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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 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 September 5, 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 March 31, 2003 and December 31, 2002 | 3 | |||
Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 | 5 | |||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 14 | ||
Item 4. | Controls and Procedures | 15 | ||
Part II Other Information: | ||||
Item 1. | Legal Proceedings | 16 | ||
Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
17 |
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ANALEX CORPORATION
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, 2003 | December 31, 2002 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 65,200 | $ | 301,800 | ||
Accounts receivable, net | 13,287,600 | 12,556,100 | ||||
Prepaid expenses and other | 283,200 | 270,500 | ||||
Total current assets | 13,636,000 | 13,128,400 | ||||
Fixed assets, net | 257,700 | 216,700 | ||||
Goodwill | 15,534,600 | 15,534,600 | ||||
Contract rights and other intangibles, net | 1,647,800 | 1,770,200 | ||||
Deferred finance costs | 71,000 | 75,900 | ||||
Other | 60,000 | 58,400 | ||||
Total other assets | 17,571,100 | 17,655,800 | ||||
Total assets | $ | 31,207,100 | $ | 30,784,200 | ||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, 2003 | December 31, 2002 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,640,200 | $ | 3,294,700 | ||||
Note payable—line of credit | 4,016,700 | 2,187,700 | ||||||
Note payable—bank term note | 700,000 | 700,000 | ||||||
Notes payable—other | 1,012,200 | 1,012,100 | ||||||
Other current liabilities | 5,465,400 | 5,258,400 | ||||||
Total current liabilities | 12,834,500 | 12,452,900 | ||||||
Note payable—bank term note | 1,866,700 | 2,041,700 | ||||||
Notes payable—other | 1,764,000 | 2,297,200 | ||||||
Other | 83,400 | 90,600 | ||||||
Total long-term liabilities | 3,714,100 | 4,429,500 | ||||||
Total liabilities | 16,548,600 | 16,882,400 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Common stock $.02 par; authorized 30,000,000 shares; issued and outstanding—March 31, 2003, 14,445,356 shares and December 31, 2002, 14,427,080 shares | 294,000 | 288,500 | ||||||
Additional capital | 21,176,200 | 21,171,400 | ||||||
Deferred compensation | (3,900 | ) | (7,700 | ) | ||||
Accumulated other comprehensive loss | (83,400 | ) | (90,600 | ) | ||||
Accumulated deficit | (6,724,400 | ) | (7,459,800 | ) | ||||
Total shareholders’ equity | 14,658,500 | 13,901,800 | ||||||
Total liabilities and shareholders’ equity | $ | 31,207,100 | $ | 30,784,200 | ||||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
March 31, 2003 | March 31, 2002 | |||||||
Revenues | $ | 16,631,200 | $ | 13,035,500 | ||||
Operating costs and expenses: | ||||||||
Costs of revenue | 13,860,100 | 11,028,900 | ||||||
Selling, general and administrative | 1,531,000 | 1,268,000 | ||||||
Amortization of goodwill and other intangibles | 100,200 | 65,500 | ||||||
Total operating costs and expenses | 15,491,300 | 12,362,400 | ||||||
Operating income | 1,139,900 | 673,100 | ||||||
Other income (expense): | ||||||||
Interest income | 1,100 | 100 | ||||||
Interest expense | (112,400 | ) | (268,500 | ) | ||||
Total other expense | (111,300 | ) | (268,400 | ) | ||||
Income before income taxes | 1,028,600 | 404,700 | ||||||
Provision for income taxes | 293,200 | 9,500 | ||||||
Net income | $ | 735,400 | $ | 395,200 | ||||
Net income per share: | ||||||||
Basic | $ | 0.05 | $ | 0.03 | ||||
Diluted | $ | 0.04 | $ | 0.02 | ||||
Weighted average number of shares: | ||||||||
Basic | 14,445,356 | 14,385,725 | ||||||
Diluted | 17,565,684 | 16,796,764 | ||||||
See Notes to Consolidated Financial Statements
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ANALEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
March 31, 2003 | March 31, 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 735,400 | $ | 395,200 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 24,300 | 29,800 | ||||||
Amortization of goodwill and other intangibles | 100,200 | 65,500 | ||||||
Non-cash interest expense | — | 86,400 | ||||||
Stock compensation expense | 3,800 | 3,300 | ||||||
Write-off of patent related cost | 6,500 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (731,500 | ) | (1,083,900 | ) | ||||
Prepaid expenses and other | (12,700 | ) | (265,400 | ) | ||||
Other assets | 3,300 | (5,000 | ) | |||||
Accounts payable | (1,654,500 | ) | 427,500 | |||||
Other current liabilities | 207,000 | (75,400 | ) | |||||
Other long-term liabilities | — | (60,000 | ) | |||||
Total adjustments | (2,053,600 | ) | (877,200 | ) | ||||
Net cash used in operating activities | (1,318,200 | ) | (482,000 | ) | ||||
Cash flows from investing activities: | ||||||||
Property additions | (45,500 | ) | (36,100 | ) | ||||
Intangible additions | (4,000 | ) | — | |||||
Net cash used in investing activities | (49,500 | ) | (36,100 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings on bank and other loans | 1,829,000 | 1,156,300 | ||||||
Proceeds from stock options and warrants exercised | 10,300 | 16,400 | ||||||
Payments on bank and other loans | (708,200 | ) | (375,000 | ) | ||||
Net cash provided by financing activities | 1,131,100 | 797,700 | ||||||
Net increase (decrease) in cash and cash equivalents | (236,600 | ) | 279,600 | |||||
Cash and cash equivalents at beginning of period | 301,800 | 83,100 | ||||||
Cash and cash equivalents at end of period | $ | 65,200 | $ | 362,700 | ||||
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 is expected to account for approximately 45% of the Company’s 2003 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 NRO, CIA, NSA, DoD, and major prime contractors.
The Systems Engineering Group is expected to account for approximately 48% of the Company’s 2003 revenues. This Group provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle (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 is expected to account for approximately 7% of the Company’s 2003 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 consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Amended No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2002 (“2002 Form 10-K”) filed with the Securities and Exchange Commission on September 5, 2003.
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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
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”). The Credit Facility has an annual renewal occurring April 30 of each year. 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 March 31, 2003, the Credit Facility and Term Loan balances were $4,016,700 and $2,566,700, respectively. The interest rate at March 31, 2003 was 3.81% for the Credit Facility and 4.34% 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 March 31, 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.
In addition, the Company was required by Bank of America to obtain personal guarantees in the amount of $2,000,000, which the Company procured from two individuals, the Company’s Board member Gerald R. McNichols and J. Richard Knop. The compensation during the period of guaranty was in the form of cash and warrants. On December 20, 2002, Mr. McNichols and Mr. Knop were released from the guarantees.
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. Beginning in January 2002, the Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt, now totaling $2,200,000 is 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 March 31, 2003.
The Company’s comprehensive income for the three months ended March 31, 2003 was $742,600, which includes net income of $735,400 and other comprehensive income of $7,200 arising from the interest rate swap. The Company’s comprehensive income for the three months ended March 31, 2002 was $384,200, which includes net income of $395,200 and other comprehensive loss of $11,000 arising from the interest rate swap.
On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $772,600 with a five-year term, bearing interest at 6%. At March 31, 2003, the Seller Notes had an outstanding balance of approximately $600,500. The Company also entered into non-competition agreements with these sellers for total payments of $540,000 over a three-year period. As of March 31, 2003, the balance on the non-compete payments to be made by the Company was $360,000. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over various periods. The balance remaining to be paid under these non-competition agreements on March 31, 2003 was $228,951.
On May 29, 2002, Analex announced that it had been awarded a $164 million Expendable Launch Vehicle Integrated Support (“ELVIS”) prime contract by NASA. In conjunction with this award the Company issued promissory notes to certain Analex sellers totaling $1,000,000 with a three-year term, bearing interest at the prime rate plus 1%. At March 31, 2003 the outstanding balance on these notes was $833,333.
With its purchase of Analex, the Company assumed a note payable to the Department of Justice (“DOJ”). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006. The DOJ note payable balance was $739,600 as of March 31, 2003.
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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
5. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31, | ||||||
2003 | 2002 | |||||
Numerator: Net Income | $ | 735,400 | $ | 395,200 | ||
Denominator: | ||||||
Denominator for basic earnings per share: | ||||||
Weighted average shares outstanding | 14,445,356 | 14,385,725 | ||||
Effect of dilutive securities: | ||||||
Warrants | 1,956,858 | 1,766,658 | ||||
Employee stock options | 1,163,470 | 644,381 | ||||
Denominator for diluted earnings per share | 17,565,684 | 16,796,764 | ||||
Basic earnings per share | $ | .05 | $ | .03 | ||
Diluted earnings per share | $ | .04 | $ | .02 | ||
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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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED—(Continued)
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 3/31/03 | Three Months Ended 3/31/02 | |||||
Net income as reported | $ | 735,400 | $ | 395,200 | ||
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax effects | $ | 2,700 | $ | 3,200 | ||
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects | $ | 36,500 | $ | 2,000 | ||
Pro forma net income | $ | 701,600 | $ | 396,400 | ||
Earnings per share: | ||||||
Basic as reported | $ | .05 | $ | .03 | ||
Diluted as reported | $ | .04 | $ | .02 | ||
Basic pro forma | $ | .05 | $ | .03 | ||
Diluted pro forma | $ | .04 | $ | .02 |
7. | Concentration of Business |
Almost all of the Company’s revenues are derived either directly as prime contractor or indirectly as a subcontractor to other government prime contractors. With the award of the ELVIS contract to the Company, approximately 48% of the Company’s 2003 revenues are expected to be derived, directly and indirectly, from NASA. Approximately 51% of the Company’s 2003 revenues are expected to be derived from various Department of Defense agencies.
The majority of the Company’s technical and professional services business with governmental departments and agencies is obtained through competitive procurement and through follow-on services related to existing contracts. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.
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, if such shares are sold within such period and if certain other conditions are satisfied.
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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED—(Continued)
As of March 31, 2003, the maximum amount that the Company would be required to pay under the terms of the guarantee was $728,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of March 31, 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/(loss) 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.
Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | |||||
Revenues: | ||||||
ABS | $ | 1,353,000 | $ | 1,570,200 | ||
Analex | 15,278,200 | 11,465,300 | ||||
Total revenues: | 16,631,200 | 13,035,500 | ||||
Net income/(loss): | ||||||
ABS | $ | 86,400 | $ | 62,300 | ||
Analex | 649,000 | 332,900 | ||||
Total net income: | 735,400 | 395,200 | ||||
Assets: | ||||||
ABS | $ | 1,625,000 | $ | 1,034,700 | ||
Analex | 29,582,100 | 27,201,100 | ||||
Total assets: | 31,207,100 | 28,235,800 | ||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003
TO THE THREE MONTHS ENDED MARCH 31, 2002
Revenues for the three months ended March 31, 2003 were $16.6 million, an increase of $3.6 million from the $13.0 million in revenues for the three months ended March 31, 2002. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group, offset by a reduction in revenues of ABS. Revenues of the Homeland Security Group increased approximately $0.2 million due to growth on various contracts. Revenues of the Systems Engineering Group increased approximately $4.0 million. The increase is primarily from the ELVIS contract, which generated approximately $5.0 million in revenues, partially offset by a reduction in the level of activity on the Microgravity Research Development and Operations contract due to completion of specifically scheduled tasks. Systems Engineering Group revenues are also offset by approximately $0.6 million due to the completion of the Payload and Ground Operations contract which was the predecessor to the ELVIS contract. Additionally, total revenues are offset by a decline in revenues in ABS of approximately $0.2 million as a result of the completion of research work under grants from the U.S. 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 existing or in-process intellectual property. Increases or decreases in revenue are predominantly attributable to changes in the volume of services provided. As a government contractor, costs billed to the government are prescribed by Federal Acquisition Regulations and include recovery of allowable costs such as labor, fringe benefits, overhead and general and administrative expenses plus a reasonable fee.
Costs of revenue for the quarter ended March 31, 2003 were $13.9 million, an increase of $2.8 million from the same period in the prior year. The increase is largely due to the costs of revenue generated by the Systems Engineering Group on the ELVIS contract, which was approximately $4.0 million offset by a $1.2 million decrease in the Systems Engineering Group due to reduction in costs on the contracts noted above. Costs of revenue as a percentage of revenues were approximately 83% and 85% for the quarters ended March 31, 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, as well as and controlling overhead expenses.
Selling, general and administrative expenses totaled $1.5 million for the quarter ended March 31, 2003, compared with $1.3 million for the same period in the prior year. The $0.2 million increase is primarily due costs related to the staffing of key business development and marketing positions that were vacant in the prior period.
Operating income for the three months ended March 31, 2003 was $1.1 million, compared to operating income of $0.7 million for the period ended March 31, 2002. This $0.4 million increase is primarily attributable to the profitability in the Systems Engineering Group derived from the ELVIS contract, which contributed approximately $0.2 million, offset by the completion of tasks in the Systems Engineering group referenced above. In addition, the Homeland Security Group had increased operating income, of which $0.3 million was due to the growth noted above coupled with reduced allocations of corporate expenses. Corporate expenses are allocated to operating groups on a total cost basis. Therefore, as the Company’s revenue base grows, operating groups will be allocated fewer corporate expenses as a percentage of costs resulting in increased operating margins on fixed-price and time and materials contracts. The Company’s operating income to be derived in the future from ABS depends on its success in generating fee or royalty-bearing increases in revenues, as described above.
Operating margin for the three months ended March 31, 2003 was 7%, compared to operating margin of 5% for the period ended March 31, 2002. This 2% increase is primarily attributable to the increased profitability of the Homeland Security Group as noted above.
Interest expense totaled $0.1 million for the quarter ended March 31, 2003, compared with $0.3 million for the same period in the prior year. The $0.2 million decrease is due to the Company’s increased profitability, which reduced borrowings under the credit facility, coupled with the release of the guarantees associated with the Bank of America Debt.
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Income tax expense for the quarter ended March 31, 2003 was $0.3 million compared with $0.01 million for the same period in 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.
CAPITAL RESOURCES AND LIQUIDITY
Working capital at March 31, 2003 increased by approximately $126,000 from March 31, 2003 primarily due to an increase in accounts receivable partially offset by an increase in the credit facility balance.
Net cash used in operating activities during the three months ended March 31, 2003 was approximately $1,318,200, as compared with net cash used of approximately $482,000 during the same period in 2002. This increase was due to the timing of certain accounts payable disbursements in 2003, which is not a reflection of an underlying increase in cost of operations.
Net cash used in investing activities during the three months ended March 31, 2003 was approximately $49,500 compared to $36,100 used during the three months ended March 31, 2002. Net cash used in investing activities was for fixed asset purchases and costs associated with patent development.
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. The Credit Facility has an annual renewal occurring April 30 of each year. 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 Company must maintain the following ratios: a Total Funded Debt to EBITDA ratio of no greater than 3.0 to 1.0, a Senior Debt to EBITDA ratio of no greater than 2.75 to 1.0, a Fixed Charge Coverage Ratio of no less than 1.3 to 1.0, and Net Worth equal to at least the sum of $9 million and 65% of net income (not to be reduced by net losses) during each fiscal quarter ending March 31, 2002 and thereafter. At March 31, 2003, the Company was in compliance with each of these covenants. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.
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 March 31, 2003, the maximum amount that the Company would be required to pay under the terms of the guarantee was $728,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of March 31, 2003, no amounts were accrued under the guarantee.
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.
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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 over nine years, four months is $163.8 million. However, total 9-year contract value may be increased as a result of additional task orders which may be issued under the contract as required.
With respect to the ELVIS contract, the Company is the prime contractor with three subcontractors performing various functions. Approximately 27% of the contract is expected to be performed by the subcontractors. As the prime, the Company is responsible for all aspects of work performed by the subcontractors including, but not limited to, quality of work, timeliness of performance, and cost control. The Company records all customer payments under this contract as revenues and all subcontractor invoices as contract costs.
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 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 has 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.
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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 |
The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At March 31, 2003 the notional value of the swap was $2,200,000. 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 $52,200, based on debt levels at March 31, 2003.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company’s disclosure controls and procedures were evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Such controls and procedures were deemed to be effective to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation.
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Part II. Other Information
No material legal proceedings are currently pending.
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 |
None. |
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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: September 5, 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 (Principal Executive Officer) | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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