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 June 30, 20052006
| ¨ | 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.) | |
Suite
| ||
| (Address of principal executive offices) | (Zip Code) | |
(703) 329-9400852-4000
Registrant’s telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12-b2 of the Exchange Act).
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
Title of Class | Number of shares outstanding on | |
| Common Stock, $0.02 par value per share |
TABLE OF CONTENTS
Part 1.Financial1. Financial Statements
CONSOLIDATED BALANCE SHEETS
As of June 30, 20052006 and December 31, 2004
Unaudited2005
June 30, 2005 | December 31, 2004 | |||||||
| ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 3,097,200 | $ | 1,034,200 | ||||
Accounts receivable, net | 24,061,700 | 18,350,400 | ||||||
Deferred tax asset | 457,700 | — | ||||||
Prepaid expenses and other | 4,143,100 | 4,037,800 | ||||||
Raw material inventory | 400,300 | — | ||||||
Total current assets | 32,160,000 | 23,422,400 | ||||||
Fixed assets, net | 2,402,700 | 1,434,700 | ||||||
Goodwill | 78,027,500 | 43,175,200 | ||||||
Contract rights and other intangible assets, net | 12,326,200 | 6,363,500 | ||||||
Other assets | 716,000 | 526,300 | ||||||
Total assets | $ | 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 | ||||
June 30, 2006 (unaudited) | December 31, 2005 | |||||||
| ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,038,600 | $ | 3,459,200 | ||||
Accounts receivable, net | 30,567,400 | 31,067,500 | ||||||
Prepaid expenses and other current assets | 4,707,800 | 4,445,500 | ||||||
Deferred tax asset, net | 511,200 | — | ||||||
Property held for sale | — | 430,600 | ||||||
Total current assets | 36,825,000 | 39,402,800 | ||||||
Property and equipment, net | 2,735,500 | 2,726,000 | ||||||
Contract rights and other intangible assets, net | 8,637,900 | 10,404,800 | ||||||
Goodwill | 78,716,900 | 77,887,000 | ||||||
Other assets | 582,200 | 671,700 | ||||||
Total assets | $ | 127,497,500 | $ | 131,092,300 | ||||
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 5,988,100 | $ | 3,961,100 | ||||
Accrued payroll and employee benefits | 14,557,700 | 11,834,800 | ||||||
Notes payable | 192,800 | 387,500 | ||||||
Deferred tax liability, net | — | 780,300 | ||||||
Total current liabilities | 20,738,600 | 16,963,700 | ||||||
Notes payable – line of credit | 19,336,300 | 27,631,400 | ||||||
Series A convertible note | 7,401,700 | 6,497,700 | ||||||
Deferred tax liability | 3,148,400 | 3,677,200 | ||||||
Other long-term liabilities | 1,250,200 | 1,131,500 | ||||||
Total long-term liabilities | 31,136,600 | 38,937,800 | ||||||
Total liabilities | $ | 51,875,200 | $ | 55,901,500 | ||||
Convertible preferred stock; 17,297,884 shares issued and outstanding at June 30, 2006 and December 31, 2005 | 39,343,500 | 36,229,600 | ||||||
Shareholders’ equity | ||||||||
Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding June 30, 2006, 16,732,890 shares and December 31, 2005, 16,340,445 shares | 334,700 | 326,800 | ||||||
Additional paid-in capital | 50,736,500 | 50,279,000 | ||||||
Warrants outstanding | 9,228,300 | 9,228,300 | ||||||
Accumulated deficit | (24,020,700 | ) | (20,872,900 | ) | ||||
Total shareholders’ equity | 36,278,800 | 38,961,200 | ||||||
Total liabilities, convertible preferred stock and shareholders’ equity | $ | 127,497,500 | $ | 131,092,300 | ||||
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 20052006 and 20042005
Unaudited
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
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 | 3,418,500 | 2,552,500 | 5,609,700 | 4,353,900 | ||||||||||||
Amortization of intangible assets | 989,100 | 277,300 | 1,479,600 | 426,500 | ||||||||||||
Total operating costs and expenses | 35,382,900 | 20,187,000 | 61,777,200 | 36,189,000 | ||||||||||||
Operating income | 2,765,700 | 2,028,200 | 4,809,600 | 2,657,600 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 2,500 | 29,600 | 4,800 | 42,900 | ||||||||||||
Interest expense | (998,700 | ) | (1,698,900 | ) | (1,764,100 | ) | (2,400,000 | ) | ||||||||
Income from continuing operations before income taxes | 1,769,500 | 358,900 | 3,050,300 | 300,500 | ||||||||||||
Provision for income taxes | 1,286,800 | 459,500 | 1,901,600 | 384,700 | ||||||||||||
Income (loss) from continuing operations | 482,700 | (100,600 | ) | 1,148,700 | (84,200 | ) | ||||||||||
Income (loss) from discontinued operations, net of income taxes | 6,700 | (50,700 | ) | 30,300 | (79,200 | ) | ||||||||||
Loss on disposal of discontinued operations, net of income taxes | — | (521,800 | ) | — | (521,800 | ) | ||||||||||
Net income (loss) | 489,400 | (673,100 | ) | 1,179,000 | (685,200 | ) | ||||||||||
Dividends on convertible preferred stock | (781,900 | ) | (225,000 | ) | (1,181,300 | ) | (450,000 | ) | ||||||||
Accretion of convertible preferred stock | (1,588,800 | ) | (939,100 | ) | (2,526,300 | ) | (1,876,600 | ) | ||||||||
Net loss available to common shareholders | $ | (1,881,300 | ) | $ | (1,837,200 | ) | $ | (2,528,600 | ) | $ | (3,011,800 | ) | ||||
Net loss available to common shareholders per share: | ||||||||||||||||
Continuing operations | ||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||
Diluted | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||
Discontinued operations | ||||||||||||||||
Basic | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
Diluted | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
Net loss available to common shareholders: | ||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
Diluted | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
Weighted average number of shares: | ||||||||||||||||
Basic | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||
Diluted | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue | $ | 37,907,100 | $ | 36,548,500 | $ | 73,438,300 | $ | 63,128,600 | ||||||||
Operating costs and expenses | ||||||||||||||||
Cost of revenue | �� | 30,476,700 | 29,149,500 | 59,513,300 | 50,754,200 | |||||||||||
Selling, general and administrative | 3,874,900 | 3,433,700 | 6,896,800 | 5,870,400 | ||||||||||||
Amortization of intangible assets | 852,500 | 989,100 | 1,766,900 | 1,479,100 | ||||||||||||
Depreciation | 237,400 | 194,400 | 484,100 | 273,800 | ||||||||||||
Total operating costs and expenses | 35,441,500 | 33,766,700 | 68,661,100 | 58,377,500 | ||||||||||||
Operating income | 2,465,600 | 2,781,800 | 4,777,200 | 4,751,100 | ||||||||||||
Interest Expense, net | (1,145,700 | ) | (996,200 | ) | (2,332,300 | ) | (1,759,200 | ) | ||||||||
Income from continuing operations before income taxes | 1,319,900 | 1,785,600 | 2,444,900 | 2,991,900 | ||||||||||||
Provision for income taxes | 384,800 | 1,298,500 | 993,900 | 1,885,000 | ||||||||||||
Income from continuing operations | 935,100 | 487,100 | 1,451,000 | 1,106,900 | ||||||||||||
Income (loss) from discontinued operations, net of income taxes | 8,500 | (4,300 | ) | (151,200 | ) | 65,600 | ||||||||||
Income on disposal of discontinued operations, net of income taxes | 226,300 | 6,700 | 226,300 | 6,700 | ||||||||||||
Net income | 1,169,900 | 489,500 | 1,526,100 | 1,179,200 | ||||||||||||
Dividends on convertible preferred stock | 780,000 | 781,900 | 1,560,000 | 1,181,400 | ||||||||||||
Accretion of convertible preferred stock | 1,568,200 | 1,588,800 | 3,113,900 | 2,526,300 | ||||||||||||
Net loss attributable to common shareholders | $ | (1,178,300 | ) | $ | (1,881,200 | ) | $ | (3,147,800 | ) | $ | (2,528,500 | ) | ||||
Net loss attributable to common shareholders per share: | ||||||||||||||||
Continuing operations | ||||||||||||||||
Basic and diluted | $ | (0.08 | ) | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.16 | ) | ||||
Discontinued operations | ||||||||||||||||
Basic and diluted | $ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Net loss attributable to common shareholders: | ||||||||||||||||
Basic and diluted | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.16 | ) | ||||
Weighted average number of shares: | ||||||||||||||||
Basic and diluted | 16,706,056 | 15,821,971 | 16,988,890 | 15,623,730 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 20052006 and 20042005
Unaudited
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 | ||||
June 30, 2006 | June 30, 2005 | |||||||
Reconciliation of net income to cash provided by operating activities | ||||||||
Net income | $ | 1,526,100 | $ | 1,179,200 | ||||
Net income from discontinued operations, including disposal | 75,100 | 72,300 | ||||||
Net income from continuing operations | 1,451,000 | 1,106,900 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Amortization of intangible assets and depreciation expense | 2,251,000 | 1,752,900 | ||||||
Amortization of debt discounts | 904,000 | 904,000 | ||||||
Amortization of deferred financing costs | 98,300 | 90,700 | ||||||
Gain on disposal of property held for sale | (13,200 | ) | — | |||||
Stock-based compensation expense | 196,400 | — | ||||||
Changes in operating assets and liabilities, net of effect of business combinations | ||||||||
Accounts receivable, net | 390,100 | 2,761,600 | ||||||
Prepaid expenses and other | (262,300 | ) | 1,956,800 | |||||
Other assets | (520,000 | ) | (1,105,800 | ) | ||||
Other current liabilities | 3,141,600 | (33,700 | ) | |||||
Other long-term liabilities | (556,100 | ) | 1,100 | |||||
Net cash provided by continuing operating activities | 7,080,800 | 7,434,500 | ||||||
Net cash provided by discontinued operating activities, including disposal | 48,900 | 75,200 | ||||||
Net cash provided by operating activities | 7,129,700 | 7,509,700 | ||||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (323,000 | ) | (218,400 | ) | ||||
Proceeds from sale of property | 460,100 | — | ||||||
Proceeds from sale of SyCom Services, Inc. | 110,000 | — | ||||||
Cash paid for ComGlobal Systems, Inc., net of cash acquired | — | (45,391,500 | ) | |||||
Net cash provided (used) by investing activities | 247,100 | (45,609,900 | ) | |||||
Cash flows from financing activities | ||||||||
(Payments) proceeds from line of credit | (8,295,100 | ) | 15,000,700 | |||||
Payments on notes payable | (194,700 | ) | (558,400 | ) | ||||
Proceeds from sale of common stock | — | 945,000 | ||||||
Proceeds from stock options and warrants exercised | 10,200 | 422,000 | ||||||
Proceeds from employee stock purchase plan | 211,700 | 196,300 | ||||||
Proceeds from ABS notes receivable | 26,200 | — | ||||||
Proceeds from issuance of Series B-2 Preferred Stock and Warrants | — | 24,965,400 | ||||||
Payments of dividends on preferred stock | (1,555,700 | ) | (807,800 | ) | ||||
Net cash (used) provided by financing activities | (9,797,400 | ) | 40,163,200 | |||||
Net (decrease) increase in cash | (2,420,600 | ) | 2,063,000 | |||||
Cash and cash equivalents at beginning of period | 3,459,200 | 1,034,200 | ||||||
Cash and cash equivalents at end of period | $ | 1,038,600 | $ | 3,097,200 | ||||
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1.Business GroupsOverview
Analex Corporation (“Analex” or the “Company”) is a provider of mission-critical professional services to federal government clients. The Company is a leading provider of services in support of our nation’s security. The Company specializes in providing information technology,intelligence, systems engineering security services and intelligence supportsecurity services in support of the U.S. Government.nation’s security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, and designing, developing and testing aerospace systems.systems and providing a full range of security support services to the U.S. government. The Company provides itsspecializes in the following professional services:
| • | Information Technology Services.Information technology services focus on design, development, test, integration and support of software and networks for business and mission critical systems. The Company develops radar, modeling and simulation and system software, all in support of collecting, testing, and analyzing data from various intelligence systems. The Company also provides the military with program management, systems engineering and software development and development of command, control, communications, computers and intelligence (“C4I”) programs. |
| • | Aerospace Engineering Services.Aerospace engineering services focus on engineering associated with the development, support and operations of space launch vehicles and facilities as well as independent verification and validation services. The Company provides services in the design and testing of expendable launch vehicles for the Department of Defense (“DoD”) and intelligence community. The Company’s highly specialized expertise includes test, analysis and independent validation and verification support in areas such as structural dynamics, trajectory and performance, thermal system performance, and range safety. The Company’s solutions enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. The Company also performs verification and validation of test results to ensure the reliability of the data. |
| • | Security and Intelligence Support Services.The Company’s security and intelligence support services focus on analysis support and threat assessments, counterintelligence, information, network and facilities security, technology protection and security education and training. |
These services are provided through itsthe Company’s two strategic business units: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.
Group.
The Homeland Security Group accounted for approximately 67% of the Company’s 2005 year-to-date 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. AnalexThe Homeland Security Group provides these services to the intelligence community, including the National Reconnaissance Office, the Missile Defense Agency, the National Security Agency, the Department of Defense,DoD, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.
The Systems Engineering Group accounted for approximately 33% of the Company’s 2005 year-to-date revenue. This group provides engineering and information technology services and solutions to assist in the development of space-based systems and to support operations of terrestrial assets. Capabilities include expendable launch vehicle engineering, space systems development, and ground support for space operations.
On April 1, 2005, Analexthe company acquired ComGlobal Systems, IncorporatedInc., (“ComGlobal”). in a transaction valued at approximately $47.0 million. ComGlobal is reported as a part of the Homeland Security Group. ComGlobal specializessoftware engineering and information technology firm, specializing in command, control, communications, computers and intelligence (C4I)C4I programs for the military, and itsmilitary. ComGlobal’s largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program.
On May 28, 2004, ComGlobal is a wholly-owned subsidiary of Analex acquired Beta Analytics, Inc. (“BAI”). BAI isand reported as a part of the Company’s 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,ended March 31, 2006, the Company concluded that Advanced Biosystems,SyCom Services, Inc. (ABS)(“SyCom”), a then wholly ownedwholly-owned subsidiary of the Company, did not fit with the Company’s long-term strategic plan and decidedcommitted to divest ABS.a plan to dispose of this subsidiary. SyCom provided staff augmentation services principally to a single customer and had 32 employees. The Company disposed of ABSsold its SyCom Services subsidiary on November 16, 2004 and has presented theApril 1, 2006. SyCom’s results of operations of ABSare presented 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(of a normal and recurring accruals)nature) 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, 20042005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
by U.S. generally accepted accounting principles for complete financial statements. These unaudited condensed 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, 20042005 (“20042005 Form 10-K”) filed with the Securities and Exchange Commission on March 28, 2005.8, 2006. Certain amounts in the prior year financial statements and related notes have been reclassified to conform to the current year presentation.
3.Recent Accounting Pronouncements
3.In June, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109.The Interpretation clarifies the accounting for uncertainty in income statements recognized in an enterprise’s financial statements in accordance with SFAS No, 109. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation is effective for fiscal years beginning after December 15, 2006. Management is in the process of determining the effect of this proposal on its financial statements.
4.Acquisition of ComGlobal 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 anthe sale and issuance of additional Series B Convertible Preferred Stock (“Series B-2”) in the amount of $25 million (see Note 10)11).
The acquisition of ComGlobal was accounted for using the purchase method of accounting. Under the purchase method of accounting, the Any remaining purchase price consideration to be recorded against goodwill is first allocated tostill preliminary, pending resolution of the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill.Altus matter (see Note 15). The Agreement and Plan of Merger contains certain financial representations, secured by $8.0 million held in escrow, which will survive afteris scheduled to be released to the closing date.former shareholders of ComGlobal, net of any indemnification obligations, starting in December 2006 and continuing through April 2010.
5.Sale of Property
ComGlobal’s resultsIn March 2006, the Company sold land and a building it owned in Upper Marlboro, Maryland for cash proceeds of operations are included as part$460,100. The Company recognized a gain of Analex’s unaudited Consolidated Statement of Operations for$13,200 on the three months ended June 30, 2005, reported herein. The following table providessale. This property was the unaudited pro forma resultsformer corporate headquarters 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 ofCompany’s 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. The Common Stock was valued at $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 the Series B Senior Subordinated Notes (see Note 10).
The total cost of the acquisition of BAI, which was valued at approximately $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 any excess recorded as goodwill. The Stock Purchase Agreement contains certain financial representations, which will survive after the closing date.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
Incorporated subsidiary.
5.6.Goodwill, Contract Rights And Other Intangible Assets
Effective January 1, 2002,The Company has recorded goodwill of $78.7 million as of June 30, 2006 and $77.9 million as of December 31, 2005. The increase in goodwill is a result of a court ruling on June 2, 2006 that requires the Company adopted SFAS No. 142,to pay an additional finder’s fee of $830,000 related directly to the ComGlobal acquisition (see Note 15).
Goodwill and Other Intangible Assets. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. Under SFAS 142, goodwill is tomust be reviewed at least annually for impairment. The Company has have elected to perform this review annually during the thirdfourth quarter of each calendar year. The Company has recorded goodwill of $78.0 million and $43.2 million as of June 30, 2005 and 2004. There werehave been no events or conditions existing throughduring the six months ended June 30, 2005quarter that the Company believes would result in an impairment of goodwill.
Identifiable intangible assets, which have finite useful lives, consist of customercontract rights and non-compete agreements. The following table provides the details of the net carrying amounts of these intangible assets as of:assets:
| June 30, 2005 | December 31, 2004 | June 30, 2006 | December 31, 2005 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | 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 | $ | 14,346,300 | $ | (5,873,300 | ) | $ | 8,473,000 | $ | 14,346,300 | $ | (4,245,800 | ) | $ | 10,100,500 | ||||||||||||
Non-compete agreements | 1,105,500 | (639,500 | ) | 466,000 | 1,495,500 | (1,030,200 | ) | 465,300 | 753,300 | (588,400 | ) | 164,900 | 1,105,500 | (801,200 | ) | 304,300 | ||||||||||||||||||||||||
Total amortizable intangible assets | $ | 15,451,800 | $ | (3,125,600 | ) | $ | 12,326,200 | $ | 8,577,800 | $ | (2,214,300 | ) | $ | 6,363,500 | $ | 15,099,600 | $ | (6,461,700 | ) | $ | 8,637,900 | $ | 15,451,800 | $ | (5,047,000 | ) | $ | 10,404,800 | ||||||||||||
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
The Company recorded amortization expense associated with identifiable intangible assets of $852,500 and $1,766,900 for the three and six months ended June 30, 2006 compared to $989,100 and $1,479,100 for the three and six months ended June 30, 2005. During the six months ended June 30, 2006, certain of our non-compete agreements became fully amortized, therefore the gross carrying valuesvalue of customer rights andthese non-compete agreements increasedwas reduced by $7.3 million and $0.2 million, respectively, from December 31, 2004 to June 30, 2005 due to the acquisition of ComGlobal on April 1, 2005.
approximately $352,200.
The following table provides the estimated amortization expense for the remainder of 2006 and each of the next five years ending December 31 based on the carrying amount of amortizable intangible assets existing as of June 30, 2005:2006:
Year | Estimated Amortization Expense | ||
2005 | $ | 1,865,500 | |
2006 | 3,448,000 | ||
2007 | 2,660,200 | ||
2008 | 2,004,200 | ||
2009 | 785,000 | ||
Year | Estimated Amortization Expense | ||
July 1, to December 31, 2006 | $ | 1,681,200 | |
2007 | 2,661,000 | ||
2008 | 2,004,200 | ||
2009 | 785,000 | ||
2010 | 597,500 | ||
2011 | 434,100 | ||
6.7.Debt
The Company has a $40 million revolving line of credit agreement with Bank of America, N.A. (“the Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, theThe Credit Facility was amendedis subject to certain borrowing base and restated to provide a $20 million revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1.7 million was consolidated into the Credit Facility. On April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to increase the amount available under the Credit Facility from $20.0 million to $40.0 million.other requirements. As of June 30, 2005,2006, the outstanding balance of the Credit Facility was $21.6$19.3 million and the interest rate was 5.83%8.35%. The Credit Facilitycredit facility has a maturity date of May 31, 2007.
2008.
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 June 30, 2005,2006, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of properties other than ABS,certain properties; incur additional indebtedness,indebtedness; pay dividends (except to holders of the Series A and Series B-1 and B-2B Preferred Stock) or other distributions,distributions; create liens on assets,assets; enter into sale andcertain leaseback transactions,transactions; make investments, loans or advances,advances; engage in mergers or consolidations,consolidations; and engage in certain transactions with affiliates. The Credit Facility is generally secured by the accounts receivable and other assets of the Company.
In January 2002, theThe Company entered intoalso has outstanding an interest-rate swap agreement with Bankaggregate $10.0 million of America whereby its obligation to pay floating-rate LIBOR on debt was swapped into a fixed rate obligation at 4.25%. The purpose of the swap was to protect the Company from potential rising interest rates on debt with variable interest rate features. During periods of rising interest rates, the Company will benefit from the protection of the swap, during periods of declining interest rates the Company will incur additional interest expense due to 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 maturedSeries A Convertible Notes issued on December 1, 2004.
The Company’s comprehensive loss available to common shareholders for the three months ended June 30, 2004 was $1,822,000 which includes the net loss available to common shareholders of $1,837,200 and other comprehensive income of $15,2009, 2003 (see Note 11).
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
arising from the interest rate swap. The Company’s comprehensive loss for the six months ended June 30, 2004 was $2,985,700, which includes the net loss available to common shareholders of $3,011,800 and other comprehensive income of $26,100 arising from the interest rate swap.
The Company also has outstanding a $10.0 million Series A Convertible Note issued on December 9, 2003 (see Note 10).
7.8.Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Income (loss) from continuing operations | $ | 482,700 | $ | (100,600 | ) | $ | 1,148,700 | $ | (84,200 | ) | ||||||
Dividends on convertible preferred stock | (781,900 | ) | (225,000 | ) | (1,181,300 | ) | (450,000 | ) | ||||||||
Accretion of convertible preferred stock | (1,588,800 | ) | (939,100 | ) | (2,526,300 | ) | (1,876,600 | ) | ||||||||
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 | 6,700 | (50,700 | ) | 30,300 | (79,200 | ) | ||||||||||
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 | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Employee stock options | — | — | — | — | ||||||||||||
Diluted weighted average shares outstanding | 15,821,971 | 14,049,715 | 15,623,730 | 13,547,203 | ||||||||||||
Net loss available to common shareholders per share | ||||||||||||||||
Continuing operations | ||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||
Diluted | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.16 | ) | $ | (0.18 | ) | ||||
Discontinued operations | ||||||||||||||||
Basic | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
Diluted | $ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
Net loss available to common shareholders | ||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
Diluted | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Income from continuing operations | $ | 935,100 | $ | 487,100 | $ | 1,451,000 | $ | 1,106,900 | ||||||||
Dividends on convertible preferred stock | (780,000 | ) | (781,900 | ) | (1,560,000 | ) | (1,181,400 | ) | ||||||||
Accretion of convertible preferred stock | (1,568,200 | ) | (1,588,800 | ) | (3,113,900 | ) | (2,526,300 | ) | ||||||||
Net loss from continuing operations | (1,413,100 | ) | (1,883,600 | ) | (3,222,900 | ) | (2,600,800 | ) | ||||||||
Income (loss) from discontinued operations, net of income taxes | 8,500 | (4,300 | ) | (151,200 | ) | 65,600 | ||||||||||
Income on disposal of discontinued operations, net of income taxes | 226,300 | 6,700 | 226,300 | 6,700 | ||||||||||||
Net loss attributable to common shareholders | $ | (1,178,300 | ) | $ | (1,881,200 | ) | $ | (3,147,800 | ) | $ | (2,528,500 | ) | ||||
Weighted average shares outstanding | 16,706,056 | 15,821,971 | 16,988,890 | 15,623,730 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Employee stock options | — | — | — | — | ||||||||||||
Diluted weighted average shares outstanding | 16,706,056 | 15,821,971 | 16,988,890 | 15,623,730 | ||||||||||||
Net (loss) income attributable to common shareholders per share | ||||||||||||||||
Continuing operations | ||||||||||||||||
Basic and diluted | $ | (0.08 | ) | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.16 | ) | ||||
Discontinued operations | ||||||||||||||||
Basic and diluted | $ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Net loss attributable to common shareholders | ||||||||||||||||
Basic and diluted | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.16 | ) | ||||
Shares issuable upon the exercise or conversion of certain equity instruments have been excluded from the computation of diluted shares outstanding to the extent that their inclusion would be anti-dilutive. As of June 30, 2006, shares issuable upon conversion of such instruments are as follows:
Instrument | Common shares issuable upon conversion, exercise or vesting | Conversion or exercise price | Proceeds from conversion | |||
Series A Convertible Preferred Stock | 6,726,457 | $2.23 | $— | |||
Series A Common Stock Warrants | 1,345,291 | 3.28 | 4,412,556 | |||
Series A Convertible Notes | 3,321,707 | 3.01 | — | |||
Series A Convertible Note Warrants | 664,341 | 3.28 | 2,179,038 | |||
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 | |||
Options issued under Incentive Stock Option Plans | 91,833 | $0.69 - $1.99 | 101,523 | |||
Options issued under Incentive Stock Option Plans | 1,148,413 | $2.16 – $2.49 | 2,606,882 | |||
Options issued under Incentive Stock Option Plans | 1,672,500 | $2.79-$4.49 | 5,911,175 | |||
Unvested restricted stock awards | 150,000 | — | — | |||
Stock-Only Stock Appreciation Rights issued under Long-Term Incentive Plan | 860,000 | — | — | |||
Total | 31,870,180 | $26,599,111 | ||||
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 June 30, 2005, shares issuable upon conversion of such instruments arewere as follows:
Instrument | Common shares issuable upon conversion | Exercise price | Proceeds from conversion | ||||
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 | — | ||||
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 | ||||
Options issued under Incentive Stock Option Plans | 996,358 | $ 0.50 - $1.99 | 1,327,836 | ||||
Options issued under Incentive Stock Option Plans | 1,248,413 | $ 2.20 - $2.49 | 2,848,882 | ||||
Options issued under Incentive Stock Option Plans | 1,609,166 | $ 2.54 - $4.49 | 5,815,406 | ||||
Total | 31,801,371 | $ | 27,971,653 | ||||
Instrument | Common shares issuable upon conversion | Exercise price | Proceeds from conversion | |||
Series A Convertible Preferred Stock | 6,726,457 | $2.23 | $— | |||
Series A Common Stock Warrants | 1,345,291 | $3.28 | 4,412,554 | |||
Series A Convertible Notes | 3,321,707 | $3.01 | — | |||
Series A Convertible Note Warrants | 664,341 | $3.28 | 2,179,038 | |||
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 | |||
Options issued under Incentive Stock Option Plans | 996,358 | $ 0.50 -$1.99 | 1,327,836 | |||
Options issued under Incentive Stock Option Plans | 1,248,413 | $ 2.20 -$2.49 | 2,848,882 | |||
Options issued under Incentive Stock Option Plans | 1,609,166 | $ 2.54 -$4.49 | 5,815,406 | |||
Total | 31,801,371 | $27,971,653 | ||||
8.9.Stock-based compensation
In DecemberMay 2002, shareholders approved the FASB issued SFAS No. 148, “AccountingAnalex Corporation 2002 Stock Option Plan (“2002 Stock Option Plan”). The 2002 Stock Option Plan provided for Stock-Based Compensation—Transition and Disclosure—an amendmentthe issuance of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methodsincentive stock options within the meaning 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 effectSection 422 of the method used on reported results.Internal Revenue Code of 1986 and non-qualified stock options to purchase an aggregate of up to 3,000,000 shares of Common Stock. The Company has chosen2002 Stock Option Plan permits the grant of options to continue to account for stock-based compensation usingkey employees, consultants and directors of the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense forCompany. The exercise price of the incentive stock options is measured as the excess, if any,required to be at least equal to 100% of the fair market value of the Company’s Common Stock on the date of grant (110% of the fair market value in the case of options granted to employees who are 10% shareholders). The exercise price of the non-qualified stock options is required to be not less than the par value of a share of the Company’s common stock on the date of grant. The term of an incentive or non-qualified stock option may not exceed ten years (five years in the case of an incentive stock option granted to a 10% shareholder). The vesting for each option holder is set forth in the individual option agreements and is generally a three-year period. The 2002 Stock Option Plan honors all of the stock options outstanding under the Company’s 2000 and 1994 Stock Option Plans, as amended (the “Plan”).
On May 18, 2006, shareholders of the Company approved the adoption of the Company’s 2006 Long Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of stock based incentive awards, including incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights (“SOSAR”) and other long-term incentive awards to employees, directors and consultants. The aggregate number of shares of Common Stock that may be subject to award under the 2006 Plan, subject to adjustment upon a change in capitalization, is 3,000,000 shares.
Adoption of SFAS No. 123(R)
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123(R) eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.
Effective January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of the grantadoption are measured at estimated fair value and included in operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123(R).
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
Prior to the adoption of SFAS No. 123(R), the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the period beginning January 1, 2006, excess tax benefits from the exercise of stock options are presented as financing cash flows. Such benefits were not material for the three or six months ended June 30, 2006 or 2005, respectively.
As a result of adopting SFAS No. 123(R), the Company recorded $63,700 and $166,500 of stock-based compensation expense, or approximately $49,100 and $131,100 after-tax for the three and six months ended June 30, 2006. Stock-based compensation expense reduced both basic and diluted earnings per share by $0.00 and $0.01 per share the three months and six months ended June 30, 2006.
Stock-Based Compensation Activity
During the three months ended June 30, 2006, the Company granted an aggregate 825,000 SOSARs to certain employees. The SOSARs were issued at an exercise price of $2.17 per share, the related option. The following table is a computationfair value of the pro forma earnings hadCompany’s common stock on the date of grant. The Black-Scholes option pricing model weighted-average value for the SOSARs was $1.47 per share. The SOSARs vest 25% per year over a 4 year period from the grant date and expire ten years from the grant date.
During the three months ended March 31, 2006, the Company accountedgranted 35,000 SOSARs to certain members of the Company’s Board or Directors. The SOSARs were issued at an exercise price of $2.86 per share, the fair value of the Company’s common stock on the date of grant. The Black-Scholes option pricing model weighted-average value for the SOSARs was $1.84 per share. The SOSARs are 100 percent vested and expire ten years from the grant date. The Company recorded approximately $65,000 of stock-based compensation expense associated with these SOSAR grants.
During the three months ended March 31, 2006, the Company also exchanged 875,725 nonqualified stock options for an equal number of SOSARs. The 875,725 SOSARs were issued on the same terms as the original options grant and were immediately exercised.
The table below summarizes stock option and SOSAR activity for the six months ended June 30, 2006:
| Number of Shares | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (Years) | ||||||||
Options outstanding, January 1, 2006 | 3,802,800 | $ | 2.59 | 5.00 | |||||||
Options and SOSARs granted | 860,000 | 2.19 | |||||||||
Options and SOSARs exercised | (885,725 | ) | 1.37 | ||||||||
Options cancelled and expired | (4,300 | ) | 1.42 | ||||||||
Options and SOSARs outstanding, June 30, 2006 | 3,772,775 | $ | 2.91 | $ | 474,492 | 6.86 | |||||
Exercisable at June 30, 2006 | 2,947,746 | $ | 2.96 | $ | 276,492 | ||||||
Shares reserved for equity awards at June 30, 2006 | 2,287,252 | ||||||||||
Fair Value Determination
To determine the fair value of each option or SOSAR grant, the Company has elected to continue to use both the Black-Scholes option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant.
The Black-Scholes model uses the assumptions noted in the table below to compute a fair value of each option or SOSAR grant. The expected volatility of the Company’s shares was estimated based upon the historical volatility of the Company’s share price. The expected term was calculated based upon the simplified method for estimating expected terms as allowed under SEC Staff Accounting Bulletin (“SAB”) No. 107. The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield available on a U.S. Treasury note with a term similar to the expected term of the underlying grants. The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not paid dividends on its common stock in the past nor does it expect to pay dividends in the future.
The table below summarizes the Black-Scholes option pricing model fair value assumptions used for stock option grants based on theirand SOSAR awards during the six month period ended June 30, 2006:
| Six Months Ended June 30, 2006 | ||||
Weighted average exercise price | $ | 2.20 | ||
Range of expected volatilities | 70-75 | % | ||
Range of expected terms (in years) | 5-6.25 | |||
Range of risk free interest rates | 4.5 – 4.9 | % | ||
Expected dividend yield | 0.00 | % | ||
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Unaudited
Pro Forma Disclosures
Under the modified prospective method, results for the three and six months ended June 30, 2005 were not restated to include stock-based compensation expense. The previously disclosed pro forma effects of recognizing the estimated fair value as determined under SFAS No. 123:of stock-based compensation for the three and six months ended June 30, 2005 are presented below.
| 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 | ) | ||||||
Three Months Ended June 30, 2005 | Six Months Ended June 30, 2005 | |||||||
Net loss attributable to common shareholders, as reported | $ | (1,881,200 | ) | $ | (2,528,500 | ) | ||
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 | 624,000 | ||||||
Pro forma net loss attributable to common shareholders | $ | (2,006,200 | ) | $ | (3,152,500 | ) | ||
Loss per share: | ||||||||
Basic and diluted, as reported | $ | (0.12 | ) | $ | (0.16 | ) | ||
Basic and diluted, pro forma | $ | (0.13 | ) | $ | (0.20 | ) | ||
The fair value of each option grant iswas estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following assumptions were used for grants:grants prior to January 1, 2006: 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%.
Restricted Stock Awards
ANALEX CORPORATIONThe Company awarded 150,000 shares of restricted common stock to three members of the Company’s senior management team as an inducement for their continued employment. The restricted stock will vest at the rate of 25 percent per year over 4 years starting on the employee’s first day of employment. As of June 30, 2006, none of the 150,000 shares of restricted stock has either become vested or forfeited.
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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) requiresThe Company’s stock-based compensation costsexpense related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measuredrestricted stock award was 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 exerciseclosing price of the option is more thanCompany’s common stock on the fair market value. SFASgrant date, which was $2.80 per share. The table below summarizesCompany recorded approximately $27,000 and $56,000 of stock-based compensation expense associated with these transactions for the accelerated vesting of options during thethree and 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 | |||
2006, respectively. There was approximately $364,000 of unrecognized compensation cost related to the nonvested shares of restricted stock as of June 30, 2006. These costs are scheduled to be fully amortized by December 2009.
9.Employee stock purchase plan
In May 2005, shareholders approved the Analex Corporation Amended and Restated Employee Stock Purchase Plan (the “ESPP Plan”). The number of shares currently reserved for issuance under the Plan is 1,050,000. The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended. The Plan is non-compensatory as defined by SFAS 123(R). Under the terms of the Plan, individual employees may pay up to $25,000 per calendar year for the purchase of the Company’s common shares, at 95% of the market price. During the three and six months ended June 30, 2006, employees paid $95,500 and $201,100 into this plan. During the three and six months ended June 30, 2005, the employees paid $94,600 and $198,000 into this plan, respectively.
10.Concentration of Business
Almost all of the Company’s revenue is derived either directly from the U.S. government as a prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately 67%72% of the Company’s 20052006 year-to-date revenue has been derived from various Department of Defense and intelligence agencies. Approximately 33%28% of the Company’s 20052006 year-to-date revenue has been derived, directly or indirectly, from NASA.
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10.11.Convertible Preferred Stock and Convertible Notes
Series A Convertible Preferred Stock and Convertible Notes
In December 2003, the Company sold and issued for $15.0 million, 6,726,457 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) for $15.0 million.and 1,345,291 Common Stock Warrants. The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series A Preferred Stock for three and six months ended June 30, 2005 and 2004 was $0.2 million and $0.4 million for the three and six months ended for both June 30, 2006 and 2005, respectively.
Upon issuance of the Series A Preferred Stock, the Company allocated relative fair value of approximately $3.8$3.9 million to the Common Stock Warrants and recorded a beneficial conversion charge related to the Series A Preferred Stock of approximately $11.1 million. These amounts are being recorded as accretion of Series A Preferred Stock over the period tothrough the earliest redemption date which is September 15, 2008.of December 9, 2007. For the three and six months ended for both June 30, 20052006 and 2004,2005, the Company recorded $0.9 million and $1.9$1.8 million respectively, of accretion related to these charges.charges, respectively. The unamortized discount as of June 30, 2006 and 2005 was $5.4 million and $9.1 million.
The Series A Preferred Stock is convertible into Common Stock at any time at the election of its holders, initially at a ratio of one share of Common 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 then 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.
Holders of the Series A Preferred Stock may require the Company to 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.
million respectively.
In December of 2003, the Company also sold and issued, in aggregate, $10,000,000 principleprincipal amount of Series A Secured Subordinated Convertible Promissory Notes (the “Series(Series A Convertible Notes”).
ANALEX CORPORATION
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The Series A Convertible Notes bear interest at 7.0% annual rate, and are convertible into 3,321,707 shares of common stock and 664,341 Common Stock Warrants.
Upon issuance of the Series A Convertible Notes, the Company allocated relative fair value of approximately $1.9 million to the Series A Convertible Note Warrants and recorded a beneficial conversion charge related to the Series A Convertible Notes of approximately $5.3 million. The discount created by these charges is beingwill be amortized to interest expense over the life of the Series A Convertible Notes.Notes which will mature on December 9, 2007. For the three and six months ended June 30, 2006, the Company recognized $0.5 million and $1.0 million of amortization of that discount, respectively. For the three and six months ended June 30, 2005, and 2004, the Company recognized $0.5 million and $0.9$0.4 million of amortization of that discount. The unamortized discount as of June 30, 2006 and 2005 was $2.6 million and $4.4 million.
million respectively
Series B-1 and B-2 Convertible Preferred Stock
In May 2004, the Company sold and issued and soldin aggregate $12.0 million principal amount of convertible secured senior subordinated promissory notes (“Series B-1 Notes”) in the aggregate amount of $12 million. Subsequently, inand 857,142 Common Stock Warrants (the “Series B-1 Common Stock Warrants”). In September 2004, the Series BB-1 Notes were converted into 3,428,571 shares of Series B Convertible Preferred Stock (“Series B-1 Preferred Stock”).
Stock.
The Company had the option to obtain an additional $25.0 million through the sale of additional Series B-1 Preferred Stock is convertible into Common Stock at any time at the election of its holders at a per share conversion price of $2.80 (the “Series B-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 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-1B Preferred Stock for at least 2.5 times the Series B-1 Original Issue Pricepurpose of $3.50. The Series B-1 Preferred Stock will automatically convert into Common Stock uponpaying for the agreementcost of a Company acquisition. In connection with the holdersApril 2005 acquisition of 75% of the then outstanding Series B-1 Preferred Stock.
Holders of two-thirds of the Series B-1 Preferred Stock may requireComGlobal, 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 Companyexercised this option and issued for $25.0 million, an additional 7,142,856 shares of Series B Convertible Preferred Stock (“Series B-2 Preferred Stock”) for $25.0 million.
and 1,785,713 Common Stock Warrants (the “Series B-2 Common Stock Warrants”).
Upon issuance of the Series B-2 Preferred Stock, the Company allocated relative fair value of $2.4 million to the PreferredCommon Stock Warrants and recorded a beneficial conversion charge related to the Series B-2 Preferred Stock of $8.0 million. These amounts are being recorded as accretion of Series B-2 Preferred Stock over the period tothrough the earliest redemption date which isof September 15, 2008. For the three and six months ended June 30, 20052006, the Company recorded $0.6 million and $1.2 million of accretion related to these charges. For the three and six months ended June 30, 2005, the Company recognized $0.4 million of accretion related to these charges. The unamortized discount as of June 30, 2006 and 2005 was $7.3 million and $9.8 million.
The Series B-2 Preferred Stock is 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-2 Preferred Stock will 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 B-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 B-2 Issue 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 B-2 Preferred Stock will automatically convert into common stock if, any time following 18 months after the Series B-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 (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B-2 Preferred Stock); or (ii) with respect to any holder’s shares of Series B-2 Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series B-2 Preferred Stock for at least 2.5 times the Series B-2 Original Issue Price. The Series B-2 Preferred Stock will automatically convert into common stock upon the agreement of the holders of 75% of the then outstanding Series B-2 Preferred Stock.
Holders of two-thirds of the Series B-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 B-2 Preferred Stock will 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 B-2 Preferred Stock issued pursuant to the Series B-2 Purchase Agreement remain outstanding, the Company may not take
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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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-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 B-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.
million, respectively.
All Series B Convertible Preferred Stocks accrueStock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series B-1B Convertible Preferred Stock for the three and six months ended June 30, 20052006 was $0.6 million and $1.2 million, respectively and $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.same periods in 2005.
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Common Stock Warrants
The Common Stock Warrants issued in connection with the Series B-2 financing will expire on April 1, 2015. They are not exercisable at the time of issuance. Upon stockholders’ approval at the annual meeting, the Common Stock Warrants will become exercisable at the option of the 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.
Summary of ChargesConvertible Instruments
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 detailsprovides the face value and carrying value of the convertible preferred stock as of June 30, 2006 and December 31, 2005 and the remaining periods of amortization associated with each as of June 30, 2006:
| Face Value | June 30, 2006 | December 31, 2005 | Remaining Periods of Amortization | ||||||||||||||
| Carrying Value | Remaining Amount to be Accreted | Carrying Value | Remaining Amount to be Accreted | ||||||||||||||
Series A Preferred Stock | $ | 15,000,000 | $ | 9,611,300 | $ | 5,388,700 | $ | 7,736,300 | $ | 7,263,700 | 1.50 years | ||||||
Series B-1 Preferred Stock | $ | 12,000,000 | $ | 12,000,000 | $ | — | $ | 12,000,000 | $ | — | — | ||||||
Series B-2 Preferred Stock | $ | 25,000,000 | $ | 17,732,200 | $ | 7,267,800 | $ | 16,493,300 | $ | 8,506,700 | 2.25 years | ||||||
The table below provides the face value and carrying value of the Series A convertible debt as of June 30, 2006 and December 31, 2005 and the remaining period of amortization expense that will be recognized in subsequent quarters as interest expense:of June 30, 2006:
| 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 | ||||||
| Face Value | June 30, 2006 | December 31, 2005 | Remaining Period of Amortization | ||||||||||||||
| Carrying Value | Remaining Amount to be Accreted | Carrying Value | Remaining Amount to be Accreted | ||||||||||||||
Series A Convertible Notes | $ | 10,000,000 | $ | 7,401,700 | $ | 2,598,300 | $ | 6,497,700 | $ | 3,502,300 | 1.50 years | ||||||
11.12.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 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 June 30, 2005,2006, 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 Stock was in excess of the guaranteed share prices as of June 30, 2005,2006, 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.
In February 2006, the Company entered into a lease agreement, considered an operating lease, with a property management company to lease approximately 7,000 square feet of office space to be used as the Company’s Chantilly regional office. The lease commenced on February 1, 2006 and the initial term of the lease is five years with one optional renewal period of five years. The Company took occupancy of the new facility in April 2006. Future minimum lease payments over the five-year lease term will be approximately $0.9 million.
12.13.Segment Reporting
Although the CompanyAnalex is organized byinto two strategic business units, the Company considers each of its government contracting units to have similar economic characteristics, provideprovided similar types of services, and havehas 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, security, intelligence support or technical services to federal government agencies or major defense contractors.
ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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13.14.Discontinued Operations
During the second quarter of 2004,ended March 31, 2006, the Company concluded that ABS, a wholly owned subsidiary of the Company,SyCom did not fit with the Company’s long-term strategic plan and decideddisposed this subsidiary on April 1, 2006. SyCom provided staff augmentation services principally to divest ABS. The Company disposed of ABS on November 16, 2004. Therefore, thea single customer and had 32 employees. SyCom’s results of operations of this business are reportedpresented as a discontinued operations, net of applicable income taxes,operation for all periods presented in accordance with SFAS 144,Accounting for the Impairmentherein. The Company recorded a gain of Disposal of Long-Lived Assets. Proceeds from$226,300 related to the sale of ABS were two non-recourse notes for $1 million. The Company reviewed the future viability of ABS and its underlying credit worthiness and determined a full reserve against the notes was necessary.SyCom subsidiary.
The Company’s historical financial statements have been restated to reflect ABS as discontinued operations for the periods presented. Operating results of the discontinued businessbusinesses, excluding the related disposal activity, for the three and six months ended June 30, 2006 and 2005 respectively are as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Revenue | $ | — | $ | 500,000 | $ | — | $ | 978,700 | ||||||
Income (loss) from discontinued operations | 8,900 | (99,000 | ) | 47,200 | (128,900 | ) | ||||||||
Income tax expense (benefit) | 2,200 | (48,300 | ) | 16,900 | (49,700 | ) | ||||||||
Income (loss) from discontinued operations, net of tax | $ | 6,700 | $ | (50,700 | ) | $ | 30,300 | $ | (79,200 | ) | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue | $ | — | $ | 1,600,100 | $ | 892,500 | $ | 3,458,200 | ||||||||
(Loss) income from discontinued operations | 31,200 | (16,000 | ) | (243,800 | ) | 61,700 | ||||||||||
Income tax benefit (expense) | (11,900 | ) | 11,600 | 92,600 | (25,700 | ) | ||||||||||
(Loss) income from discontinued operations, net of tax | $ | 19,300 | $ | (4,400 | ) | $ | (151,200 | ) | $ | 36,000 | ||||||
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.
14.15.Litigation and Claims
The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. The 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$1.0 million to Swales in July 2004. Included in the $1,000,000$1.0 million settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and payment wasthe Company received by the Company.payment. Legal fees are expected to be approximately $290,000. Based on$325,000. The Company has received an opinion byfrom legal 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. Therefore, the Company established a receivable inof approximately $1.0 million related to the amountexpected reimbursement of $984,000 has been recorded. However, on July 28, 2004,these costs. In May 2005, the Company received fromoral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and management’s assessment of relevant facts, the Company believed and continues to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, the Company met with NASA a Notice of Intentprocurement personnel who indicated to Disallow Costs. Notwithstanding the Notice of IntentCompany prior NASA communications with respect to Disallow Costs,allowability and allocability should not be relied upon. While the Company continues to believe that the costs offull $1.0 million is allowable, allocable and reasonable, and therefore should be recoverable under the settlement will be reimbursed by NASA. DiscussionsELVIS contract with NASA, are continuing. However, there can be no assurance that the Company will in fact be reimbursed inhad concluded a reserve of $500,000 was appropriate and was therefore recorded as of December 31, 2005. The Company intends to continue to use all reasonable efforts to recover the full by NASA in the foreseeable future.
amount of its costs from NASA.
On April 29, 2005 the CompanyAnalex was served on with a compliant filed by H&K Strategic Business Solutions, LLC, now known as Altus Associates (“HKSBS”Altus”), in Virginia Circuit Court 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 seekingAltus sought damages of $830,000, related to a finder’s fee in connection with Analex’ acquisition of ComGlobal in April 2005, together with legal fees and expenses. WeThe Company filed a counter-claim against Altus seeking
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reimbursement of prior retainer payments made to Altus of approximately $110,000, plus certain legal fees. This matter was tried in March 2006 in Fairfax County Circuit Court. On June 2, 2006, the Fairfax County Circuit Court issued its decision and ruled that Altus is entitled to a fee of $830,000, plus interest at an annual rate of 6 percent, together with legal fees and expenses. The Company and its counsel continue to believe that the complaintAltus claim is without merit however, we cannot predictand the outcomeCompany has filed an appeal to the Virginia Supreme Court. For the quarter ended June 30, 2006, the Company recorded a liability for each element of the proceedingjudgment. The finder’s fee of $830,000 represents an additional direct cost of the ComGlobal acquisition and increased the goodwill recorded in connection with that transaction. Approximately $60,000 of interest expense, representing interest on the finder’s fee at 6 percent for the period April 1, 2005 through June 30, 2006, and approximately $200,000 of legal expenses for Altus’s attorney’s fees were accrued during the quarter ended June 30, 2006. In the event the Company’s appeal is unsuccessful, thus requiring the Company to make total cash payments of approximately $1.1 million to Altus, management believes this time.amount can be paid without materially impacting the Company’s liquidity or cash flows.
16.Subsequent Events
In August 2006, the Company consolidated two facilities and executed a sublease agreement for the Company’s remaining lease term of one of these previously utilized facilities. The Company will record a loss of approximately $230,000 during the three months ended September 30, 2006 primarily related to the shortfall of the cash receipts under the sublease agreement in relation to the amounts due under the original lease agreement for the remaining 39 month term of the lease.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
IntroductionFORWARD-LOOKING STATEMENTS
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 providing information technology, systems engineering, security services and intelligence support services in support of 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 U.S. Government, analyze and support defense systems, design, develop and test aerospace systems according to the specifications provided by our customers.
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. We believe that our acquisition of ComGlobal will yield additional significant yearly revenue and strong operating income, enhanced attractiveness to institutional investors and 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 revenue and strong operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within our 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 disposed of ABS 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.
New 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 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.
Results of Operations and Related Information
We have one reportable segment, which is engaged in professional services related to information technology and systems engineering for the U.S. government, primarily the Department of 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.
Our services are provided under three types of contracts: cost-plus-fees, time-and-materials, and fixed price contracts.
The following table shows our revenue from each of these types of contracts 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 | |||||||||
Cost-plus-fees | 45 | % | 40 | % | 38 | % | 43 | % | ||||
Time-and-materials | 32 | 43 | 35 | 41 | ||||||||
Fixed price | 23 | 17 | 27 | 16 | ||||||||
Total | 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 June 30, 2005 was approximately $352 million. Funded backlog as of June 30, 2005 was approximately $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 JUNE 30, 2005
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
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 | )% | ||||
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 REVENUE BY GROUP
Three Months Ended | June 30, 2005 | % of Total | June 30, 2004 | % of Total | |||||||
Homeland Security Group | 27,024,800 | 71 | % | $ | 11,404,800 | 51 | % | ||||
Systems Engineering Group | 11,123,800 | 29 | 10,810,400 | 49 | |||||||
Total | 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 BY GROUP
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 | % | ||
Revenue for the three months ended June 30, 2005 was $38.1 million, which represented an increase of $15.9 million, or 71.7% from the same 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 the prior year. Revenue growth attributable to acquisitions was $15.5 million for the three months ended June 30, 2005 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 National Reconnaissance Office (“NRO”).
Revenue of the Systems Engineering Group increased 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 9.2% from the same period last year. This was primarily due to additional tasking from the customer under both the ELVIS and Glenn Engineering Support Services contracts with NASA. This increase was offset by the continuation of planned step-down in activities under the Micorgravity Research Development and Operations subcontract. This contract provides services to NASA related to designing and building experiments to be run on the International Space Station.
Cost of revenue for the three months ended June 30, 2005 was $31.0 million, an increase of $13.6 million from the same period in the prior year. Cost of revenue for the six months ended June 30, 2005 was $54.7 million, an increase of $23.3 million from the same period in the prior year. In 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 prior 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 Series A and Series B Financing which are not deductible for tax purposes.
EBITDA, as defined below, was $3.9 million for the three months ended June 30, 2005 after adding back depreciation of $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 adding back depreciation of $0.3 million and amortization of $1.5 million to operating income of $4.8 million. EBITDA as a percent of revenue was 10.4% and 9.9% for the three and six months ended June 30, 2005, respectively, compared to 10.6% and 8.2% for the same periods from the previous year.
EBITDA, or earnings before interest, taxes, depreciation and amortization, is a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a Company’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 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.
CAPITAL RESOURCES AND LIQUIDITY
The Company experienced net income for the three and six months ended June 30, 2005 of $0.5 million and $1.2 million, respectively, compared to net losses of $0.7 million for each of the same periods in 2004. The improvement in both periods reflects a reduction in interest expense through the first two quarters of 2005 compared with the same 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-1 and B-2 Convertible Preferred Stocks and the 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 | |||||||||||||||||
| 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 $8.3 million for the six months ended June 30, 2005, compared to net 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 six months ended June 30, 2005 was $45.6 million compared to $27.2 million for the same period of the prior year. The increase within net cash used in investing activities during the six months ended June 30, 2005 compared the same period in 2004 was primarily related to the acquisition of ComGlobal. Net cash provided by financing activities during the 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 the result of the cash related activities associated with financing the ComGlobal acquisition.
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 million revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1.7 million was consolidated into the Credit Facility. On April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to increase the amount available under the Credit Facility from $20 million to $40 million. The Credit Facility has a maturity date of 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 June 30, 2005, the Credit Facility outstanding balance was $21.6 million. The interest rate at June 30, 2005 was 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 June 30, 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 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 June 30, 2005, the maximum amount payable under the terms of the guaranteed shares was approximately $1.6 million. As the fair market value of the Company’s Common Stock was in excess of the guaranteed share prices as of June 30, 2005, no amounts were accrued under the guarantee.
On November 2, 2001, the Company issued 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 outstanding balance of the promissory notes was approximately $0.3 million. The Company also entered into non-competition agreements with former employees totaling $0.4 million, on a discounted basis, payable over various periods with a current balance of $52,000 at June 30, 2005.
Forward-Looking Statements
Certain matters contained in thisthe following discussion and analysis concerning our operations, cash flows, financial position, economic performance, plans, trends, strategies 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 the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involveare not guarantees of future performance and subject to 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.
INTRODUCTION
This management’s discussion and analysis of financial condition and results of operations is intended to provide readers with an understanding of our past performance, our financial condition and our prospects. We will discuss and provide our analysis of the following:
OVERVIEW OF BUSINESS
We are a leading provider of mission-critical professional services to the U.S. government. We specialize in providing intelligence, systems engineering and security services in support of our nation’s security. We focus on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing and testing aerospace systems and providing a full range of security support services to the U.S. government. We specialize in the following professional services:
Information Technology Services.Our information technology services focus on design, development, test, integration and support of software and networks for mission critical systems. We develop radar, modeling and simulation and system software, all in support of collecting, testing, and analyzing data from various intelligence systems. We also provide the military with program management, systems engineering and software development services, including the development of command, control, communications, computers and intelligence (“C4I”) programs.
Aerospace Engineering Services.Our aerospace engineering services focus on engineering associated with the development, support and operations of space launch vehicles and facilities as well as independent verification and validation services. We provide services in the design and testing of expendable launch vehicles for the Department of Defense (“DoD”) and intelligence community. Our highly specialized expertise includes test, analysis and independent validation and verification support in areas such as structural dynamics, trajectory and performance, thermal system performance, and range safety. Our solutions enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. We also perform verification and validation of test results to ensure the reliability of the data.
Security and Intelligence Support Services.Our security and intelligence support services focus on analysis support and threat assessments, counterintelligence, information, network and facilities security, technology protection and security education and training.
We provide our services through one reportable segment, comprised of two strategic business units, our Homeland Security Group (“HSG”) and our Systems Engineering Group (“SEG”). HSG represented approximately 72% and 65% of our revenue for the six months ended June 30, 2006 and 2005, respectively. HSG provides information technology services, aerospace engineering services and security and intelligence support services to the agencies within the intelligence community such as the National Reconnaissance Office (“NRO”), the Missile Defense Agency (“MDA”) and the National Security Agency (“NSA”). HSG also provides services to the DoD, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman. We expect that HSG will continue to benefit from the country’s shifting current priorities in national defense and homeland security and emphasis on enhanced intelligence capabilities.
SEG represented approximately 28% and 35% of our revenue for the six months ended June 30, 2006 and 2005, respectively. SEG provides aerospace engineering services and information technology services, including program management support, primarily to NASA and major aerospace contractors in support of the development of space-based systems. SEG also supports the operation of terrestrial assets and the launch of unmanned rockets by NASA under our Expendable Launch Vehicle Integrated Support (“ELVIS”) contract. Specific capabilities of SEG include expendable launch vehicle engineering, space systems development, and ground support for space operations.
Our principal customer is the U.S. government. Revenue generated from contracts to federal government agencies and their prime contractors represented more than 99% of our total revenue for the six months ended June 30, 2006 and 2005, respectively. Our principal U.S. government customer is the DoD, which, directly or through its prime contractors, accounted for approximately 72% and 65% of our revenue for the six months ended June 30, 2006 and 2005, respectively. NASA is also a significant customer, generating 28% and 35% of our revenue for the six months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 approximately 37% of our revenue and 83% of our operating income was earned under three prime contracts with
agencies within the DoD. For the six months ended June 30, 2006 one of these three DoD contracts represented approximately 11% of our revenue and 40% of our operating. For the six months ended June 30, 2006 approximately 19% of our revenue and 17% of our operating income came from one prime contract with NASA. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.
On April 1, 2005, we acquired ComGlobal Systems, Incorporated (“ComGlobal”). ComGlobal, a software engineering and information technology firm, specializes in C4I programs for the military. Its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program. ComGlobal is now a wholly-owned subsidiary of ours and is reported as a part of our Homeland Security Group.
During the first fiscal quarter of 2006, we concluded that our wholly-owned subsidiary, SyCom Systems, Inc. (“SyCom”), did not fit with our long-term strategic plan and decided to divest SyCom. SyCom provided staff augmentation services principally to a single customer and had 32 employees. We disposed of SyCom on April 1, 2006. Therefore, the results of operations of SyCom are reported as discontinued operations, net of applicable income taxes, for all periods presented. Historically, we reported SyCom as a component of our Homeland Security Group.
We generate a majority of our revenue as a prime contractor to the federal government. Our objective is to focus on retaining and increasing the percentage of our business as a prime contractor because we believe it provides us with stronger client relationships. The following table summarizes our revenue as a prime contractor and as a subcontractor as a percentage of our total revenue for the three and six months ended June 30:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
Prime contract revenue | 81 | % | 73 | % | 81 | % | 75 | % | ||||
Subcontract revenue | 19 | 27 | 19 | 25 | ||||||||
Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||
All of our U.S. government contracts are subject to audit and various cost controls, and include standard provisions for termination at any time at the convenience of the U.S. government. Multi-year U.S. government contracts and related orders are subject to cancellation if funding for contract performance for any subsequent year becomes unavailable.
Future growth is dependent upon the strength of our target markets, our ability to identify opportunities, and our ability to successfully bid and win new contracts. Our success can be measured in part based upon the level of our backlog. The following table summarizes our contract backlog as of June 30 (in millions):
June 30, 2006 | June 30, 2005 | |||||
Funded backlog | $ | 75.0 | $ | 64.0 | ||
Unfunded contract value | 257.0 | 288.0 | ||||
Total estimated backlog | $ | 332.0 | $ | 352.0 | ||
We currently expect to recognize revenue during the remainder of fiscal 2006 of approximately 22% from our total backlog as of June 30, 2006. Subsequent to June 30, 2006, we have been notified of new contract awards that should increase our backlog by approximately $120 million, to approximately $450 million, once we complete the negotiations related to these new contracts. One of these new awards is a $64.9 million contract for security and intelligence directorate support services for the Defense Advanced Research Project Agency (the “DARPA Contract”). Analex commenced performance under the DARPA Contract on July 27, 2006. Two of the unsuccessful offerors in this solicitation have now protested the DARPA Contract award to the Government Accountability Office (“GAO”). GAO protest regulations call for an automatic stay of contract performance in the event of protest. However, as also permitted by statute, DARPA issued an override of the automatic stay due to compelling and urgent circumstances requiring performance of the contract. We were informed that one of the unsuccessful offerors who is protesting has also filed a lawsuit with the Court of Federal Claims challenging DARPA’s override. The GAO decisions regarding the two protests are due in early November 2006.
Contract profit margins are generally affected by the type of contracts we have. We can typically earn higher profits on fixed-price and time-and-material contracts than cost-plus-fee contracts. Thus, an important part of growing our operating income is to increase the amount of services successfully delivered under fixed-price and time and material contracts The following table summarizes our historical contract mix, measured as a percentage of total revenue, for the three and six months ended June 30:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
Cost-plus-fees | 42 | % | 46 | % | 42 | % | 40 | % | ||||
Time-and-materials | 32 | 29 | 32 | 32 | ||||||||
Fixed price | 26 | 25 | 26 | 28 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
While our government clients typically determine what type of contract will be awarded to us, where we have the opportunity to influence the type of contract awarded, we will pursue time-and-material and fixed-price contracts for the reasons discussed above.
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COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
Three Months Ended | June 30, 2006 | % of Revenue | June 30, 2005 | % of Revenue | % Change | ||||||||||||
Revenue | $ | 37,907,100 | $ | 36,548,500 | 3.7 | % | |||||||||||
Operating costs and expenses | |||||||||||||||||
Cost of revenue | 30,476,700 | 80.4 | % | 29,149,500 | 79.8 | % | 4.6 | % | |||||||||
Selling, general and administrative | 3,874,900 | 10.2 | % | 3,433,700 | 9.4 | % | 12.8 | % | |||||||||
Amortization of intangible assets | 852,500 | 2.2 | % | 989,100 | 2.7 | % | (13.8 | )% | |||||||||
Depreciation | 237,400 | 0.6 | % | 194,400 | 0.5 | % | 22.1 | % | |||||||||
Total operating costs and expenses | 35,441,500 | 93.5 | % | 33,766,700 | 92.4 | % | 5.0 | % | |||||||||
Operating income | 2,465,600 | 6.5 | % | 2,781,800 | 7.6 | % | (11.4 | )% | |||||||||
Interest expense, net | (1,145,700 | ) | (3.0 | )% | (996,200 | ) | (2.7 | )% | 15.0 | % | |||||||
Income from continuing operations before income taxes | 1,319,900 | 3.5 | % | 1,785,600 | 4.9 | % | (26.1 | )% | |||||||||
Provision for income taxes | 384,800 | 1.0 | % | 1,298,500 | 3.6 | % | (70.4 | )% | |||||||||
Income from continuing operations | 935,100 | 2.5 | % | 487,100 | 1.3 | % | 92.0 | % | |||||||||
Income (loss) from discontinued operations, net of tax | 8,500 | 0.0 | % | (4,300 | ) | (0.0 | )% | (297.7 | )% | ||||||||
Income on disposal of discontinued operations, net of income taxes | 226,300 | 0.6 | % | 6,700 | 0.0 | % | 3277.6 | % | |||||||||
Net income | 1,169,900 | 3.1 | % | 489,500 | 1.3 | % | 139.0 | % | |||||||||
Dividends on convertible preferred stock | 780,000 | 2.1 | % | 781,900 | 2.1 | % | (0.2 | )% | |||||||||
Accretion of convertible preferred stock | 1,568,200 | 4.1 | % | 1,588,800 | 4.3 | % | (1.3 | )% | |||||||||
Net loss attributable to common shareholders | (1,178,300 | ) | (3.1 | )% | $ | (1,881,200 | ) | (5.1 | )% | (37.4 | )% | ||||||
Six Months Ended | June 30, 2006 | % of Revenue | June 30, 2005 | % of Revenue | % Change | ||||||||||||
Revenue | $ | 73,438,300 | $ | 63,128,600 | 16.3 | % | |||||||||||
Operating costs and expenses | |||||||||||||||||
Cost of revenue | 59,513,300 | 81.0 | % | 50,754,200 | 80.4 | % | 17.3 | % | |||||||||
Selling, general and administrative | 6,896,800 | 9.4 | % | 5,870,400 | 9.3 | % | 17.5 | % | |||||||||
Amortization of intangible assets | 1,766,900 | 2.4 | % | 1,479,100 | 2.3 | % | 19.5 | % | |||||||||
Depreciation | 484,100 | 0.7 | % | 273,800 | 0.4 | % | 76.8 | % | |||||||||
Total operating costs and expenses | 68,661,100 | 93.5 | % | 58,377,500 | 92.5 | % | 17.6 | % | |||||||||
Operating income | 4,777,200 | 6.5 | % | 4,751,100 | 7.5 | % | 0.5 | % | |||||||||
Interest expense, net | (2,332,300 | ) | (3.2 | )% | (1,759,200 | ) | (2.8 | )% | 32.6 | % | |||||||
Income from continuing operations before income taxes | 2,444,900 | 3.3 | % | 2,991,900 | 4.7 | % | (18.3 | )% | |||||||||
Provision for income taxes | 993,900 | 1.4 | % | 1,885,000 | 3.0 | % | (47.3 | )% | |||||||||
Income from continuing operations | 1,451,000 | 2.0 | % | 1,106,900 | 1.8 | % | 31.1 | % | |||||||||
Income (loss) from discontinued operations, net of tax | (151,200 | ) | (0.2 | )% | 65,600 | 0.1 | % | (330.5 | )% | ||||||||
Income on disposal of discontinued operations, net of income taxes | 226,300 | 0.3 | % | 6,700 | 0.0 | % | 3277.6 | % | |||||||||
Net income | 1,526,100 | 2.1 | % | 1,179,200 | 1.9 | % | 29.4 | % | |||||||||
Dividends on convertible preferred stock | 1,560,000 | 2.1 | % | 1,181,400 | 1.9 | % | 32.0 | % | |||||||||
Accretion of convertible preferred stock | 3,113,900 | 4.2 | % | 2,526,300 | 4.0 | % | 23.3 | % | |||||||||
Net loss attributable to common shareholders | (3,147,800 | ) | (4.3 | )% | $ | (2,528,500 | ) | (4.0 | )% | 24.5 | % | ||||||
Revenue
The Homeland Security Group (“HSG”) provided $27.0 million, or 71%, of our revenue for the three months ended June 30, 2006 and $52.7 million, or 72%, of our revenue for the six months ended June 30, 2006. This represented a 6.1% and 28.4% increase in HSG revenue from the three and six months ended June 30, 2005. HSG organic revenue growth was approximately 6.1% and 7.2% for the three and six months ended June 30, 2006, respectively. Contributing to this increase were the effects of our acquisition of ComGlobal in April 2005 and increased technology asset protection solutions we provided to certain agencies, including MDA and the Counterintelligence Field Activity (“CIFA”). In addition, we provided increased independent verification and validation services in support of launches of expendable launch vehicles by the United States Air Force and NRO.
Our Systems Engineering Group (“SEG”) provided $10.9 million, or 29%, of our revenue for the three months ended June 30, 2006 and $20.7 million, or 28%, of our revenue for the six months ended June 30, 2006. SEG revenue decreased approximately 1.7% and 6.1% for the three and six months ended June 30, 2006, respectively compared to same periods in the prior year. This decrease is attributable to the continuing planned step-down of our Microgravity Research and Development Research Development and Operations subcontract (“MRDOC”).
Cost of Revenue
Cost of revenue for the three months ended June 30, 2006 was $30.5 million, an increase of $1.3 million, or 4.6%, from the same period in the prior year. Cost of revenue for the six months ended June 30, 2006 was $59.5 million, an increase of $8.8million, or 17.3%, from the same period in the prior year. Cost of revenue, as a percentage of revenue for the three months ended June 30, 2006 was 80.4%, compared to 79.8% for the same period in the prior year. Cost of revenue, as a percentage of revenue for the six months ended June 30, 2006 was 81.0%, compared to 80.4% for the same period in the prior year. The increases in cost of revenue as a percentage of revenue are primarily the result of higher health insurance costs in 2006 compared to 2005.
Selling, General and Administrative Expenses (“SG&A”)
SG&A for the three months ended June 30, 2006 was $3.9 million, an increase of $ 0.4million, or 12.8%, from the same period in the prior year. SG&A expense for the six months ended June 30, 2006 was $6.9 million, an increase of $1.0 million, or 17.5%, from the same period in the prior year. SG&A, as a percentage of revenue was 10.2% and 9.4% for the three and six months ended June 30, 2006 compared to 9.4% and 9.3% for the same periods in the prior year. The increases in SG&A as a percentage of revenue were primarily due to increased expenses related to marketing and business development activities, plus legal expenses of $200,000 recorded in connection with the Altus Associates judgment (see Note 15)
Depreciation Expense and Amortization of Intangible Assets
Depreciation expense and intangible amortization expense for the three and six months ended June 30, 2006 was $1.1 million and $2.3 million, respectively. This was a decrease of $0.1 million and an increase of $0.5 million when compared to the same periods in 2005. The six month increase resulted primarily from the fixed assets and identifiable intangible assets we acquired in connection with the ComGlobal acquisition in April 2005.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA, as defined below, for the three months ended June 30, 2006 was $3.6 million after adding depreciation of $0.2 million and amortization of $0.9 million to operating income of $2.5 million. This was a decrease of $0.4 million, or 10.3% from the same period in the prior year. This decrease is primarily a result of the legal fees we accrued in relation to the Altus judgment (see Note 15) and our increased investment in marketing and business development as discussed in the SG&A section above.
EBITDA for the six months ended June 30, 2006 was $7.0 million after adding depreciation of $0.5 million and amortization of $1.8 million to operating income of $4.8 million. This was an increase of $0.5 million, or .8.1% from the same period in the prior year. For the six months ended June 30, 2006, EBITDA, as a percentage of revenue was and 9.6% compared to10.3% for the same period in the prior year. The decline in EBITDA margin for the six months ended June 30, 2006 is attributable to the one-time legal fees accrued as described above and our increased investment in marketing and business development.
EBITDA is a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a Company’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 we believe is useful to investors in evaluating our results because it excludes certain non-cash expenses that are not directly related to our core operating performance. EBITDA is calculated by adding 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 our operating performance, or for cash flow, as measures of our liquidity. In addition, because not all companies calculate EBITDA identically, our presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
Interest Expense
Interest expense for the three months ended June 30, 2006 was $1.1 million, an increase of $0.1 million, or 15.0%, from the same period in the prior year. Interest expense for the six months ended June 30, 2006 was $2.3 million, an increase of $0.6 million, or 32.6%, from the same period in the prior year. Interest expense has increased for the three months ended June 30, 2006 due to the $60,000 of interest we accrued in relation to the Altus judgment (see Note 15). Interest expense increased for the six month period due to the increased borrowings on our revolving line of credit in April 2005 to fund a portion of the ComGlobal purchase price.
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 2006 was $0.4 million, a decrease of $0.9 million, or 70.4%, from the same period in the prior year. The provision for income taxes for the six months ended June 30, 2006 was $1.0 million, a decrease of $.9 million, or 47.3%, from the same period in the prior year. These decreases result primarily from a reduction in our effective state tax rate and the cumulative effect of applying this lower rate to our deferred tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to finance the costs of operations pending the billing and collection of accounts receivable, to acquire capital assets, to pay the interest on our credit facility, to make quarterly dividend payments on our convertible preferred stock and to make selective strategic acquisitions.
Cash Flow
For the six months ended June 30, 2006, net cash provided by operating activities was $7.1 million, compared to $7.5 million for the same period in the prior year. This decrease in cash flow from operations was primarily the result of an increase in accounts receivable days sales outstanding to 72 days, from approximately 60 days for the first six months of 2005. We bill most of our clients the month after services have been rendered. Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner and our ability to manage our vendor payments. We use Days Sales Outstanding, or DSO, to measure how efficiently we manage the billing and collection of our accounts receivable.
Cash provided by investing activities was $0.2 million for the six months ended June 30, 2006, compared to $45.6 million used in investing activities for the same period in the prior year. Our investing cash flow activity is affected primarily by our purchase of property and equipment. We acquired approximately $0.3 million of property and equipment during the six months ended June 30, 2006. This was offset by approximately $0.5 million we received associated with the sale of property held for sale and $0.1 million proceeds we received from the sale of SyCom. During the six months ended June 30, 2005, we used $45.4 million to acquire ComGlobal.
Cash used in financing activities was $9.8 million for the six months ended June 30, 2006, compared to $40.2 million of cash provided by financing activities for the same period in the prior year. We used a combination of $25 million of preferred stock and $22 million of senior bank debt to complete the acquisition of ComGlobal in April 2005. During the first six months of 2006, we have repaid $8.3 million of our revolving line of credit.
Credit Facility and Borrowing Capacity
We have a long-standing relationship with Bank of America, N.A. (“the Bank”). Part of our relationship with the Bank includes a $40.0 million revolving line of credit (“the Credit Facility”) used for senior acquisition financing and working capital requirements. The Credit Facility has a maturity date of May 31, 2008. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in the agreement. As of June 30, 2006, the outstanding balance of the Credit Facility was $19.3 million. The interest rate at June 30, 2006 was 8.35%. Borrowing availability under our Credit Facility, which at June 30, 2006 was determined in relation to our outstanding accounts receivable balance, continues to be sufficient to fund normal operations. Available borrowing capacity on our Credit Facility at June 30, 2006 was approximately $3.8 million. We are currently in the process of amending and restating the Credit Facility to eliminate the accounts receivable borrowing base limitations. We expect borrowing availability under the amended Credit Facility to be determined based on earnings before interest, taxes, depreciation and amortization, as defined in the Credit Facility, and that a minimum available borrowing capacity of $30 million would be available under the Credit Facility.
As of June 30, 2006, the Credit Facility was subject to a borrowing base determined based on our outstanding accounts receivable balance and certain financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of June 30, 2006 we were in compliance with these covenants. The Credit Facility also restricts our ability to dispose of properties, 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 certain leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates. All assets of our business generally secure the Credit Facility.
Guarantees and Commitments
Pursuant to the November 2, 2001 acquisition of the former Analex, we issued 3,572,143 shares of our Common Stock to the shareholders of the former Analex 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 we guarantee 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 June 30, 2006, the maximum amount payable under the terms of the guaranteed shares was approximately $1.6 million. As the fair market value of our Common Stock was in excess of the guaranteed share prices as of June 30, 2006, we did not accrue any amounts under the guarantee.
On November 2, 2001, we issued promissory notes to certain Analex Sellers totaling approximately $0.8 million with a five-year term, bearing interest at 6%. As of June 30, 2006, the outstanding balance of the promissory notes was approximately $44,000. We also entered into non-competition agreements with former employees totaling $0.4 million, on a discounted basis, payable over various periods with a current balance of approximately $34,000 at June 30, 2006.
In February 2006, we entered into a lease agreement for approximately 7,000 square feet to be used as our new Chantilly, Virginia regional office. The lease commenced on February 1, 2006 and has a term of five years with one optional renewal period of five years. Future minimum lease payments over the five-year lease term will be approximately $0.9 million.
Stock Repurchase Program
On June 15, 2006, our Board of Directors approved a stock repurchase program which authorized the use of $1.0 million of our capital to purchase shares of our outstanding common stock from time to time in the open market or through negotiated transactions, depending on market conditions, share price and other factors. As of June 30, 2006, no shares of common stock were repurchased by the Company under this stock repurchase program.
Under the repurchase program, purchases will be funded from available working capital and the repurchased shares may be retired, held in treasury or used for ongoing stock issuances such as issuances under employee stock plans.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 48
In June, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109.The Interpretation clarifies the accounting for uncertainty in income statements recognized in an enterprise’s financial statements in accordance with SFAS No, 109. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation is effective for fiscal years beginning after December 15, 2006. Management is in the process of determining the effect of this proposal on its financial statements.
Adoption of SFAS No. 123(R)
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123(R) eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.
Effective January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption are measured at estimated fair value and included in our operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123(R).
Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the period beginning January 1, 2006, excess tax benefits from the exercise of stock options are presented as financing cash flows. We did not consider such benefits material for the three or six months ended June 30, 2006 or 2005, respectively.
As a result of adopting SFAS No. 123(R), we recorded approximately $64,000 and $167,000 of stock-based compensation expense, or approximately $49,000 and $131,000 after-tax for the three and six months ended June 30, 2006. This stock-based compensation expense reduced both basic and diluted earnings per share by $0.00 and $0.01 per share for the three and six months ended June 30, 2006.
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 improvementsexpenditures exposes the Company to variability in interest payments due to changes in interest rates. The Company currently does not currently use interest rate swaps or other means to reduce the interest rate exposure on these variable rate obligations. TheFurthermore, the Company does not hold any derivatives for trading or speculative purposes.other type of derivative instrument.
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 June 30, 2005,2006, in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.
OurThe Company’s management, including ourits 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.
Item 1.Legal ProceedingsProceedings.
The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. The 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$1.0 million to Swales in July 2004. Included in the $1,000,000$1.0 million settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and payment wasthe Company received by the Company.payment. Legal fees are expected to be approximately $290,000. Based on$325,000. The Company has received an opinion byfrom legal 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. Therefore, the Company established a receivable inof approximately $1.0 million related to the amountexpected reimbursement of $984,000 has been booked. However, on July 28, 2004,these costs. In May 2005, the Company received fromoral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and management’s assessment of relevant facts, the Company believed and continues to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, the Company met with NASA a Notice of Intentprocurement personnel who indicated to Disallow Costs. Notwithstanding the Notice of IntentCompany prior NASA communications with respect to Disallow Costs,allowability and allocability should not be relied upon. While the Company continues to believe that the costs offull $1.0 million is allowable, allocable and reasonable, and therefore should be recoverable under the settlement will be reimbursed by NASA. DiscussionsELVIS contract with NASA, are continuing. However, there can be no assurance that the Company will in fact be reimbursed inhad concluded a reserve of $500,000 was appropriate and was therefore recorded as of December 31, 2005. The Company intends to continue to use all reasonable efforts to recover the full by NASA in the foreseeable future.
amount of its costs from NASA.
On April 29, 2005 the CompanyAnalex was served on with a compliant filed by H&K Strategic Business Solutions, LLC, now known as Altus Associates (“HKSBS”Altus”), in Virginia Circuit Court 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 seekingAltus sought damages of $830,000, related to a finder’s fee in connection with Analex’ acquisition of ComGlobal in April 2005, together with legal fees and expenses. The Company filed a counter-claim against Altus seeking reimbursement of prior retainer payments made to Altus of approximately $110,000, plus certain legal fees. This matter was tried in March 2006 in Fairfax County Circuit Court. On June 2, 2006, the Fairfax County Circuit Court issued its decision and ruled that Altus is entitled to a fee of $830,000, plus interest at an annual rate of 6 percent, together with legal fees and
expenses. The Company and its counsel continue to believe that the Altus claim is without merit and the Company has filed an appeal to the Virginia Supreme Court. For the quarter ended June 30, 2006, the Company recorded a liability for each element of the judgment. The finder’s fee of $830,000 represents an additional direct cost of the ComGlobal acquisition and increased the goodwill recorded in connection with that transaction. Approximately $60,000 of interest expense, representing interest on the finder’s fee at 6 percent for the period April 1, 2005 through June 30, 2006, and approximately $200,000 of legal expenses for Altus’s attorney’s fees were accrued during the quarter ended June 30, 2006. In the event the Company’s appeal is unsuccessful, thus requiring the Company to make total cash payments of approximately $1.1 million to Altus, management believes this amount can be paid without materially impacting the Company’s liquidity or cash flows.
Item 1A.Risk Factors
Other than with respect to the risk factors below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The following risk factors were disclosed on the Form 10-K and have been revised to provide updated information as of the date of filing of this quarterly report on Form 10-Q.
We depend on contracts with U.S. federal government agencies, particularly clients within the Department of Defense and NASA, for substantially all of our revenue, and if our relationships with these agencies were impaired, our business could be materially adversely affected.
Revenue derived from U.S. federal government agencies and their prime contractors represented more than 99%, of our total revenue for the six months ended June 30, 2006 and 2005, respectively. The Department of Defense, our principal U.S. government customer, represented approximately 72% and 65% of our revenue for the six months ended June 30, 2006 and 2005, respectively. NASA generated 28% and 35% of our revenue for the six months ended June 30, 2006 and 2005, respectively. Approximately 19% of our revenue and 17% of our operating income for the six months ended June 30, 2006 came from one prime contract with NASA. In addition, the Homeland Security Group’s contracts with three Department of Defense customers generated 37% of our revenue and 83% of our operating income for the six months ended June 30, 2006. For the six months ended June 30, 2006, one of these three Department of Defense contracts represented 11% of our revenue and 40% of our operating income. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, the Department of Defense, NASA or any significant agency in the intelligence community, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, operating results, financial condition and business prospects could be materially adversely affected. In July, two competitor companies filed protests against one our new awards, the DARPA contract which has a contract value of $64.9 million. If this protest prevails, we could lose the DARPA contract.
We cannot predict the results of legal proceedings which may arise from time to time in the ordinary course of business or in relation to our acquisition activities.
From time to time we are involved in legal proceedings arising in the ordinary course of our business. We cannot predict the nature, extent and timing of such legal proceedings. Furthermore, we cannot predict whether the outcome of such legal proceedings could have a material adverse effect on our operating results or cash flows.
We were served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. We entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, we paid $1.0 million to Swales in July 2004. Included in the $1.0 million settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and we received payment. Legal fees are expected to be approximately $325,000. We have received an opinion from legal counsel 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. Therefore, we established a receivable of approximately $1.0 million related to the expected reimbursement of these costs. In May 2005, we received oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and managements’ assessment of relevant facts, we believed and continue to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, we met with NASA procurement personnel who indicated to us prior NASA communications with respect to allowability and allocability should not be relied upon. While we continue to believe that the full $1.0 million is allowable, allocable and reasonable, and therefore should be recoverable under the ELVIS contract with NASA, we had concluded a reserve of $500,000 was appropriate and was therefore recorded as of December 31, 2005. We intend to continue to use all reasonable efforts to recover the full amount of its costs from NASA.
On April 29, 2005 we were served with a compliant filed by H&K Strategic Business Solutions, LLC, now known as Altus Associates (“Altus”), in Virginia Circuit Court alleging breach of contract relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004, that was later terminated by us on February 14, 2005. Under the complaint, Altus sought damages of $830,000, related to a finder’s fee in connection with Analex’ acquisition of ComGlobal in April 2005, together with legal fees and expenses. We filed a counter-claim against Altus seeking reimbursement of prior retainer payments made to Altus of approximately $110,000, plus certain legal fees. This matter was tried in March 2006 in Fairfax County Circuit Court. On June 2, 2006, the Fairfax County Circuit Court issued its decision and ruled that Altus is entitled to a fee of $830,000, plus interest at an annual rate of 6 percent, together with legal fees and expenses. We and our counsel continue to believe that the complaintAltus claim is without merit however,and we cannot predicthave filed an appeal to the outcomeVirginia Supreme Court. For the quarter ended June 30, 2006, we recorded a liability for each element of the proceedingjudgment. The finder’s fee of $830,000 represents an additional direct cost of the ComGlobal acquisition and increased the goodwill recorded in connection with that transaction. Approximately $60,000 of interest expense, representing interest on the finder’s fee at 6 percent for the period April 1, 2005 through June 30, 2006, and approximately $200,000 of legal expenses for Altus’s attorney’s fees were accrued during the quarter ended June 30, 2006. In the event our appeal is unsuccessful, thus requiring us to make total cash payments of approximately $1.1 million to Altus, management believes this time.amount can be paid without materially impacting our liquidity or cash flows.
Item 4.Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 19, 2005.
18, 2006.
(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, Daniel P. March, Gerald A. Poch, and Daniel R. Young; |
| (ii) | Proposal 2: |
| (iii) | Proposal 3: ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year |
The following votes were cast with respect to each of the matters voted on at the SpecialAnnual Meeting:
Proposal #1 | ||||||||||
DIRECTORS | FOR | WITHHELD | FOR | WITHHELD | ||||||
#1-Phillips | 31,330,382 | 29,286 | 31,737,349 | 697,329 | ||||||
#2-Belford | 31,333,932 | 25,736 | ||||||||
#3-Faulders | 31,334,457 | 25,211 | ||||||||
#2-Belford. | 31,759,506 | 675,172 | ||||||||
#3-Faulders. | 31,733,336 | 701,342 | ||||||||
#4-Faurer | 31,333,102 | 26,566 | 31,734,332 | 700,346 | ||||||
#5-Hale | 31,332,541 | 27,127 | 31,762,722 | 671,956 | ||||||
#6-Hewitt | 31,333,927 | 25,741 | 31,761,413 | 673,265 | ||||||
#7 March | 31,333,447 | 26,221 | 31,762,673 | 672,005 | ||||||
#8-Poch | 33,332,186 | 27,482 | 31,761,614 | 673,064 | ||||||
#9-Young | 31,333,427 | 26,241 | 31,735,612 | 699,066 | ||||||
Proposal #2 | FOR | AGAINST | ABSTAIN | |||||||
Total | 23,709,332 | 1,009,686 | 18,992 | |||||||
Proposal #3 | FOR | AGAINST | ABSTAIN | |||||||
Total | 31,341,304 | 10,914 | 7,450 | |||||||
Proposal #2 | FOR | AGAINST | ABSTAIN | |||
Total | 23,185,638 | 1,692,109 | 42,607 | |||
Proposal #3 | FOR | AGAINST | ABSTAIN | |||
Total | 32,405,879 | 6,551 | 22,248 | |||
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 Reportcurrent report on Form 8-K dated March 30, 2005April 3, 2006 and filed with the Securities and Exchange Commission on April 1, 2005 reported that the Company filed 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 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 April 27, 2005 and filed with the Securities and Exchange Commission on April 27, 20054, 2006 reported that the Company issued a press release announcing the completion of the sale of its financial results for the fiscal quarter ended March 31, 2005.
SyCom Services, Inc. subsidiary to Ameri-Force Craft Services, Inc.
A Current Reportcurrent report on Form 8-K dated April 25, 2005 and filed with the Securities and Exchange Commission on April 28, 2005 reported 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, 2005May 4, 2006 and filed with the Securities and Exchange Commission on May 2, 20055, 2006 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.
issued a press release announcing the date of it web cast regarding its financial results for the quarter ended June 30, 2006.
A Current Reportcurrent report on Form 8-K dated May 18, 20052006 and filed with the Securities and Exchange Commission on May 18, 200524, 2006 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminatestockholders approved the adoption of the Company’s 2006 Long Term Incentive Plan at the 2006 Annual Meeting of Stockholders held on May 13,18, 2006. The Form of Employee Stock Appreciation Rights agreement (“SARs”) was filed as Exhibit 10.1. The Company also reported that the Company entered into written agreements with both Mr. Sterling E. Phillips, Jr, Chairman and Executive Officer of the Company, whereby Mr. Phillips was granted SARs covering 400,000 shares of Analex Common Stock and Mr. Michael G. Stolarik, President and Chief Operating Officer of the Company was granted SARs covering 150,000 shares of Analex Common Stock. The Form 8-K also reported that the Board of Directors unanimously approved and adopted the Fourth Amendment to June 15, 2005.
the Company’s Amended and Restated Bylaws.
A Current Reportcurrent report on Form 8-K dated March 22, 2005June 2, 2006 and filed with the Securities and Exchange Commission on June 15, 20058, 2006 reported that the Company has extended Mr. Ronald B. Alexander’s employment, whichFairfax County Circuit Court ruled that Altus Associates was originally scheduledentitled to terminate on June 15, 2005, to July 15, 2005.
A Current Report on Form 8-K/A dateda fee of $830,000, plus interest at annual rate of 6 percent from April 1, 2005, together with legal fees and expenses and that the Company intended to file an appeal to the Virginia Supreme Court.
A current report on Form 8-K dated June 13, 2006 and filed with the Securities and Exchange Commission on June 15, 200514, 2006 reported that the Company in accordance with Item 9.1(a)issued a press release announcing the appointment of Form 8-K provided the required audited financial statements for ComGlobal Systems, Incorporated (“ComGlobal”)Daniel R. Young as of June 30, 2004, 2003 and 2002 and related Independent Auditors’ Reports (b) in accordance with Item 9.1(b) of Form 8-K, provided the required Unaudited Pro Forma Combined Balance Sheet, the Unaudited Pro Forma Combined Statement of Operations, and Notes to Unaudited Pro Forma Combined Financial Statements.
Lead Director.
A Current Reportcurrent report on Form 8-K dated JulyJune 15, 20052006 and filed with the Securities and Exchange Commission on July 15, 2005June 16, 2006 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 15, 2005.issued a press release announcing a Stock Repurchase Program.
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: August 2, 200511, 2006
Analex Corporation
(Registrant)
| By: | / | By: | / | |||||
| Sterling E. Phillips, Jr. | ||||||||
| C. Wayne Grubbs | ||||||||
Chairman and Chief Executive Officer | ||||||||
(Principal Executive Officer) | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) | |||||||
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