in comparisoncompared to $0.4$27.2 million for the same period of the prior year. NetThe increase within net cash used in investing activities during the six months ended June 30, 2005 compared the same period in 2004 was primarily used forrelated to the acquisition of BAI, netComGlobal. Net cash usedprovided by financing activities during 2003the six months ended June 30, 2005 was $39.4 million, compared to $15.4 million for the same period in the prior year. The increase in cash from financing activities was primarily used for the purchaseresult of fixed assets.the cash related activities associated with financing the ComGlobal acquisition.
The Company has a credit agreement with Bank of America, N.A. (the “Credit(“the Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, the Credit Facility was amended and restated to provide a $20,000,000$20 million revolving credit facility, and the
remaining outstanding balance on the Company’s term loan of $1,750,000$1.7 million was consolidated into the Credit Facility. An uncommitted annual guidance facility notOn April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to exceed an additional $20,000,000 isincrease the amount available under the Credit Facility from $20 million to fund future acquisitions upon application by the Company and approval by Bank of America.$40 million. The Credit Facility has an annual renewal occurring April 30a maturity date of each year.May 31, 2007. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of SeptemberJune 30, 2004,2005, the Credit Facility outstanding balance was $6,565,600.$21.6 million. The interest rate at SeptemberJune 30, 20042005 was 4.33%5.83% for the Credit Facility. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations.
The Credit Facility contains financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of SeptemberJune 30, 2004,2005, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of properties other than ABS, incur additional indebtedness, pay dividends (except to holders of the Series A and Series B Preferred Stock) or other distributions, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates. The Credit Facility is secured by the accounts receivable and other assets of the Company.
Available borrowing capacity on the Company’s Credit Facility on June 30, 2005 amounted to approximately $18.4 million.
In March 2005, the Company’s’ Board of Directors, including its compensation committee, which is solely comprised of independent directors, approved the sale of up to 300,000 shares of unregistered Common Stock to certain employees of ComGlobal to induce their employment after the merger. During April 2005, all of the approved shares of the Company’s unregistered Common Stock were sold to 22 employees of ComGlobal. The sale resulted in $840,000 of proceeds. Of the 300,000 shares sold, 161,018 shares and 20,000 shares were sold to Mr. Frank F. Hewitt and Mr. Joseph M. Harris, respectively. The sale was made in an exempt offering under Rule 506 of the Securities Act of 1933, as amended.
Pursuant to the November 2, 2001 acquisition of the former Analex, the Company issued 3,572,143 shares of the Company’s common stockCommon Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price. As of SeptemberJune 30, 2004,2005, the maximum amount payable under the terms of the guaranteed shares was $1,628,600.approximately $1.6 million. As the fair market value of the Company’s common stockCommon Stock was in excess of the guaranteed share prices as of SeptemberJune 30, 2004,2005, no amounts were accrued under the guarantee.
Series B Financing
On May 28, 2004,November 2, 2001, the Company consummatedissued promissory notes to certain Analex sellers totaling approximately $0.8 million with a five-year term, bearing interest at 6%. As of June 30, 2005 the transaction contemplated by a Stock Purchase Agreement (the “Series B Purchase Agreement”) by and among the Company and General Electric Pension Trust (“GEPT”), New York Life Capital Partners II, L.P. (“NYL”), Pequot Private Equity Fund III, L.P., and Pequot Offshore Private Equity Partners III, L.P., (collectively, “Pequot,” together with GEPT and NYL, collectively, the “Investors”). Pursuant to the Series B Purchase Agreement the Company:
A significant portion of the funds obtained on the First Closing Date under the Purchase Agreement was used to pay the cash portion of the consideration for the acquisition of BAI.
Subject to certain approval rights by the holders of Series A convertible preferred stock of the Company (the “Series A Preferred Stock”) and the Series B Preferred Stock, the Series B Purchase Agreement also provides that the Company has an option to require the Investors to purchase up to an additional $25former employees totaling $0.4 million, of Senior Subordinated Notes or Series B Preferred Stock, with additional Common Stock Warrants (the “Company Option”), at any one or more times on or prior to May 27, 2005 for the purpose of paying the cost of acquisition of the stock or assets of one or more other companies in each case with an acquisition value of at least $10 million.
Senior Subordinated Notes
The outstanding principal of $12,000,000 on the Senior Subordinated Notes was converted into Series B Preferred Stock upon stockholders’ approval at the Company’s annual meeting on September 15, 2004. The per share conversion price of the Senior Subordinated Notes is $3.50 (the “Series B Original Issue Price”).
Upon issuance of the Senior Subordinated Notes, the Company allocated fair value of $720,000 to the Common Stock Warrants based on a preliminary valuation, and recordeddiscounted basis, payable over various periods with a beneficial conversion chargecurrent balance of $3,720,000. Upon receipt of a final valuation, it was determined that $1,040,400 was the fair value of the Common Stock Warrants resulting in a beneficial conversion charge of $4,040,400. The discount created by these charges was fully amortized to interest expense upon the conversion of the Senior Subordinated Notes. For the three and nine months ended September$52,000 at June 30, 2004, the Company recognized $4.6 million and $5.5 million, respectively, of amortization of that discount.
Series B Preferred Stock
An aggregate of 3,428,571 shares of Series B Preferred Stock were issued to the Investors upon stockholders’ approval of the conversion of the $12 million Senior Subordinated Notes into the Series B Preferred Stock. The Series B Preferred Stock ranks senior to the Company’s existing Series A Preferred Stock. The Series B Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s Credit Facility, in additional shares of Series B Preferred Stock.
Upon any liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Stock will be entitled to receive, in preference to holders of Series A Preferred Stock and Common Stock, out of the Company’s assets available for stockholder distributions, an amount per share equal to the Series B Original Issue Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of 66 2/3% of the then outstanding Series B Preferred Stock and Series A Preferred Stock voting together as a class elect not to treat such transactions as liquidation events.
The Series B Preferred Stock will be convertible into Common Stock at any time at the election of its holders. The per share conversion price (the “Conversion Price”) of the Series B Preferred Stock of $2.80 was calculated using the lowest of (i) $3.10; (ii) the price that reflects a 20% discount to the trailing average closing price of the Company’s Common Stock for the 20 consecutive trading days immediately preceding the date of the conversion or the Series B Issue Date, but in no event less than $2.80; and (iii) the closing price of the Company’s Common Stock on the day immediately preceding the Series B Issue Date.
The Series B Preferred Stock will automatically convert into Common Stock if, any time following 18 months after the Series B Issue Date, (i) the average closing price of the Common Stock over the immediately preceding 20 consecutive trading day period exceeds 2.5 times the Series B Original Issue Price (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B Preferred Stock); or (ii) with respect to any holder’s shares of Series B Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the offer to purchase the Series B Preferred Stock for at least 2.5 times the Series B Original Issue Price of $2.80. The Series B Preferred Stock will automatically convert into Common Stock upon the agreement of the holders of 75% of the Series B Preferred Stock.
Holders of two-thirds of the Series B Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Series B Issue Date at the Series B Original Issue Price plus accrued but unpaid dividends.
Holders of Series B Preferred Stock are entitled to vote together with all other classes and series of voting stock of the Company on all actions to be taken by the stockholders of the Company. As long as at least 25% of the shares of the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement remain outstanding, the Company may not take numerous specified actions (including certain changes to the Company’s Certificate of Incorporation) without first obtaining the written consent of holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting separately as a class. In addition, as long as the Company Option is in effect, holders of 100% of the Series A Preferred Stock and the Series B Preferred Stock, voting together as a single class, shall have the right to veto (i) any Company Acquisition, and (ii) the issuance of any securities ranking senior to or pari passu with the Series A Preferred Stock or the Series B Preferred Stock, with respect to voting, dividend, liquidation or redemption rights, including the issuance of subordinated debt.
Common Stock Warrants
The Common Stock Warrants issued in connection with the Series B Financing will expire on May 28, 2014. They are not exercisable at the time of issuance. Upon stockholders’ approval at the Annual Meeting on September 15, 2004, the Common Stock Warrants became exercisable at the option of the Investors. The exercise price of the Common Stock Warrants is $4.32 per share.2005.
Forward-Looking Statements
Certain matters contained in this discussion and analysis concerning our operations, cash flows, financial position, economic performance, and financial condition, including in particular, the likelihood of our success in growing our business through acquisitions or otherwise, the realization of sales from backlog, and the sufficiency of capital to meet our working capital needs, include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there are events in the future that we may not be able to predict accurately or control. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, and as a result of many factors, including but not limited to the following:
Readers of this report should not place undue reliance on these forward-looking statements, which apply only as of the date of the filing of this Form 10-Q. We assume no obligation to update any such forward-looking statements.
Item 3.Quantitative and Qualitative Disclosure about Market Risk
Market Risks and Hedging Activities
The Company’s outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and capital improvements exposes the Company to variability in interest payments due to changes in interest rates. The Company uses ancurrently does not use interest rate swapswaps or other means to reduce the interest rate exposure on these variable rate obligations. The Company does not hold any derivatives for trading or speculative purposes.
Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet and included in other long-term liabilities with a corresponding adjustment to either accumulated other comprehensive income/(loss) or in earnings depending on the hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income/(loss). Over time, the unrealized gains/losses held in accumulated other comprehensive income/(loss) will be recognized in earnings consistent with when the hedged items are recognized in earnings.
Under the interest rate swap, the Company pays the bank at a fixed rate and receives variable interest at a rate approximating the variable rate of the Company’s debt, thereby creating the equivalent of a fixed rate obligation. The following table summarizes the original financial terms of the Company’s interest rate swap:
Original Notional Value | Variable Rate Received | Fixed Rate Paid | Effective Date | Expiration Date | |||||
$2,950,000 | LIBOR | 4.25 | % | 1/1/02 | 12/1/04 |
The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At September 30, 2004 the notional value of the swap was $1,300,000. Increases in prevailing interest rates could increase the Company’s interest payment obligations relating to variable rate debt, which includes the portion of the term note not covered by the interest rate swap agreement and the Credit Facility. For example, a 100 basis points increase in interest rates would increase annual interest expense by $52,700, based on debt levels at September 30, 2004.
Item 4.Controls and Procedures
The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures as of the end of the period covered in this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of SeptemberJune 30, 2004,2005, in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.
Our management, including our Chief Executive Officer and Interim Chief Financial Officer, also supervised and participated in an evaluation of any changes in internal controls over financial reporting that occurred during the last fiscal quarter. That evaluation did not identify any significant changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) in the Maryland Circuit Court for Prince George’s County alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. Under the complaint, Swales sought damages of $4 million. To minimize the expense, effort, uncertainty and inconvenience entailed in proceeding with the litigation, theThe Company entered into a Settlement Agreement dated July 22, 2004 with Swales.
Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount has beenwas billed to NASA and payment has beenwas received by the Company. Legal fees are expected to be approximately $325,000.$290,000. Based on a legalan opinion from the Company’s outsideby counsel, the Company believes that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. ATherefore, a receivable in the amount of $860,000$984,000 has been recorded in other assets.booked. However, on July 28, 2004, the Company received from NASA a Notice of Intent to Disallow Costs. Discussions with NASA are still ongoing. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Therefore, no amounts have been accrued for disallowance of this claim as of September 30, 2004.Discussions with NASA are continuing. However, there can be no assurance that the Company will in fact be reimbursed in part or in full by NASA in the foreseeable future.
On April 29, 2005 the Company was served on with a compliant filed by H&K Strategic Business Solutions, LLC (“HKSBS”) alleging breach of contract relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004 that was later terminated by the Company on February 14, 2005. Under the complaint, HKSBS is seeking damages of $830,000 together with legal fees and expenses. We believe the complaint is without merit, however, we cannot predict the outcome of the proceeding at this time.
Item 4.Submission toof Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on September 15, 2004.May 19, 2005.
(b) At the Annual Meeting, the Company’s stockholders approved:
(i) Proposal 1: the election of the incumbent nine (9) directors, namely, Sterling E. Phillips, Jr., Peter C. Belford, Sr., C. Thomas Faulders, III, Lincoln D. Faurer, Martin M. Hale, Jr., Thomas L. Hewitt, Joseph “Keith” Kellogg, Jr., Gerald A. Poch, and Daniel R. Young;
(i) | Proposal 1: the election of the incumbent nine (9) directors, namely, Sterling E. Phillips, Jr., Peter C. Belford, Sr., C. Thomas Faulders, III, Lincoln D. Faurer, Martin M. Hale, Jr., Thomas L. Hewitt, Daniel P. March, Gerald A. Poch, and Daniel R. Young; |
(ii) Proposal 2: conversion of the Senior Subordinated Notes in the aggregate principal amount of $12,000,000 into 3,428,571 shares of Series B Preferred Stock, issuance of up to an additional 7,142,857 shares of Series B Preferred Stock to the Investors pursuant to future financings using Series B Preferred Stock, and the subsequent issuance of 20% or more of the shares of the Company’s common stock upon conversion of the Series B Preferred Stock, or as payment for dividends on the Series B Preferred Stock;
(ii) | Proposal 2: an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 650,000 to 1,050,000; and |
(iii) Proposal 3: exercise of Common Stock Warrants into 857,143 shares of common stock, and to the extent provided for upon the exercise of the Common Stock Warrants, the issuance of 20% or more of the common stock upon exercise of the Common Stock Warrants;
(iv)Proposal 4: amendments to the Company’s 2002 Stock Option Plan to (i) increase the number of shares of Common Stock reserved for issuance thereunder from 2,000,000 to 3,000,000; and (ii) change the date of the initial grant of options to non-employee directors from the date of appointment to the Board to the date of the first Board meeting attended by such directors;
(v) Proposal 5: an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 500,000 to 650,000; and
(vi) Proposal 6: ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year 2004
(iii) | Proposal 3: ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year 2005 |
The following votes were cast with respect to each of the matters voted on at the Special Meeting:
Proposal #1 DIRECTORS | FOR | WITHHELD | TOTAL VOTED | |||||||||
Proposal #1 | ||||||||||||
DIRECTORS | FOR | WITHHELD | ||||||||||
#1-Phillips | 19,695,207 | 49,651 | 19,744,858 | 31,330,382 | 29,286 | |||||||
#2-Belford | 19,700,854 | 44,004 | 19,744,858 | 31,333,932 | 25,736 | |||||||
#3-Faulders | 19,700,444 | 44,414 | 19,744,858 | 31,334,457 | 25,211 | |||||||
#4-Faurer | 19,700,209 | 44,649 | 19,744,858 | 31,333,102 | 26,566 | |||||||
#5-Hale | 19,700,354 | 44,504 | 19,744,858 | 31,332,541 | 27,127 | |||||||
#6-Hewitt | 19,700,229 | 44,629 | 19,744,858 | 31,333,927 | 25,741 | |||||||
#7-Kellogg | 19,700,289 | 44,569 | 19,744,858 | |||||||||
#7 March | 31,333,447 | 26,221 | ||||||||||
#8-Poch | 19,514,823 | 230,035 | 19,744,858 | 33,332,186 | 27,482 | |||||||
#9-Young | 19,700,749 | 44,109 | 19,744,858 | 31,333,427 | 26,241 | |||||||
Proposal #2 | FOR | AGAINST | ABSTAIN | FOR | AGAINST | ABSTAIN | ||||||
Total | 15,230,642 | 247,915 | 10,566 | 23,709,332 | 1,009,686 | 18,992 | ||||||
Proposal #3 | FOR | AGAINST | ABSTAIN | FOR | AGAINST | ABSTAIN | ||||||
Total | 15,214,128 | 249,432 | 25,563 | 31,341,304 | 10,914 | 7,450 | ||||||
Proposal #4 | FOR | AGAINST | ABSTAIN | |||||||||
Total | 15,244,186 | 89,760 | 7,860 | |||||||||
Proposal #5 | FOR | AGAINST | ABSTAIN | |||||||||
Total | 15,260,944 | 73,191 | 7,671 | |||||||||
Proposal #6 | FOR | AGAINST | ABSTAIN | |||||||||
Total | 19,720,277 | 17,114 | 7,467 |
Item 6.Exhibits and Reports on Form 8-K
(a) | Exhibits |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
(b) | Reports on Form 8-K |
A Current Report on Form 8-K dated July 6, 2004March 30, 2005 and filed with the Securities and Exchange Commission on July 14, 2004April 1, 2005 reported that the Company hadfiled with the Secretary of State of the State of Delaware an amendment to each of the Company’s Certificate of Designations of the Series A Convertible Preferred Stock and the Certificate of Designations of the Series B Convertible Preferred Stock.
A Current Report on Form 8-K dated April 1, 2005 and filed with the Securities and Exchange Commission on April 6, 2005 reported that the Company announced that its acquisition of ComGlobal Systems, Incorporated (“ComGlobal”), a California corporation, was consummated on April 1, 2005.
A Current Report on Form 8-K dated April 7, 2005 and filed with the Securities and Exchange Commission on April 12, 2005 reported that Mr. Ronald B. Alexander, effective April 7, 2005, ceased to be an executive officer of the Company, and his last day of employment will be April 29, 2005. Ms. Judith N. Huntzinger has been appointed Mr. Joseph “Keith” Kellogg Jr.as the interim Chief Financial Officer.
A Current Report on Form 8-K dated April 11, 2005 and filed with the Securities and Exchange Commission on April 13, 2005 reported that Peter C. Belford, Sr. and Rear Admiral U.S. Navy (retired) Daniel P. March were appointed to the Board of Directors.
A Current Report on Form 8-K dated July 28, 2004April 27, 2005 and filed with the Securities and Exchange Commission on July 30, 2004April 27, 2005 reported (i) it had entered intothat the Company issued a settlement agreement and mutualpress release with Swales and Associates, Inc., which resolves all claims, including a litigation matter between the parties; (ii) its date for the 2004 Annual Stockholders’ Meeting and (ii)announcing its financial results for the secondfiscal quarter ended June 30, 2004.March 31, 2005.
An amendment to theA Current Report on Form 8-K/A8-K dated June 1, 2004April 25, 2005 and filed with the Securities and Exchange Commission on August 9, 2004April 28, 2005 reported (i)that the Company approved the sale of up to 300,000 shares of the Company’s unregistered Common Stock to certain employees of ComGlobal to induce their employment after the merger.
A Current Report on Form 8-K dated April 28, 2005 and filed with the Securities and Exchange Commission on May 2, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on April 29, to May 13, 2005.
A Current Report on Form 8-K dated May 18, 2005 and filed with the Securities and Exchange Commission on May 18, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on May 13, to June 15, 2005.
A Current Report on Form 8-K dated March 22, 2005 and filed with the Securities and Exchange Commission on June 15, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on June 15, 2005, to July 15, 2005.
A Current Report on Form 8-K/A dated April 1, 2005 and filed with the Securities and Exchange Commission on June 15, 2005 reported that the Company in accordance with Item 9.1(a) of Form 8-K provided the required audited financial statements for Beta Analytics,ComGlobal Systems, Incorporated (“BAI”ComGlobal”) as of May 28, 2004 and June 30, 2004, 2003 and for2002 and related Independent Auditors’ Reports (b) in accordance with Item 9.1(b) of Form 8-K, provided the eleven months ended May 28, 2004 and the two years in the period ended June 30, 2003; (ii) therequired Unaudited Pro Forma Combined Balance Sheet, the Unaudited Pro Forma Combined Statement of Operations, and Notes to Unaudited Pro Forma Combined Financial Statements; and (iii) the Stock Purchase Agreement with BAI and other parties named in the agreement dated May 6, 2004.Statements.
A Current Report on Form 8-K dated August 16, 2004July 15, 2005 and filed with the Securities and Exchange Commission on July 15, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on July 15, 2005, to July 31, 2005.
A Current Report on Form 8-K dated July 29, 2005 and filed with the Securities and Exchange Commission on July 29, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on July 31, 2005, to August 16, 2004 reported the location and date for the 2004 Annual Stockholders’ Meeting.15, 2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
Date: November 15, 2004August 2, 2005
Analex Corporation | ||||||
(Registrant) | ||||||
By: | /S/ Sterling E. Phillips, Jr. | By: | /S/ | |||
Sterling E. Phillips, Jr. | ||||||
Chairman and Chief Executive Officer | Interim Chief Financial Officer | |||||
(Principal Executive Officer) | (Principal Financial Officer and
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