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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For | the quarterly period ended June 30, 2003 |
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the period from to
Commission file number0-5404
ANALEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 71-0869563 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5904 Richmond Highway
Suite 300
Alexandria, Virginia 22303
(Address of principal executive offices)
Registrant’s Telephone number including area code
(703) 329-9400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes¨ Nox
As of August 11, 2003, 15,032,067 shares of the common stock of the registrant were outstanding.
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ANALEX CORPORATION
Page No. | ||||
Part I Financial Information: | ||||
Item 1. | Financial Statements | |||
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 | 3 | |||
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited) | 5 | |||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (unaudited) | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 29 | ||
Item 4. | Controls and Procedures | 30 | ||
Part II Other Information: | ||||
Item 1. | Legal Proceedings | 30 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 30 | ||
Item 6. | Exhibits and Reports on Form 8-K | 31 | ||
33 |
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ANALEX CORPORATION
JUNE 30, 2003 AND DECEMBER 31, 2002
June 30, 2003 | December 31, 2002 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 892,200 | $ | 301,800 | ||
Accounts receivable, net | 11,338,600 | 12,556,100 | ||||
Prepaid expenses and other | 321,100 | 270,500 | ||||
Total current assets | 12,551,900 | 13,128,400 | ||||
Fixed assets, net | 370,800 | 216,700 | ||||
Goodwill | 15,534,600 | 15,534,600 | ||||
Contract rights and other intangibles, net | 1,513,700 | 1,770,200 | ||||
Deferred finance costs | 66,000 | 75,900 | ||||
Other | 39,600 | 58,400 | ||||
Total other assets | 17,524,700 | 17,655,800 | ||||
Total assets | $ | 30,076,600 | $ | 30,784,200 | ||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
June 30, 2003 | December 31, 2002 | |||||||
(unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,128,200 | $ | 3,294,700 | ||||
Note payable—line of credit | 1,362,600 | 2,187,700 | ||||||
Note payable—bank term note | 700,000 | 700,000 | ||||||
Notes payable—other | 1,012,100 | 1,012,100 | ||||||
Other current liabilities | 7,156,000 | 5,258,400 | ||||||
Total current liabilities | 11,358,900 | 12,452,900 | ||||||
Note payable—bank term note | 1,691,700 | 2,041,700 | ||||||
Notes payable—other | 1,557,100 | 2,297,200 | ||||||
Other | 74,300 | 90,600 | ||||||
Total long-term liabilities | 3,323,100 | 4,429,500 | ||||||
Total liabilities | 14,682,000 | 16,882,400 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Common stock $.02 par; authorized 20,000,000 shares; | 297,400 | 288,500 | ||||||
Additional capital | 21,221,700 | 21,171,400 | ||||||
Deferred compensation | — | (7,700 | ) | |||||
Accumulated other comprehensive loss | (74,300 | ) | (90,600 | ) | ||||
Accumulated deficit | (6,050,200 | ) | (7,459,800 | ) | ||||
Total shareholders’ equity | 15,394,600 | 13,901,800 | ||||||
Total liabilities and shareholders’ equity | $ | 30,076,600 | $ | 30,784,200 | ||||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(unaudited) | ||||||||||||||||
Revenues | $ | 16,602,900 | $ | 12,928,200 | $ | 33,234,100 | $ | 25,963,700 | ||||||||
Operating costs and expenses: | ||||||||||||||||
Costs of revenue | 13,922,800 | 11,231,100 | 27,782,900 | 22,260,000 | ||||||||||||
Selling, general and administrative | 1,549,100 | 1,172,600 | 3,080,100 | 2,440,600 | ||||||||||||
Amortization of other intangible assets | 104,300 | 74,500 | 204,500 | 140,000 | ||||||||||||
Total operating costs and expenses | 15,576,200 | 12,478,200 | 31,067,500 | 24,840,600 | ||||||||||||
Operating income | 1,026,700 | 450,000 | 2,166,600 | 1,123,100 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | — | 500 | 1,100 | 600 | ||||||||||||
Interest expense | (84,200 | ) | (241,900 | ) | (196,600 | ) | (510,400 | ) | ||||||||
Total other expense | (84,200 | ) | (241,400 | ) | (195,500 | ) | (509,800 | ) | ||||||||
Income before income taxes | 942,500 | 208,600 | 1,971,100 | 613,300 | ||||||||||||
Provision for income taxes | 268,300 | 4,200 | 561,500 | 13,700 | ||||||||||||
Net income | $ | 674,200 | $ | 204,400 | $ | 1,409,600 | $ | 599,600 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.01 | $ | 0.10 | $ | 0.04 | ||||||||
Diluted | $ | 0.04 | $ | 0.01 | $ | 0.08 | $ | 0.04 | ||||||||
Weighted average number of shares: | ||||||||||||||||
Basic | 14,577,663 | 14,395,177 | 14,511,875 | 14,390,477 | ||||||||||||
Diluted | 17,169,313 | 16,997,139 | 17,496,504 | 16,887,701 | ||||||||||||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
June 30, 2003 | June 30, 2002 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,409,600 | $ | 599,600 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Depreciation | 63,000 | 55,800 | ||||||
Amortization of other intangible assets | 204,500 | 140,000 | ||||||
Non-cash interest expense | — | 176,500 | ||||||
Stock-based compensation expense | 7,700 | 5,100 | ||||||
Write-off of patent related cost | 38,300 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,217,500 | (1,953,200 | ) | |||||
Prepaid expenses and other | (50,600 | ) | (273,300 | ) | ||||
Other assets | 28,700 | 27,500 | ||||||
Accounts payable | (2,166,500 | ) | 24,700 | |||||
Other current liabilities | 1,897,600 | 677,900 | ||||||
Other long-term liabilities | — | (56,200 | ) | |||||
Total adjustments | 1,240,200 | (1,175,200 | ) | |||||
Net cash provided by (used in) operating activities | 2,649,800 | (575,600 | ) | |||||
Cash flows from investing activities: | ||||||||
Property additions | (197,300 | ) | (123,900 | ) | ||||
Intangible additions | (6,100 | ) | — | |||||
Net cash used in investing activities | (203,400 | ) | (123,900 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings on bank and other loans | 1,829,000 | 1,777,500 | ||||||
Proceeds from stock options and warrants exercised | 59,200 | 90,400 | ||||||
Payments on bank and other loans | (3,744,200 | ) | (882,300 | ) | ||||
Net cash (used in) provided by financing activities | (1,856,000 | ) | 985,600 | |||||
Net increase in cash and cash equivalents | 590,400 | 286,100 | ||||||
Cash and cash equivalents at beginning of period | 301,800 | 83,100 | ||||||
Cash and cash equivalents at end of period | $ | 892,200 | $ | 369,200 | ||||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Name Change and Award of ELVIS Contract
Pursuant to an approval voted by the Company’s shareholders at its annual shareholder meeting held on May 21, 2002, Hadron, Inc. changed its name on July 1, 2002, to Analex Corporation by merging Hadron, Inc. into its wholly owned subsidiary Analex Corporation. Hadron acquired Analex on November 5, 2001. Hadron’s name was changed to Analex to improve marketing effectiveness and take advantage of Analex’s broader name recognition in both the intelligence and aerospace systems engineering market segments. Under the resulting corporate structure, Analex Corporation has two wholly owned subsidiaries, SyCom Services Inc. (“SyCom”) and Advanced Biosystems, Inc. (“ABS”).
On May 29, 2002, Analex announced that it had been awarded a $164 million Expendable Launch Vehicle Integrated Support (“ELVIS”) contract by NASA, having a nine-year and four-month period of performance (3-year base period and two 3-year option periods). The ELVIS contract was effective on July 1, 2002.
2. Business Groups
Analex conducts its business through three groups: the Homeland Security Group, supporting intelligence systems; the Systems Engineering Group, supporting the development of space-based systems and the operation of terrestrial assets, including the ELVIS contract; and its ABS subsidiary, pursuing research and business opportunities in the areas of defenses against biological warfare agents and other infectious diseases.
The Homeland Security Group has accounted for approximately 40% of the Company’s 2003 year-to-date revenue. The Homeland Security Group expects to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. This group provides engineering, scientific and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to various members of the Intelligence community, including the National Reconnaissance Office (NRO), the National Security Agency (NSA), the Department of Defense (DoD), and major prime contractors.
The Systems Engineering Group has accounted for approximately 52% of the Company’s 2003 year-to-date revenues. This group provides engineering and information technology
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services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle (ELV) engineering, space systems development, and ground support for space operations. This Group’s primary customers, including NASA and major aerospace firms, expect to be beneficiaries of increased defense spending.
ABS has accounted for approximately 8% of the Company’s 2003 year-to-date revenues. ABS pursues research in the areas of defenses against, and treatments for, biological warfare agents and other infectious diseases. ABS also provides consulting services regarding biological weapons, threats, and defensive strategies.
3. Basis of Presentation
The interim consolidated financial statements for Analex Corporation (the “Company”) are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (“2002 Form 10-K”) filed with the Securities and Exchange Commission on March 25, 2003.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21,Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of EITF Issue No. 00-21 will not have a material impact on its financial position or results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of certain guarantees, the guarantor must recognize a liability for
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the fair value of the obligation it assumes under that guarantee. FIN 45’s provisions for initial recognition and measurement are required to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. As the Company has not entered into or modified any guarantees subsequent to December 31, 2002, the implementation of FIN 45 did not impact the Company’s financial position or results of operations. The Company has updated its disclosures to comply with the requirements in FIN 45.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 is not expected to have a significant impact to the Company’s financial statements.
4. Debt
On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement (“Agreement”) with Bank of America, N.A. The Agreement originally provided the Company with a $4,000,000 revolving credit facility (the “Credit Facility”) through November 2, 2006 and a five-year $3,500,000 term loan (“Term Loan”). To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility. The Company now has an $8,000,000 Credit Facility. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of June 30, 2003, the Credit Facility and Term Loan balances were $1,362,600 and $2,391,700, respectively. The interest rate at June 30, 2003 was 3.61% for the Credit Facility and 4.32% for the Term Loan. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. As of June 30, 2003, the Company is in compliance with these covenants. The accounts receivable and the other assets of the Company secure the Credit Facility and Term Loan.
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The Company’s $3.5 million Term Loan facility from Bank of America carries interest comprised of two components: floating rate LIBOR plus a credit performance margin. In January 2002, the Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt, now totaling $2,050,000 was swapped into a fixed rate obligation at 4.25%. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.25% at June 30, 2003.
The Company’s comprehensive income for the three months ended June 30, 2003 was $683,300, which includes net income of $674,200 and other comprehensive income of $9,100 arising from the interest rate swap. The Company’s comprehensive income for the six months ended June 30, 2003 was $1,425,900, which includes net income of $1,409,600 and other comprehensive income of $16,300 arising from the interest rate swap.
5. 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, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
Net income | $ | 674,200 | $ | 204,400 | $ | 1,409,600 | $ | 599,600 | ||||
Weighted average shares outstanding | 14,577,663 | 14,395,177 | 14,511,875 | 14,390,477 | ||||||||
Effect of dilutive securities: | ||||||||||||
Warrants | 1,560,693 | 1,848,726 | 1,882,978 | 1,810,982 | ||||||||
Employee stock options | 1,030,957 | 753,236 | 1,101,651 | 686,242 | ||||||||
Diluted weighted average shares outstanding | 17,169,313 | 16,997,139 | 17,496,504 | 16,887,701 | ||||||||
Basic earnings per share | $ | .05 | $ | .01 | $ | .10 | $ | .04 | ||||
Diluted earnings per share | $ | .04 | $ | .01 | $ | .08 | $ | .04 |
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.
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6. Stock-based compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The Company adopted the disclosure provisions of SFAS No. 148 beginning with its financial reports for the year ended December 31, 2002.
Three Months Ended 6/30/03 | Three Months Ended 6/30/02 | Six Months Ended 6/30/03 | Six Months Ended 6/30/02 | |||||||||
Net income as reported | $ | 674,200 | $ | 204,400 | $ | 1,409,600 | $ | 599,600 | ||||
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax effects | $ | 2,800 | $ | 1,700 | $ | 5,500 | $ | 4,900 | ||||
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects | $ | 16,100 | $ | — | $ | 52,600 | $ | 219,600 | ||||
Pro forma net income | $ | 660,900 | $ | 206,100 | $ | 1,362,500 | $ | 384,900 | ||||
Earnings per share: | ||||||||||||
Basic as reported | $.05 | $.01 | $.10 | $.04 | ||||||||
Diluted as reported | $.04 | $.01 | $.08 | $.04 | ||||||||
Basic pro forma | $.05 | $.01 | $.09 | $.03 | ||||||||
Diluted pro forma | $.04 | $.01 | $.08 | $.02 |
7. Concentration of Business
Almost all of the Company’s revenues are derived either directly from the U.S. Government as prime contractor or indirectly as a subcontractor to other government prime contractors. With the award of the ELVIS contract to the Company, approximately 52% of the Company’s 2003 year-to-date
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revenues have been derived, directly and indirectly, from NASA. Approximately 47% of the Company’s 2003 year-to-date revenues have been derived from various Department of Defense agencies.
8. Equity Capital
Pursuant to the November 2, 2001 acquisition of 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 (“Guaranteed Shares”), if such shares are sold within such period and if certain other conditions are satisfied. As of June 30, 2003, the maximum amount that the Company would be required to pay under the terms of the guarantee was $1,157,100. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of June 30, 2003, no amounts were accrued under the guarantee.
9. Business Segments
The Company has two reportable segments, ABS and Analex. The Homeland Security Group, and the Systems Engineering Group have been aggregated to form the reportable segment Analex. This aggregation is due to the fact that both groups perform similar services, operate in similar regulatory environments, and have similar customers. Each of the operating segments provides engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and technical skills.
Operating results are measured at the net income level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company’s corporate amounts consist primarily of certain activities and assets not attributable to the reportable segments.
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THREE MONTHS JUNE 30, 2003 | THREE MONTHS JUNE 30, 2002 | SIX MONTHS JUNE 30, 2003 | SIX MONTHS JUNE 30, 2002 | |||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||
Revenues: | ||||||||||||
ABS | $ | 1,177,700 | $ | 1,588,200 | $ | 2,530,700 | $ | 3,158,400 | ||||
Analex | 15,425,200 | $ | 11,340,000 | 30,703,400 | 22,805,300 | |||||||
Total revenues: | $ | 16,602,900 | $ | 12,928,200 | $ | 33,234,100 | $ | 25,963,700 | ||||
Net income: | ||||||||||||
ABS | $ | 63,200 | $ | 144,000 | $ | 149,600 | $ | 206,300 | ||||
Analex | 611,000 | 60,400 | 1,260,000 | 393,300 | ||||||||
Total net income: | $ | 674,200 | $ | 204,400 | $ | 1,409,600 | $ | 599,600 | ||||
Assets: | ||||||||||||
ABS | $ | 770,300 | $ | 805,900 | $ | 770,300 | $ | 805,900 | ||||
Analex | 29,306,300 | 29,182,200 | 29,306,300 | 29,182,200 | ||||||||
Total assets: | $ | 30,076,600 | $ | 29,988,100 | $ | 30,076,600 | $ | 29,988,100 | ||||
10. Litigation and Claims
From time to time, the Company has been subject to various claims, legal proceedings, and investigations arising in the ordinary course of business. As of June 30, 2003, management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company.
11. Subsequent Event
On July 18, 2003, the Company entered into a Purchase Agreement (the “Pequot Purchase Agreement”) with two investment funds managed by Pequot Capital Management, Inc. (“Pequot”) pursuant to which the Company has agreed to:
• | issue and sell to Pequot 6,726,457 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $2.23 per share of Series A Preferred Stock (the “Series A Purchase Price”) and an aggregate consideration of approximately $15,000,000; |
• | in connection with the issuance and sale of the Series A Preferred Stock, issue warrants (the “Preferred Warrants”) exercisable to purchase the Company’s common stock (the “Common Stock”) at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock; |
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• | issue and sell to Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”); and |
• | in connection with the issuance and sale of the Convertible Notes, issue warrants (the “Note Warrants,” and together with the Preferred Warrants, the “Warrants”) exercisable to purchase Common Stock at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. |
In addition, on July 18, 2003, the Company entered into a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with Company Chairman Jon M. Stout, certain members of Mr. Stout’s immediate family and certain entities controlled by Mr. Stout and his family (collectively, the “Stout Parties”) pursuant to which the Company will purchase an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock from the Stout Parties for aggregate consideration of approximately $9.2 million. The aggregate purchase price to be paid by the Company to the Stout Parties pursuant to the Securities Repurchase Agreement is calculated by multiplying the number of shares of Common Stock to be repurchased (including those issuable under warrants and options held by the Stout Parties) by $2.63 per share, and then reducing such amount by the amount of the aggregate exercise prices of the warrants and options held by the Stout Parties. The Common Stock, warrants and options to be purchased by the Company represent all of the equity interests in the Company owned by the Stout Parties other than approximately 100,000 shares of Common Stock which Mr. Stout may use to make a gift to a specified academic institution pursuant to the terms of the Stout Repurchase Agreement and which the Company may subsequently repurchase pursuant to the Stout Repurchase Agreement if such gift is not made.
The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are required to be closed simultaneously at a closing (the “Closing”) following approval of the Pequot Transaction by the Company’s stockholders and the satisfaction of the closing conditions provided for in the Pequot Purchase Agreement and the Stout Repurchase Agreement.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003
TO THE THREE MONTHS ENDED JUNE 30, 2002
Revenues for the three months ended June 30, 2003 were $16,602,900, an increase of $3,674,700 from the $12,928,200 in revenues for the three months ended June 30, 2002. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group (primarily from the ELVIS contract), offset by a decline in ABS revenues as a result of the completion of research work under grants from the US Army.
Revenue growth for ABS depends on its future success in replacing expiring grants from the Defense Advanced Research Projects Agency (DARPA) and the National Institutes of Health (NIH) with follow-on or other grants, as well as its future success in developing a bio-terrorism consulting business or in generating licensing revenues from any intellectual property it has or may develop. For the third quarter of 2003 and subsequent periods, the year-over-year revenue and net income comparisons will include the results of the ELVIS contract in the prior-year period. Consequently, the year-over-year comparisons resulting from organic growth are expected to be less dramatic than for the current period.
Costs of revenue for the quarter ended June 30, 2003 were $13,922,800, an increase of $2,691,700 from the same period of the prior year. The increase is largely due to the costs of revenue generated in the Systems Engineering Group by the ELVIS contract. Costs of revenue as a percentage of revenues were approximately 84% and 87% for the quarters ended June 30, 2003 and 2002, respectively. The decrease is primarily due to the company’s ability to renegotiate existing contracts and negotiate new contracts to obtain a higher fee percentage and controlling overhead expenses.
Selling, general and administrative expenses totaled $1,549,100 for the quarter ended June 30, 2003, compared with $1,172,600 for the same period of the prior year. The $376,500 increase is primarily due to costs related to fulfillment of key business development and marketing positions.
Operating income for the three months ended June 30, 2003 was $1,026,700, compared to operating income of $450,000 for the period ended June 30, 2002. This $576,700 increase is primarily attributable to the profitability in the Systems Engineering Group derived from the ELVIS contract coupled with increased profitability of the Homeland Security Group. The Company’s operating income to be derived in the future from ABS depends on
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its future success in generating fee or royalty-bearing increases in revenues, as described above.
Operating margin for the three months ended June 30, 2003 was 6%, compared to operating margin of 3% for the period ended June 30, 2002. This 3% increase is primarily attributable to the increased profitability of the Homeland Security Group.
Interest expense totaled $84,200 for the quarter ended June 30, 2003, compared with $241,900 for the same period of the prior year. The $157,700 decrease is due to the Company’s increased profitability, which reduced borrowing under the credit facility, coupled with the termination of the guarantees associated with the Bank of America debt.
Income tax expense for the quarter ended June 30, 2003 was $268,300 compared with $4,200 for the same period of the prior year. The Company’s effective income tax rate is lower than the statutory federal rate of 34% primarily due to the reduction of a valuation allowance on the Company’s deferred tax assets. Our valuation allowance is expected to be eliminated by December 31, 2003.
Net income was $674,200 for the quarter ended June 30, 2003, compared to net income of $204,400 for the same period of the prior year. The $469,800 increase resulted primarily from the net income produced in the Systems Engineering Group by the ELVIS contract coupled with the increased profitability of the Homeland Security Group. Net margin for the three months ended June 30, 2003, was 4.1% compared with 1.6% for the three months ended June 30, 2002.
In the quarter ended June 30, 2003, the Company recorded net income of approximately $674,200 and EBITDA, as defined below, of $1,169,700, after add-backs for interest of $84,200, depreciation of $38,700, amortization of $104,300, and income taxes of $268,300. In the quarter ended June 30, 2002, the Company recorded net income of approximately $204,400 and EBITDA of $551,000, after add-backs for interest of $241,900, depreciation of $26,000, amortization of $74,500, and income taxes of $4,200. EBITDA as a percent of revenue was 7.0% for the quarter ended June 30, 2003, compared to 4.3% for the quarter ended June 30, 2002.
EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a company’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 generally accepted accounting principles.
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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, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as measures of the Company’s liquidity. In addition, because EBITDA is not calculated identically by all companies, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003
TO THE SIX MONTHS ENDED JUNE 30, 2002
Revenues for the six months ended June 30, 2003 were $33,234,100, an increase of $7,270,400 from the $25,963,700 in revenues for the six months ended June 30, 2002. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group (primarily from the ELVIS contract), offset by a decline in revenues in ABS as a result of the completion of research work under grants from the US Army.
Revenue growth for ABS depends on its future success in replacing expiring grants from DARPA and NIH with follow-on or other grants, as well as its future success in developing a bio-terrorism consulting business or in generating licensing revenues from any intellectual property it has or may develop. For the third quarter of 2003 and subsequent periods, the year-over-year revenue and net income comparisons will include the results of the ELVIS contract in the prior-year period. Consequently, the year-over-year comparisons resulting from organic growth are expected to be less dramatic than for the current period.
Costs of revenue for the six months ended June 30, 2003 were $27,782,900, an increase of $5,522,900 from the same period of the prior year. The increase is largely due to the costs of revenue generated in the Systems Engineering Group by the ELVIS contract. Costs of revenue as a percentage of revenues were approximately 84% and 86% for the six months ended June 30, 2003 and 2002, respectively. The decrease is primarily due to the company’s ability to renegotiate existing contracts and negotiate new contracts to obtain a higher fee percentage and controlling overhead expenses.
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Selling, general and administrative expenses totaled $3,080,100 for the six months ended June 30, 2003, compared with $2,440,600 for the same period of the prior year. The $639,500 increase is primarily due to costs related to fulfillment of key business development and marketing positions. The decrease is primarily due to the company’s ability to renegotiate contracts to obtain a higher fee percentage and controlling overhead expenses.
Operating income for the six months ended June 30, 2003 was $2,166,600, compared to operating income of $1,123,100 for the six months ended June 30, 2002. This $1,043,500 increase is primarily attributable to the profitability in the Systems Engineering Group derived from the ELVIS contract coupled with increased profitability of the Homeland Security Group. The Company’s operating income to be derived in the future from ABS depends on its future success in generating fee or royalty-bearing increases in revenues, as described above.
Operating margin for the six months ended June 30, 2003 was 7%, compared to operating margin of 4% for the six months ended June 30, 2002. This 3% increase is primarily attributable to the increased profitability of the Homeland Security Group.
Interest expense totaled $196,600 for the six months ended June 30, 2003, compared with $510,400 for the same period of the prior year. The $313,800 decrease is due to the Company’s increased profitability, which reduced borrowing under the credit facility, coupled with the release of the guarantees associated with the Bank of America debt.
Income tax expense for the six months ended June 30, 2003 was $561,500 compared with $13,700 for the same period of the prior year. The Company’s effective income tax rate is lower than the statutory federal rate of 34% primarily due to the reduction of a valuation allowance on the Company’s deferred tax assets. Our valuation allowance is expected to be eliminated by December 31, 2003.
Net income was $1,409,600 for the six months ended June 30, 2003, compared to net income of $599,600 for the same period of the prior year. The $810,000 increase resulted primarily from the net income produced in the Systems Engineering Group by the ELVIS contract coupled with the increased profitability of the Homeland Security Group. Net margin for the six months ended June 30, 2003, was 4.2% compared with 2.3% for the six months ended June 30, 2002.
In the six months ended June 30, 2003, the Company recorded net income of approximately $1,409,600 and EBITDA, as defined below, of $2,434,100, after add-backs for interest of $195,500, depreciation of $63,000, amortization of $204,500, and income
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taxes of $561,500. In the six months ended June 30, 2002, the Company recorded net income of approximately $599,600 and EBITDA of $1,319,500, after add-backs for interest of $510,400, depreciation of $55,800, amortization of $140,000, and income taxes of $13,700. EBITDA as a percent of revenue was 7.3% for the six months ended June 30, 2003, compared to 5.1% for the six months ended June 30, 2002.
EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a company’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 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, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as measures of the Company’s liquidity. In addition, because EBITDA is not calculated identically by all companies, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
CAPITAL RESOURCES AND LIQUIDITY
Working capital at June 30, 2003 increased by approximately $517,500 from December 31, 2002 primarily due to an increase in cash and a decrease in the credit facility balance.
Net cash provided by operating activities during the six months ended June 30, 2003 was approximately $2,649,800, as compared with net cash used of approximately $575,600 during the same period in 2002. This increase was due to the Company’s increased profitability.
Net cash used in investing activities during the six months ended June 30, 2003 was approximately $203,400 compared to $123,900 used during the six months ended June 30, 2002. Net cash used in investing activities during the six months ended June 30, 2003, and during the six months ended June 30, 2002, was for fixed asset purchases and costs associated with patent development.
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On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit Agreement which originally provided the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility. The Company now has an $8,000,000 Credit Facility. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.
ELVIS Contract
Under the ELVIS contract, Analex provides a broad range of Expendable Launch Vehicle (ELV) support services for NASA requirements at John F. Kennedy Space Center, Florida; Cape Canaveral Air Force Station, Florida; Vandenberg Air Force Base, California; and other launch site locations. This includes management, operation and maintenance of facilities, systems and equipment, as well as specified technical and administrative capabilities.
The contract covers responsibility for furnishing engineering services; performing safety and mission assurance functions; and providing communications, data and telemetry support. In addition, at Vandenberg, Analex will also be responsible for maintenance of NASA’s administrative, launch support and spacecraft facilities, mission support planning, and customer support for payload processing activities.
The contract had a one-month phase-in period in June 2002, which is followed by a three-year, three-month basic period of performance. There are two options of three years each for a potential nine-year, four-month contract term. The contract value for the basic performance period is $55 million. The potential contract value including all priced options, is $163.8 million. However, total contract value may be increased as a result of additional task orders which may be issued under the contract as required.
Subsequent Events
On July 18, 2003, the Company entered into a Purchase Agreement (the “Pequot Purchase Agreement”) with two investment funds managed by Pequot Capital Management, Inc. (“Pequot”) pursuant to which the Company has agreed to:
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• | issue and sell to Pequot 6,726,457 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $2.23 per share of Series A Preferred Stock (the “Series A Purchase Price”) and an aggregate consideration of approximately $15,000,000; |
• | in connection with the issuance and sale of the Series A Preferred Stock, issue warrants (the “Preferred Warrants”) exercisable to purchase the Company’s common stock (the “Common Stock”) at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock; |
• | issue and sell to Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”); and |
• | in connection with the issuance and sale of the Convertible Notes, issue warrants (the “Note Warrants,” and together with the Preferred Warrants, the “Warrants”) exercisable to purchase Common Stock at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. |
In addition, on July 18, 2003, the Company entered into a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with Company Chairman Jon M. Stout, certain members of Mr. Stout’s immediate family and certain entities controlled by Mr. Stout and his family (collectively, the “Stout Parties”) pursuant to which the Company will purchase an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock from the Stout Parties for aggregate consideration of approximately $9.2 million. The aggregate purchase price to be paid by the Company to the Stout Parties pursuant to the Securities Repurchase Agreement is calculated by multiplying the number of shares of Common Stock to be repurchased (including those issuable under warrants and options held by the Stout Parties) by $2.63 per share, and then reducing such amount by the amount of the aggregate exercise prices of the warrants and options held by the Stout Parties. The Common Stock, warrants and options to be purchased by the Company represent all of the equity interests in the Company owned by the Stout Parties other than approximately 100,000 shares of Common Stock which Mr. Stout may use to make a gift to a specified academic institution pursuant to the terms of the Stout Repurchase Agreement and which the Company may subsequently repurchase pursuant to the Stout Repurchase Agreement if such gift is not made.
The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are required to be
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closed simultaneously at a closing (the “Closing”) following approval of the Pequot Transaction by the Company’s stockholders and the satisfaction of the closing conditions provided for in the Pequot Purchase Agreement and the Stout Repurchase Agreement. The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are collectively referred to herein as the “Pequot Transaction.”
The proceeds from the sale of the Convertible Notes will be used to repurchase the securities from the Stout Parties and pay expenses in connection with the Pequot Transaction.
The Company anticipates using the proceeds from the sale of the Series A Preferred Stock to pay certain existing liabilities and to support all or a portion of the cost of future acquisitions by the Company.
Pequot Purchase Agreement
The issuance of the Series A Preferred Stock, Convertible Notes and Warrants and the other transactions contemplated by the Pequot Purchase Agreement are subject to several closing conditions, including the approval of the Company’s stockholders.
If the Company is unable to consummate the Pequot Transaction due to a determination by the Company’s Board of Directors that consummation of such transaction conflicts with the Board’s fiduciary duties under applicable law, the Company is required to pay Pequot a fee of $750,000. If the Closing does not occur because Pequot is unable to consummate the transaction for any reason other than the Company’s failure to comply with its obligations or to satisfy the conditions to Pequot’s closing obligations, then Pequot is required to pay the Company a fee of $750,000.
Series A Preferred Stock
The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s senior credit facility, in additional shares of Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote together with all other classes and series of voting stock of the Company on all actions to be taken by the stockholders of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not take numerous specified actions (including mergers, certain changes to the Company’s Certificate of Incorporation and acquisitions involving aggregate consideration greater than $10,000,000) without obtaining the written consent of the holders
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of a majority of the Series A Preferred Stock. If the Company fails to comply with its redemption obligations with respect to the Series A Preferred Stock (discussed below), the Company may not take such specified actions without Pequot’s consent, regardless of the amount of Series A Preferred Stock Pequot owns.
Upon any liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Stock are entitled to receive, out of the Company’s assets available for stockholder distributions and prior to distributions to junior securities (including the Common Stock), an amount equal to the Series A Purchase Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of a majority of the Series A Preferred Stock elect not to treat such transactions as liquidation events.
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 conversion ratio is subject to adjustments for certain dilutive equity issuances and for stock splits, stock dividends and similar events. The Series A Preferred Stock will automatically convert into Common Stock if, any time following 18 months after the Closing, 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. In addition, the Series A Preferred Stock will 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 the fourth anniversary of the Closing at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued but unpaid dividends. Holders of the Series A Preferred Stock and any debt or equity security of the Company convertible into Series A Preferred Stock (including the Convertible Notes) have pro rata preemptive rights with respect to private equity offerings by the Company after the Closing, subject to specified exceptions.
These and other terms and provisions of the Series A Preferred Stock are set forth in the Certificate of Designations Powers, Preferences and Rights of the Series A Preferred Stock (the “Series A Certificate of Designations”) that will form a part of the Company’s Certificate of Incorporation. The Series A
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Certificate of Designations will be filed with the Secretary of State of Delaware prior to the Closing.
Convertible Notes
The Convertible Notes mature on the fourth anniversary of the Closing. The Convertible Notes bear interest at an annual rate of 7%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s senior credit facility, accrued and added to the outstanding principal. Upon a payment default, the interest rate on the Convertible Notes will be increased to 11% per annum.
Prior to the date which is 18 months after the Closing, the Convertible Notes may not be prepaid without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any time following 18 months after the Closing, the Company, at its sole option, may prepay the Convertible Notes. Such prepayment will be made, in most circumstances at the option of the Convertible Note holders, either in cash in an amount equal to the outstanding principal plus the net present value of interest to maturity discounted at 7% per annum or by conversion of the principal into shares of Series A Preferred Stock and the payment of interest in cash or in shares of Series A Preferred Stock. Holders of the Convertible Notes may convert the outstanding principal and accrued interest on the Notes into Series A Preferred Stock at any time. The conversion price for the Convertible Notes is 135% of the Series A Purchase Price, subject to adjustment for stock splits, stock dividends and similar events. The Company may cause the automatic conversion of the Convertible Notes into Common Stock if, any time following 18 months after the Closing, the average closing price for the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the Series A Purchase Price, as adjusted for dilutive equity issuances, stock splits, stock dividends and similar events.
The terms of the Convertible Notes provide for specified events of default, including failure to pay principal of and interest on the Notes, certain violations of financial and operational covenants and certain other events, many of which are similar to the events of default under the Company’s senior credit facility. The Company’s obligations under the Convertible Notes will be secured by a lien on substantially all of the assets of the Company and its subsidiaries and will be guaranteed by the Company’s subsidiaries. Such obligations will be subordinated to the rights of the Company’s present and future senior secured lenders and the rights of the DOJ under the Settlement Agreement between the DOJ and the former Analex Corporation. The relative rights of the Company’s senior lenders and the holders of the
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Convertible Notes are set forth in an intercreditor agreement (the “Intercreditor Agreement”) that will become effective at the Closing.
During the time that the Convertible Notes and the Series A Preferred Stock are outstanding, the Company will be subject to financial and operational covenants specified in the Pequot Purchase Agreement. These financial and operational covenants will be no more restrictive than the financial and operational covenants included in the Company’s senior credit facility. Certain of such covenants will continue in effect after the payment or conversion of the Convertible Notes.
Warrants
The Warrants are exercisable at any time before the tenth anniversary of the Closing. The Preferred Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock. The Note Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. The exercise price of the Warrants is $3.28 (representing a 47% premium to the Series A Purchase Price) subject to adjustment for stock splits, stock dividends and similar events.
Stockholders’ Voting Agreement
At the Closing, the Company, Pequot and certain stockholders of the Company who, together with Pequot, will own a majority of the voting stock of the Company upon the Closing, will enter into a Stockholders’ Voting Agreement (the “Stockholders’ Agreement”), pursuant to which Pequot and such stockholders agree to vote, or cause to be voted, all securities of the Company they own or over which they have voting control so that the number of directors of the Company will be seven (7), consisting of:
• | the Company’s chief executive officer, currently Mr. Phillips, |
• | two (2) directors designated by Pequot, |
• | three (3) non-employee directors designated by the Company’s Chief Executive Officer and acceptable to Pequot, and |
• | one (1) independent director designated by Pequot and acceptable to the Company’s Chief Executive Officer. |
One of the directors designated by Pequot will be the “financial expert” required by Securities and Exchange Commission rules,
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and, to the greatest extent permitted by applicable law and regulations, at least one director designated by Pequot will be on each committee of the Board. If Pequot holds less than specified percentages of the securities it originally purchases at the Closing, Pequot will have the right to designate two, one or no directors. If Pequot has the right to designate fewer than two directors, the above voting provisions are adjusted in the manner described in the Stockholders’ Agreement.
Immediately following the Closing, the Board will be constituted in accordance with the Stockholders’ Agreement, and will consist of four current directors, including Mr. Phillips, and three directors designated by Pequot, including Gerald Poch, Managing Director of a Pequot affiliate, and Martin Hale, General Partner of a Pequot affiliate. At the Closing, Mr. Stout and Shawna Stout will resign from the Board.
In certain circumstances, including the Company’s failure to redeem the Series A Preferred Stock as required or failure to pay certain amounts due under the Convertible Notes, Pequot may designate additional directors so that the Pequot directors comprise a majority of the Board. This right will terminate if the Company redeems the Series A Preferred Stock and repays the Convertible Notes.
Registration Rights
At the Closing, the Company will enter into a Registration Rights Agreement with Pequot (the “Registration Rights Agreement”), pursuant to which, within 30 days following the Closing, the Company will be required to file a registration statement on Form S-3 registering the resale of the Common Stock underlying the Series A Preferred Stock, the Convertible Notes and the Warrants. The Company will be required to keep such registration statement effective until all the Common Stock registered thereunder is sold or the holders are entitled to sell such Common Stock under Rule 144(k) under the Securities Act of 1933. The Registration Rights Agreement also provides Pequot with piggyback registration rights with respect to certain underwritten offerings initiated by the Company.
Stout Repurchase
The consummation of the transactions under the Stout Repurchase Agreement is subject to several conditions, including the approval of the Company’s stockholders of the Pequot Transaction and the receipt by the Company of an updated fairness opinion from Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc. with respect to the fairness of the Pequot Transaction, including the repurchase of the Stout Parties’ securities.
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At the Closing, the Registration Rights Agreement, dated as of March 30, 2000, by and among the Company, Mr. Stout, Patricia Stout, the Stout Dynastic Trust, J. Richard Knop and certain other investors in the Company, will be terminated. In addition, the Voting Agreement, dated as of March 30, 2000, by and among Mr. Stout, Mrs. Stout, the Stout Dynastic Trust, Mr. Knop, C.W. Gilluly and certain other investors in the Company, will be terminated at the Closing.
In connection with the Closing, Mr. Stout’s employment with the Company will be terminated, and an Employment Termination Agreement between the Company and Mr. Stout (the “Stout Employment Termination Agreement”) will become effective. Pursuant to the Stout Employment Termination Agreement, at the Closing, the Company will pay Mr. Stout $280,000, representing two years’ base salary under Mr. Stout’s existing employment agreement. In addition, a Non-Competition Agreement between Mr. Stout and the Company (the “Stout Non-Competition Agreement”) will become effective at the Closing. Under the Stout Non-Competition Agreement, Mr. Stout agrees not to compete with the Company, adversely interfere with the Company’s current and prospective customers and clients or solicit or hire Company employees, consultants or service providers for a period of three (3) years following the Closing. As consideration for such non-competition and non-solicitation restrictions, and as long as Mr. Stout is in compliance with the Stout Non-Competition Agreement, the Company will pay him $50,000 every three months during the term of the agreement, for aggregate consideration of $600,000.
Amendment to Senior Credit Facility
In connection with the Closing, an amendment (the “Credit Agreement Amendment”) to the Company’s existing credit agreement with Bank of America, N.A. (“Bank of America”) will become effective. The Credit Agreement Amendment will eliminate or revise certain operational and financial covenants and revise an event of default provision. In connection with the execution of the Pequot Transaction documents, Bank of America has provided the Company with a letter (the “Bank of America Consent Letter”) consenting to the Company’s entering into the Pequot Transaction and waiving certain covenant defaults under the existing credit agreement otherwise triggered by the Pequot Transaction.
Increase in Authorized Stock
In connection with its review and approval of the Pequot Transaction, the Company’s Board of Directors has authorized an increase in the number of shares of the Company’s Common Stock and Preferred Stock authorized for issuance. This increase would result in the Company having total authorized capital stock of 100,000,000 shares, consisting of 65,000,000 shares of Common
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Stock and 35,000,000 shares of Preferred Stock. The increase will be reflected in a Certificate of Amendment to the Company’s Certificate of Incorporation (the “Certificate of Amendment”) which will be presented to the Company’s stockholders for approval at the special meeting to be held to approve the Pequot Transaction.
Stockholder Approval
The Company’s stockholders will be asked to approve the Pequot Transaction and the increase in authorized capital stock at a special meeting of stockholders. In connection with the execution of the Pequot Purchase Agreement, stockholders holding approximately 48% of the Company’s Common Stock (including the Stout Parties) entered into a Voting Agreement (the “Pequot Transaction Voting Agreement”), pursuant to which these stockholders have agreed to vote in favor of the Pequot Transaction at any meeting of the Company’s stockholders or in connection with any action taken by such stockholders.
Summary of Terms
The description of the terms and provisions of the Pequot Purchase Agreement, the Series A Certificate of Designations, the Convertible Notes, the Warrants, the Intercreditor Agreement, the Stockholders’ Voting Agreement, the Registration Rights Agreement, the Stout Repurchase Agreement, the Stout Employment Termination Agreement, the Stout Non-Competition Agreement, the Certificate of Amendment, the Credit Agreement Amendment, the B of A Consent Letter and the Pequot Transaction Voting Agreement set forth herein do not purport to be complete and are subject to, and are qualified in their entirety by, the detailed provisions of those documents. Copies of these documents are filed as exhibits to the Current Report on Form 8-K dated July 18, 2003 and filed with the Securities and Exchange Commission on July 21, 2003.
Except for the historical information contained herein, the matters discussed in this 10-Q include forward-looking statements that involve a number of risks and uncertainties. There are certain important factors and risks that could cause results to differ materially from those anticipated by the statements contained herein. Such factors and risks include business conditions and growth in the information services, engineering services, software development and government contracting arenas and in the economy in general. Competitive factors include the pressures toward consolidation of small government contracts into larger contracts awarded to major, multi-national corporations; and the Company’s ability to continue to recruit and retain highly skilled technical, managerial and sales/marketing
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personnel. Other risks may be detailed from time to time in the Company’s SEC reports.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market Risks and Hedging Activities
The Company’s outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and capital improvements exposes the Company to variability in interest payments due to changes in interest rates. The Company uses an interest rate swap to reduce the interest rate exposure on these variable rate obligations. The Company does not hold any derivatives for trading or speculative purposes.
The Company’s $3.5 million term loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR was swapped into a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation.
Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet and included in other long-term liabilities with a corresponding adjustment to either accumulated other comprehensive income/(loss) or in earnings depending on the hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income/(loss). Over time, the unrealized gains/losses held in accumulated other comprehensive income/(loss) will be recognized in earnings consistent with when the hedged items are recognized in earnings.
Under the interest rate swap, the Company pays the bank at a fixed rate and receives variable interest at a rate approximating the variable rate of the Company’s debt, thereby creating the equivalent of a fixed rate obligation. The following table summarizes the original financial terms of the Company’s interest rate swap:
Notional Value | Variable Rate Received | Fixed Rate Paid | Effective Date | Expiration Date | |||||
$2,950,000 | LIBOR | 4.25 | % | 1/1/02 | 12/1/04 |
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The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At June 30, 2003 the notional value of the swap was $2,050,000. Increases in prevailing interest rates could increase the Company’s interest payment obligations relating to variable rate debt. For example, a 100 basis points increase in interest rates would increase annual interest expense by $24,500, based on debt levels at June 30, 2003.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Analex management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Exchange Act Rule 13a-15(d), Analex management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
No material legal proceedings are currently pending.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company’s Annual Meeting of Stockholders was held May 20, 2003.
(b) At the Annual Meeting, the Company’s stockholders (i) re-elected the Company’s eight directors, (ii) approved amendments to the Company’s 2002 Stock Option Plan, including an increase in the number of shares of common stock reserved for issuance thereunder from 1,500,000 to 2,000,000 and (iii) ratified the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year 2003.
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The following votes were cast with respect to each of the matters voted on at the Annual Meeting:
Election of Directors:
Directors | Votes For | Votes Withheld | Abstentions and Broker Non-Votes | |||
Jon M. Stout | 13,323,983 | 93,572 | 0 | |||
Peter C. Belford, Sr. | 13,324,213 | 93,342 | 0 | |||
Lincoln D. Faurer | 13,326,027 | 91,528 | 0 | |||
Alan L. Kaplan | 13,325,479 | 92,076 | 0 | |||
Gerald R. McNichols | 13,326,057 | 91,498 | 0 | |||
Sterling E. Phillips, Jr. | 11,798,941 | 1,618,614 | 0 | |||
Shawna L. Stout | 11,798,505 | 1,619,050 | 0 | |||
Daniel R. Young | 13,324,193 | 93,362 | 0 |
Amendments to 2002 Stock Option Plan:
Votes For | Votes Against | Abstentions and Broker Non-Votes | ||
13,193,332 | 203,260 | 20,963 |
Ratification of Appointment of Ernst & Young LLP:
Votes For | Votes Against | Abstentions and Broker Non-Votes | ||
13,361,668 | 39,118 | 16,769 |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 | Third Amendment, dated as of April 30, 2003, to Credit Agreement, dated as of November 2, 2001, by and among Bank America, N.A., Analex Corporation and certain subsidiaries of Analex Corporation (filed herewith). | |
10.2 | 2002 Stock Option Plan (incorporated by reference to Annex B filed with the Company’s Proxy Statement dated April 14, 2003, filed with the Commission on April 18, 2003). | |
10.3 | Analex Corporation 2000 Stock Option Plan (filed herewith). | |
31.1 | Certification pursuant to Section 302 of the Sarbanes- |
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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
Current Report on Form 8-K, dated June 30, 2003 and filed with the Securities and Exchange Commission on July 3, 2003, to report that the Company had issued a press release a press release announcing a proposed transaction in which the Company would issue and sell preferred stock and convertible notes to Pequot Ventures and would repurchase the equity interests in the Company held by Analex Chairman Jon Stout, his family members and affiliated entities.
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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 13, 2003
Analex Corporation (Registrant)
By: /S/ STERLING E. PHILLIPS, JR. | By: /S/ RONALD B. ALEXANDER | |
Sterling E. Phillips, Jr. | Ronald B. Alexander | |
President and Chief Executive Officer | Chief Financial Officer | |
(Principal Executive Officer) | (Principal Financial Officer and Principal Accounting Officer) |
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