UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 8-K/A

(Amendment No. 1 )

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

 

Date of report (Date of earliest event reported): January 21, 2004

 


 

SI International, Inc.

(Exact Name of Registrant as Specified in Charter)

 

Delaware

 

000-50080

 

52-2127278

(State or Other Jurisdiction
of Incorporation)

 

(Commission File Number)

 

(IRS Employer Identification No.)

 

 

 

 

 

12012 Sunset Hills Road, Reston, Virginia

 

20190-5869

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (703) 234-7000

 

N/A

(Former Name or Former Address, if Changed Since Last Report)

 

 



 

Item 2. Acquisition or Disposition of Assets.

 

As previously reported on Form 8-K filed with the Securities and Exchange Commission on January 28, 2004, SI International, Inc. (the “Company”) issued a press release on January 21, 2004 announcing that the acquisition of MATCOM International Corp. was closed on January 21, 2004 pursuant to an Agreement and Plan of Merger dated as of December 17, 2003, as amended by the First Amendment and Plan of Merger, dated as of January 21, 2004.  As a result of this acquisition, MATCOM became a wholly-owned subsidiary of the Company.  This form 8-K/A is being filed to report the financial statements and pro forma financial information pursuant to Item 7 below.

 

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits

 

(a)   Financial Statements of Business Acquired:

 

 

 

The following financial statements omitted from the Current Report on Form 8-K dated January 28, 2004 in reliance upon Item 7(a)(4) of Form 8-K are filed herewith.

 

 

 

Report of Independent Certified Public Accountants

3

 

 

Consolidated Balance Sheets for MATCOM International Corp. as of December 31, 2003, March 31, 2003 and March 31, 2002

4

 

 

Consolidated Statements of Operations for MATCOM International Corp. for the nine months ended December 31, 2003 and 2002, the twelve months ended March 31, 2003 and 2002, and the fifteen months ended March 31, 2001

6

 

 

Consolidated Statements of Stockholders’ Equity for MATCOM International Corp. for the twelve months ended March 31, 2003 and 2002, and the fifteen months ended March 31, 2001

7

 

 

Consolidated Statements of Cash Flows for MATCOM International Corp. for the nine months ended December 31, 2003 and 2002, the twelve months ended March 31, 2003 and 2002, and the fifteen months ended March 31, 2001

9

 

 

Notes to Consolidated Financial Statements

11

 

 

(b)   Pro Forma Financial Information

 

 

 

The following pro forma financial information omitted from the Current Report on Form 8-K dated January 28, 2004 in reliance upon Item 7(b)(2) of Form 8-K are filed herewith.

 

 

 

Introduction

 

 

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 27, 2003

30

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 27, 2003

32

 

 

Unaudited Pro Forma Notes to the Pro Forma Condensed Consolidated Financial Statements

33

 

(c)   Exhibits

 

Exhibit
Number

 

Exhibit

2.1*

 

Agreement and Plan of Merger among the Company, Link Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company, MATCOM International Corp., and the stockholders of MATCOM, dated as of December 17, 2003, as amended by the First Amendment to Agreement and Plan of Merger, dated as of January 21, 2004.

 

 

 

 

 

(The appendices (except for Appendix A) and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  SI International, Inc. hereby undertakes to furnish supplementally to the Securities and Exchange Commission copies of any omitted appendices and exhibits upon request therefor by the Securities and Exchange Commission.)

 

 

 

23.1

 

Consent of Grant Thornton LLP.

 

 

 

99.1*

 

Press Release issued January 21, 2004 by SI International, Inc.

 


*              Incorporated by reference to the Company’s Current Report on Form 8-K dated January 28, 2004.

 

2



 

Report of Independent Certified Public Accountants

 

Board of Directors

MATCOM International Corporation

 

We have audited the accompanying consolidated balance sheets of MATCOM International Corporation (the Company) as of March 31, 2003 and 2002, and the related statements of operations, stockholders’ equity and cash flows for each of the 12 months ended March 31, 2003 and 2002 and for the 15 months ended March 31, 2001.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MATCOM International Corporation as of March 31, 2003 and 2002, and the results of its operations and its cash flows for each of the 12 months ended March 31, 2003 and 2002 and for the 15 months ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note A to the financial statements, effective April 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

 

 

/S/ Grant Thornton, LLP

 

Grant Thornton, LLP

Vienna, Virginia

May 28, 2003

 

3



 

MATCOM International Corporation

Consolidated Balance Sheets

 

 

 

December 31,
2003
(Unaudited)

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

114,974

 

$

232,850

 

$

164,479

 

Accounts receivable, net

 

17,623,086

 

17,022,294

 

18,008,839

 

Prepaid expenses and other

 

1,507,576

 

1,474,383

 

918,526

 

Income tax receivable

 

710,050

 

1,259,817

 

15,206

 

Deferred income tax asset

 

 

 

199,065

 

 

 

 

 

 

 

 

 

Total Current Assets

 

19,955,686

 

19,989,344

 

19,306,115

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

1,237,202

 

1,243,819

 

1,397,266

 

 

 

 

 

 

 

 

 

Deposits

 

138,577

 

138,577

 

133,007

 

 

 

 

 

 

 

 

 

Capitalized Costs, net

 

570,296

 

864,554

 

244,751

 

 

 

 

 

 

 

 

 

Goodwill

 

29,677,436

 

26,378,720

 

16,660,391

 

 

 

 

 

 

 

 

 

Total Assets

 

$

51,579,197

 

$

48,615,014

 

$

37,741,530

 

 

4



 

MATCOM International Corporation

Consolidated Balance Sheets

 

 

 

December 31,
2003
(Unaudited)

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Line-of-credit

 

$

9,176,566

 

$

8,905,218

 

$

8,768,199

 

Notes payable, current

 

1,132,050

 

1,132,050

 

6,504,022

 

Accounts payable

 

3,536,916

 

4,158,212

 

4,322,414

 

Accrued subcontractors

 

332,914

 

810,317

 

2,698,705

 

Accrued salaries and related expenses

 

1,847,792

 

1,073,770

 

1,319,129

 

Accrued leave

 

1,386,348

 

1,429,086

 

1,008,163

 

Other accrued liabilities

 

1,364,327

 

2,251,042

 

2,072,616

 

Deferred income tax liability

 

656,093

 

656,093

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

19,433,006

 

20,415,788

 

26,693,248

 

 

 

 

 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

 

 

Notes payable, net of current maturities

 

16,656,239

 

17,359,097

 

2,507,067

 

Accrued interest

 

750,000

 

750,000

 

 

Deferred income tax liability

 

527,885

 

527,885

 

207,336

 

 

 

 

 

 

 

 

 

Total Long-term Liabilities

 

17,934,124

 

18,636,982

 

2,714,403

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

 

Series A, $.01 par value, liquidation value of $7,129,800, 71,300 shares authorized, 71,298 shares issued and outstanding at December 31, 2003, March 31, 2003 and 2002

 

713

 

713

 

713

 

Series B, $.01 par value, liquidation value of $3,200,000, 32,000 shares authorized, issued and outstanding at December 31, 2003, March 31, 2003 and 2002

 

320

 

320

 

320

 

Series C, $.01 par value, liquidation value of $3,500,000, 55,000 shares authorized,35,000 issued and outstanding at December 31,2003, March 31, 2003 and 2002

 

350

 

350

 

350

 

Series D-1, $.01 par value, liquidation value of $2,500,000, 781,250 shares authorized, issued, and outstanding at December 31, 2003. 781,250 and zero shares authorized, none issued or outstanding at March 31, 2003 and 2002

 

7,813

 

 

 

Series D-2, $.01 par value, liquidation value of $1,000,000, 312,500 shares authorized, issued, and outstanding at December 31, 2003.  312,500 and zero shares authorized, none issued or outstanding at March 31, 2003 and 2002

 

3,125

 

 

 

Common stock

 

 

 

 

 

 

 

Class A, $.01 par value, 7,000,000 shares authorized, 3,016,288 shares issued and outstanding at December 31, 2003, March 31, 2003 and 2002

 

30,163

 

30,163

 

30,163

 

Class B, $.01 par value, 1,000,000 shares authorized, 412,000, 412,000, and zero shares issued and outstanding at December 31, 2003, March 31, 2003 and 2002

 

4,120

 

4,120

 

 

Additional paid-in capital

 

17,102,385

 

13,613,323

 

13,205,443

 

Notes receivable from stockholders

 

(410,000

)

(410,000

)

 

Accumulated deficit

 

(2,526,922

)

(3,676,745

)

(4,903,110

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

14,212,067

 

9,562,244

 

8,333,879

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

 51,579,197

 

$

 48,615,014

 

$

 37,741,530

 

 

5



 

MATCOM International Corporation

Consolidated Statements of Operations

 

 

 

Nine months
ended
December 31,
2003
(Unaudited)

 

Nine months
ended
December 31,
2002
(Unaudited)

 

Twelve months
ended
March 31,
2003

 

Twelve months
ended
March 31,
2002

 

Fifteen months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

53,323,428

 

$

49,804,971

 

$

64,280,255

 

$

73,554,546

 

$

69,795,651

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Costs

 

32,760,712

 

32,178,868

 

39,954,447

 

50,966,905

 

46,651,531

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

20,562,716

 

17,626,103

 

24,325,808

 

22,587,641

 

23,144,120

 

 

 

 

 

 

 

 

 

 

 

 

 

Overhead and General and Administrative Expenses

 

16,257,029

 

14,081,206

 

19,253,607

 

19,928,464

 

22,649,907

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

4,305,687

 

3,544,897

 

5,072,201

 

2,659,177

 

494,213

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,890

 

20,840

 

22,862

 

23,890

 

25,477

 

Interest expense

 

(2,368,765

)

(2,219,951

)

(3,027,188

)

(1,685,968

)

(2,679,097

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,366,875

)

(2,199,111

)

(3,004,326

)

(1,662,078

)

(2,653,620

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

1,938,812

 

1,345,786

 

2,067,875

 

997,099

 

(2,159,407

)

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax (Expense) Benefit

 

(788,989

)

(547,660

)

(841,510

)

(644,712

)

632,455

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

1,149,823

 

$

798,126

 

$

1,226,365

 

$

352,387

 

$

(1,526,952

)

 

6



 

MATCOM International Corporation

 

Consolidated Statements of Stockholders’ Equity

 

Twelve months ended March 31, 2003 and 2002, fifteen months ended March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

Series C

 

Series D-1

 

Series D-2

 

 

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

Preferred

 

 

 

Shares

 

Stock

 

Shares

 

Stock

 

Shares

 

Stock

 

Shares

 

Stock

 

Shares

 

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2000

 

71,298

 

$

713

 

32,000

 

$

320

 

35,000

 

$

350

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of note receivable from shareholder

 

 

 

 

 

 

 

 

 

 

 

Net loss for the 15 months ended March 31, 2001

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2001

 

71,298

 

713

 

32,000

 

320

 

35,000

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the 12 months end March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2002

 

71,298

 

713

 

32,000

 

320

 

35,000

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares

 

 

 

 

 

 

 

 

 

 

 

Net income for the 12 months ended March 31, 2003

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2003

 

71,298

 

713

 

32,000

 

320

 

35,000

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares (unaudited)

 

 

 

 

 

 

 

781,250

 

7,813

 

312,500

 

3,125

 

Net income for 9 months ended December 31, 2003 (unaudited)

 

 

713

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003 (unaudited)

 

71,298

 

$

713

 

32,000

 

$

320

 

35,000

 

$

350

 

781,250

 

$

7,813

 

312,500

 

$

3,125

 

 

 

 

 

 

 

 

 

 

Not

 

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

Receivable

 

 

 

 

 

 

 

Common

 

Common

 

Common

 

Common

 

Paid-In

 

from

 

Accumulated

 

 

 

 

 

Shares

 

Stock

 

Shares

 

Stock

 

Capital

 

Shareholder

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2000

 

3,016,288

 

$

30,163

 

 

$

 

$

13,205,443

 

(4,000

)

$

(3,728,545

)

$

9,504,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of note receivable from shareholder

 

 

 

 

 

 

4,000

 

 

4,000

 

Net loss for the 15 months ended March 31, 2001

 

 

 

 

 

 

 

(1,56,952

)

(1,526,952

)

Balance at March 31, 2001

 

3,016,288

 

30,163

 

 

 

13,205,443

 

 

(5,225,497

)

7,981,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the 12 months end March 31, 2002

 

 

 

 

 

 

 

352,387

 

352,387

 

Balance at March 31, 2002

 

3,016,288

 

30,163

 

 

 

13,205,443

 

 

(4,903,110

)

8,333,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

2,000

 

20

 

1,980

 

 

 

2,000

 

Issuance of shares

 

 

 

410,000

 

4,100

 

405,900

 

(410,000

)

 

 

Net income for the 12 months ended March 31, 2003

 

 

 

 

 

 

 

1,226,365

 

1,226,365

 

Balance at March 31, 2003

 

3,016,288

 

30,163

 

412,000

 

4,120

 

13,613,323

 

(410,000

)

(3,676,745

)

9,562,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares (unaudited)

 

 

 

 

 

3,489,062

 

 

 

3,500,000

 

Net income for 9 months ended December 31, 2003 (unaudited)

 

 

 

 

 

 

 

1,149,823

 

1,149,823

 

Balance at December 31, 2003 (unaudited)

 

3,016,288

 

$

30,163

 

412,000

 

$

4,120

 

$

17,102,385

 

$

(410,000

)

$

(2,526,922

)

$

14,212,067

 

 

7



 

MATCOM International Corporation

Consolidated Statements of Cash Flows

 

 

 

Nine months
ended
December 31,
2003
(Unaudited)

 

Nine months
ended
December 31,
2002
(Unaudited)

 

Twelve months
ended
March 31,
2003

 

Twelve months
ended
March 31,
2002

 

Fifteen months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,149,823

 

$

798,126

 

$

1,226,365

 

$

352,387

 

$

(1,526,952

)

Adjustments to reconcile net income  (loss) to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

912,250

 

796,398

 

1,008,818

 

1,809,162

 

2,255,010

 

Loss on disposal of property and equipment

 

9,516

 

 

 

 

 

Deferred income tax expense(benefit)

 

 

 

1,175,707

 

2,508

 

(460,115

)

Changes in assets and liabilities, net  effect of acquisition:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(600,792

)

3,109,836

 

2,784,627

 

(4,328,490

)

(606,565

)

Receivable-other

 

 

 

 

 

1,162,907

 

Prepaid expenses

 

(33,193

)

(267,586

)

(224,161

)

(134,253

)

(174,551

)

Current tax receivable

 

549,767

 

(46,084

)

(1,179,791

)

714,611

 

(202,024

)

Deposits

 

 

(1,781

)

(1,791

)

(31,825

)

(20,365

)

Accounts payable

 

(621,296

)

(1,454,425

)

(788,808

)

1,529,114

 

1,226,378

 

Accrued subcontractors

 

(477,403

)

(1,361,544

)

(1,361,544

)

2,343,691

 

355,014

 

Accrued salaries and related expenses

 

774,022

 

667,854

 

(245,359

)

26,918

 

520,486

 

Accrued leave

 

(42,738

)

60,284

 

313,126

 

(28,827

)

(163,277

)

Accrued liabilities and interest

 

(886,715

)

1,256,774

 

74,529

 

653,093

 

269,932

 

Accrued interest, payable in kind

 

 

105,058

 

105,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

733,241

 

3,662,910

 

2,886,776

 

2,908,089

 

2,635,878

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

(389,825

)

(360,794

)

(459,056

)

(812,350

)

(515,040

)

Cash paid in acquisition of ENTEK

 

 

(8,896,390

)

(8,896,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(389,825

)

(9,257,184

)

(9,355,446

)

(812,350

)

(515,040

)

 

8



 

MATCOM International Corporation

Consolidated Statements of Cash Flows

 

 

 

Nine months
ended
December 31,
2003
(Unaudited)

 

Nine months
ended
December 31,
2002
(Unaudited)

 

Twelve months
ended
March 31,
2003

 

Twelve months
ended
March 31,
2002

 

Fifteen months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,000

 

2,000

 

 

4,000

 

Debt issuance costs

 

(29,782

)

(976,978

)

(976,978

)

 

(82,502

)

Net proceeds (borrowings) under line-of-credit

 

271,348

 

(362,618

)

137,019

 

459,982

 

408,712

 

Payments on notes payable

 

(702,858

)

(7,545,587

)

(7,625,000

)

(2,504,836

)

(2,474,375

)

Proceeds from notes payable

 

 

15,000,000

 

15,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash (Used in) Provided by Financing Activities

 

(461,292

)

6,116,817

 

6,537,041

 

(2,044,854

)

(2,144,165

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (Decrease) Increase in Cash

 

(117,876

)

522,543

 

68,371

 

50,885

 

(23,327

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash, beginning of year

 

232,850

 

164,479

 

164,479

 

113,594

 

136,921

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, end of year

 

$

114,974

 

$

687,022

 

$

232,850

 

$

164,479

 

$

113,594

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

60,804

 

$

60,804

 

$

2,291,708

 

$

1,359,387

 

$

2,472,842

 

Interest

 

$

3,012,667

 

$

3,012,667

 

$

889,290

 

$

498,775

 

$

12,463

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

Stock issued in exchange for note receivable

 

$

 

$

410,000

 

$

410,000

 

$

 

$

 

Stock issued related to the ENTEK purchase

 

$

3,500,000

 

$

 

$

 

$

 

$

 

Notes payable issued to purchase ENTEK

 

$

 

$

2,000,000

 

$

2,000,000

 

$

 

$

 

 

9



 

MATCOM International Corporation

 

Notes to Consolidated Financial Statements

 

March 31, 2003, 2002 and 2001

 

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

MATCOM International Corporation (the Company) was incorporated in Delaware on March 1, 1999 as a part of the reorganization of Materials, Communication and Computers, Inc. (MATCOM).  The Company’s services include information technology, engineering, and technical solutions for government clients worldwide.  The Information Technology (IT) Group designs, develops, installs, maintains and operates computer software for legacy, client-server, embedded and Web-based applications.  The IT Group also provides leading-edge e-government solutions.  The Engineering Technology (ET) Group provides integrated logistics support for both developmental and field military and civilian systems.  The ET Group develops engineering solutions, and provides technical support for civilian aviation systems and weapons systems of every military service.  The ET Group also provides technical support in training, systems simulation and material management, including outsourcing operations.  The Company operates from offices located throughout the United States and temporary facilities around the world, based on customer requirements.

 

The Company entered into an agreement effective January 21, 2004, whereby SI International, Inc., purchased all of the Company’s outstanding stock, outstanding unexpired and unexercised options, warrants and other rights to acquire or receive any Company stock.  Concurrent with the transaction all of the Company’s outstanding debt was paid.  The accompanying financial statements have been prepared on a historical cost basis and do not reflect any adjustments related to the aforementioned transaction.

 

Approximately 99 percent of the Company’s revenue in the nine months ending December 31, 2003 and 2002 was derived from agencies of the U.S. government through prime and subcontracts.  Approximately 20 percent of revenue was derived from one contract for the nine months ending December 31, 2003, and 25 percent of revenue was derived from one contract for the nine months ending December 31, 2002.

 

Approximately 99 percent of the Company’s revenue in the 12 months ending March 31, 2003 and 2002, and approximately 99 percent in the 15 months ending March 31, 2001, was derived from agencies of the U.S. government through prime and subcontracts.  Approximately 23 percent of revenue was derived from one contract in the 12 months ending March 31, 2003; 42 percent was derived from two contracts in the 12 months ending March 13, 2002; and 32 percent was derived from one contract for the 15 months ended March 31, 2001.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MATCOM and ENTEK, Inc. (ENTEK).  All material intercompany transactions and balances have been eliminated upon consolidation.

 

10



 

Revenue Recognition

 

The Company provides professional and technical services under three types of contracts: cost-reimbursement, fixed-price, and time-and-materials.  In accordance with American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts, revenue is recognized for cost-reimbursement contracts to the extent of costs incurred, plus a proportionate amount of fee earned, for fixed-price-type contracts on the percentage-of-completion method, and for time-and-materials contracts by the application of contract labor and material rates as services are performed.

 

The Company reported activity under certain contracts on a net basis in accordance with Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.  Management believes this presentation reflects the substance of the Company’s role in certain contracts in which independent contractors negotiate and perform all services, but use the Company’s contracts as an administrative contracting vehicle.

 

The Company provides for anticipated losses on contracts by a charge to income during the period in which they are first identified.

 

Certain of the Company’s costs are subject to audit by agencies of the U.S. government.  Contract costs have been audited through the fiscal year ended 2002.  Management believes future adjustments will not have a material effect on the financial statements.

 

Deferred Charges

 

The Company capitalizes certain costs related to developing program training course manuals.  The manuals will be used in connection with contracts that provide for training seminars and workshops.  The Company will amortize these deferred costs when related sales commence.  As of December 31, 2003, March 31, 2003 and March 31, 2002, approximately $682,000, $300,000 and $-0- of these costs were recorded and included in prepaid expenses and other.

 

11



 

Goodwill

 

Goodwill is recorded from the acquisitions of all of the outstanding shares of ENTEK in November 2002, the net assets of Mei Technology Corporation (Mei) in March of 1999, and all of the outstanding shares of Management Assistance Corporation of America (MACA) in 1998.  The Company amortized goodwill recorded on the Mei and MACA acquisitions until April 1, 2002.  Effective April 1, 2002, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the Company discontinued amortization of its goodwill.  Net income for the 12 months ending March 31, 2002 would have been approximately $1,030,000, excluding goodwill amortization expensed during the period of approximately $678,000, net of tax of approximately $307,000.  Net loss for the 15 months ending March 31, 2001, would have been approximately $492,000, excluding goodwill amortization expensed during the period of approximately $1,035,000, net of tax of approximately $443,000.

 

In accordance with SFAS No. 142, applicable impairment testing was completed during fiscal year 2003 with no resulting impairment of goodwill found.

 

Goodwill recorded in the purchase transactions consists of the following:

 

 

 

December 31,
2003

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

ENTEK

 

$

13,017,045

 

$

9,718,329

 

$

 

Mei

 

10,488,694

 

10,488,694

 

10,488,694

 

MACA

 

6,171,697

 

6,171,697

 

6,171,697

 

 

 

$

29,677,436

 

$

26,378,720

 

$

16,660,391

 

 

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

 

The Company adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on April 1, 2002.  SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset might not be recoverable.  Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If such assets were considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the assets exceeded the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

 

Prior to the adoption of SFAS No. 142, the Company followed SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in assessing impairment of goodwill.

 

12



 

Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

Depreciation and Amortization

 

Property and equipment are stated at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets for furniture and equipment.  Amortization of leasehold improvements is computed on a straight-line method over the lesser of the estimated useful life or the remaining lease term.

 

Fair Value of Financial Instruments

 

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract that imposes an obligation to deliver cash or other financial instruments to a second party.  Cash is carried at fair market value, and the carrying amounts of accounts receivable and accounts payable in the accompanying financial statements approximate fair value due to the short maturity of these instruments.

 

Income Taxes

 

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.  Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.

 

13



 

Stock Options

 

The Company has an incentive stock option plan, which is more fully described in Note K.  The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following tables illustrate the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation.

 

 

 

Nine months
ended
December 31,
2003

 

Nine months
ended
December 31,
2002

 

 

 

 

 

 

 

Net income as reported

 

$

1,149,823

 

$

798,126

 

Deduct:  total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects

 

1,208

 

981

 

Proforma net income

 

$

1,148,615

 

$

797,145

 

 

 

 

12 months
ended
March 31,
2003

 

12 months
ended
March 31,
2002

 

15 months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

Net income (loss) as reported

 

$

1,226,365

 

$

352,387

 

$

(1,526,952

)

Deduct: total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects

 

12,576

 

1,926

 

43,498

 

Proforma net income (loss)

 

$

1,213,789

 

$

350,461

 

$

(1,570,450

)

 

14



 

 

Recent Accounting Pronouncements Issued Not Yet Adopted

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.  SFAS No. 150 is effective for the beginning of the first interim period after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public company.  MATCOM has not yet adopted SFAS No. 150 as a non-public entity, but would adopt the standard on January 21, 2004, the date on which MATCOM was purchased by a publicly held entity.  The impact of adopting this standard would be a reclassification of the liquidation value of all the outstanding shares of preferred stock from stockholders’ equity to long-term liabilities.  The result would be a reduction of stockholders’ equity and an increase in long-term liabilities of $17,329,800 as of December 31, 2003.  In addition, all of the related undeclared accumulated dividends would be recorded as a liability and a charge to income as a change in accounting principle totaling $7,272,973.  In connection with the sale of the Company all of the preferred stock was retired.

 

Interim Financial Information

 

The accompanying unaudited financial information for the nine months ended December 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  All references to amounts at December 31, 2003, and the nine-month periods ended December 31, 2003 and 2002, are unaudited.

 

Reclassification

 

Certain amounts in the 2002 and 2001 financial statements have been reclassified to conform to the 2003 presentation.

 

15



 

NOTE B—ENTEK ACQUISITION

 

Effective September 30, 2002, the Company purchased all of the outstanding shares of ENTEK.  The results of ENTEK’s operations have been included in the consolidated financial statements since that date.  ENTEK, based in Alexandria, Virginia, provides engineering, logistics and information technology service solutions to the federal government.  The acquisition opens the door of opportunity into the homeland security marketplace and expands the Company’s United States Air Force presence.

 

The aggregate purchase price was $14,397,000 (net of cash received of $1,259,000), including $8,897,000 in net cash, $2,000,000 in notes payable, 781,250 shares of Series D-1 senior redeemable convertible preferred stock, and 312,500 shares of Series D-2 senior redeemable preferred stock, with a redemption value totaling $3,500,000.  The shares of the preferred stock are held in escrow, and their release is contingent upon meeting certain earnings targets for the 12 months ending September 30, 2003.  Therefore, the preferred shares are not considered part of the net price, recorded as of March 31, 2003, of $10,897,000.

 

The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition:

 

March 31, 2003

 

 

 

 

 

 

 

Cash

 

$

1,259,000

 

 

 

 

 

Accounts receivable

 

2,095,000

 

Other assets

 

180,000

 

Goodwill

 

9,718,000

 

 

 

 

 

Total assets acquired

 

13,252,000

 

Current liabilities

 

1,096,000

 

 

 

 

 

Net assets acquired

 

$

12,156,000

 

 

Goodwill in the amount of $842,450 is expected to be deductible for tax purposes.

 

On October 1, 2003, ENTEK achieved the earning targets for the 12 months ending September 30, 2003 as stipulated by the stock purchase agreement.  All of the preferred shares held in escrow were released to the sellers.  The value of the preferred shares is $3,500,000.  This is considered additional purchase price and is therefore added to the original amount of goodwill recorded as of September 30, 2002.  In addition, the Company completed the calculation of the net after-tax profits for the period from September 30, 2002 through November 21, 2002 to be paid to the sellers, which resulted in a decrease in the total purchase price and therefore a reduction of goodwill for approximately $200,000.  Therefore, total goodwill recorded as of December 31, 2003 for the purchase of ENTEK is $13,017,000, resulting in the total net assets acquired of $15,656,000.

 

16



 

The following unaudited proforma statement of operations shows the combined results of the Company and ENTEK assuming that the acquisition had occurred on April 1, 2002.  The proforma information is based on historical financial statements of these operations of these companies giving effect to purchase accounting adjustments as of the beginning of the period.  The unaudited proforma information is not intended to be indicative of the future results of operations or results that might have been achieved if this transaction had been in effect since the beginning of these periods.

 

 

 

MATCOM
12 months
ended
March 31, 2003

 

ENTEK
April 1, 2002
to
Sept. 30, 2002

 

Proforma
MATCOM
12 months
ended
March 31, 2003

 

 

 

 

 

 

 

 

 

Revenue

 

$

64,280,225

 

$

5,740,417

 

$

70,020,642

 

Direct expenses

 

39,954,447

 

3,016,263

 

42,970,710

 

Overhead and general and administrative expenses

 

19,253,607

 

1,580,667

 

20,834,274

 

Net income

 

1,226,365

 

663,487

 

1,889,852

 

 

NOTE C—ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, consist of the following:

 

 

 

December 31,
2003

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Billed

 

$

15,310,717

 

$

12,420,755

 

$

14,132,489

 

Unbilled

 

2,134,517

 

4,259,081

 

3,615,822

 

Retentions

 

409,257

 

420,968

 

339,038

 

 

 

17,854,491

 

17,100,804

 

18,087,349

 

 

 

 

 

 

 

 

 

Less:  allowance for doubtful accounts

 

(231,405

)

(78,510

)

(78,510

)

 

 

 

 

 

 

 

 

 

 

$

17,623,086

 

$

17,022,294

 

$

18,008,839

 

 

17



 

Accounts receivable at December 31, 2003 and March 31, 2003 and 2002, include $204,898, $204,786 and $417,489, respectively, of unbilled indirect cost rate variances.  Such rate variances arise as a result of the Company’s recording of revenue using actual indirect cost rates, which have exceeded the rates used in billing its customers.  Management believes these unbilled cost rate variances will be collected upon final submission of invoices to the customer upon completion of contract audits and subsequent approval of such indirect costs by the U.S. Defense Contract Audit Agency.  Also included in unbilled are costs of approximately $873,000, $400,000 and $45,000 incurred on certain contracts that are in excess of current contract funding limitations at December 31, 2003 and March 31, 2003 and 2002.  Management expects to receive additional funding for such costs incurred as of December 31, 2003, within 120 days after period end.

 

The Company provides for an allowance for doubtful accounts based on reviews of potential losses on individual contracts and collectibility of recorded billed, unbilled and retention receivables.  While management uses the best information available in making its determination, the ultimate recovery of such receivables is also dependent on future economic events and other conditions that may be beyond management’s control.

 

Retentions arise principally as a result of the Company’s recording of revenue earned under cost-reimbursable and time-and-materials contracts in which the customer requires a certain percentage of the revenue earned to remain unbilled until after completion of contract audits.  Management believes these unbilled fee retentions will be collected upon final submission of invoices to the customer upon completion of such contract audits.

 

NOTE D—PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

 

 

December 31,
2003

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Furniture and equipment

 

$

6,548,323

 

$

6,192,738

 

$

5,635,378

 

Equipment under capital leases

 

157,955

 

157,955

 

157,955

 

Leasehold improvements

 

342,186

 

320,741

 

292,825

 

 

 

 

 

 

 

 

 

 

 

7,048,464

 

6,671,434

 

6,086,158

 

 

 

 

 

 

 

 

 

Less:  accumulated depreciation and amortization

 

(5,811,262

)

(5,427,615

)

(4,688,892

)

 

 

 

 

 

 

 

 

 

 

$

1,237,202

 

$

1,243,819

 

$

1,397,266

 

 

18



 

NOTE E—CAPITALIZED COSTS

 

Capitalized costs consist of the following:

 

 

 

December 31,
2003

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Recapitalization

 

$

282,960

 

$

282,960

 

$

282,960

 

Debt issuance

 

1,006,760

 

976,978

 

903,821

 

 

 

 

 

 

 

 

 

 

 

1,289,720

 

1,259,938

 

1,186,781

 

 

 

 

 

 

 

 

 

Less accumulated amortization

 

(719,424

)

(395,384

)

(942,030

)

 

 

 

 

 

 

 

 

 

 

$

570,296

 

$

864,554

 

$

244,751

 

 

Recapitalization costs represent financing and professional fees related to issuance of preferred stock in 1997.  The costs are being amortized over the six-year redemption life of the preferred stock.

 

Debt issuance costs as of December 31 and March 31, 2003, represent professional fees related to the amendment of the line-of-credit and issuance of the term notes in 2003.  Such costs are being amortized over one to four years, depending on the term of the debt.

 

Debt issuance costs as of March 31, 2002, represent professional fees related to the issuance and amendment of the line-of-credit and the term note from 1997 to 2001.  Such costs were being amortized over three- or five-year lives, depending on the term of the debt.  In fiscal year 2003, these costs were written off to general administrative expenses upon payment of the related debt.

 

The aggregate amortization expense for the 12 months ending March 31, 2003 and 2002, was $357,176 and $309,821, respectively, and $313,116 for the 15 months ending March 31, 2001.  The aggregate amortization expense for the nine months ending December 31, 2003 was $324,040.  The estimated amortization expense for the next four years is as follows:

 

Year ending March 31,

 

 

 

 

 

 

 

2004

 

$

348,000

 

2005

 

194,000

 

2006

 

194,000

 

2007

 

129,000

 

 

19



 

NOTE F—LINE-OF-CREDIT AND NOTES PAYABLE

 

Line-of-credit consists of the following:

 

 

 

December 31,
2003

 

March 31,
2003

 

March 31,
2002

 

 

 

 

 

 

 

 

 

Line-of-credit for borrowings up to the lesser of $12,000,000 or qualifying receivables.  Borrowings under the agreement are evidenced by a promissory note maturing in March 2004.  Accrued interest on the outstanding debt is payable monthly at 5.00%, 5.25% and 6.75% at December 31, 2003, March 31, 2003 and 2002, respectively.  Included in the line-of-credit were checks issued but not yet presented for payment totaling $651,869, $509,243 and $474,443 as of December 31, 2003, March 31, 2003 and 2002, respectively.

 

$

9,176,566

 

$

8,905,218

 

$

8,768,199

 

 

 

 

 

 

 

 

 

Notes payable consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured term note for $4,500,000 (Term A), maturing in November 2006.  Principal payments are due monthly.  Interest accruing on the outstanding debt is payable monthly at London Interbank Offered Rate (LIBOR) plus 10%; the effective rate of interest at December 31, 2003 was 11.13%.  The default interest rate is the rate as calculated plus 200 basis points compounded monthly.

 

$

3,187,500

 

$

4,125,000

 

$

 

 

 

 

 

 

 

 

 

Senior secured term note for $4,500,000 (Term B), maturing in November 2006.  Principal payments are due monthly beginning in December 2004.  Interest accruing on the outstanding debt is payable monthly at LIBOR plus 11%; the effective rate of interest at December 31, 2003 was 12.13%.  The default interest rate is the rate as calculated plus 200 basis points compounded monthly.

 

$

4,500,000

 

$

4,500,000

 

$

 

 

Senior subordinated term note for $6,000,000, maturing in November 2006.  Interest is payable monthly in cash at a fixed rate equal to 13% per annum and payable in kind (PIK) at a fixed rate equal to 5% per annum.  The Company may elect to pay the PIK interest in cash at any time during the term of this note.  Unless paid in cash, PIK interest shall be automatically added to the principal of this note and shall be due and payable in full in November 2006.  The note is subordinate to the line-of-credit and term notes discussed above.

 

$

6,346,431

 

$

6,109,097

 

$

 

 

 

 

 

 

 

 

 

Term note for $2,500,000 with the principal due upon maturity in September 2004.  In November 2002, the Company paid $750,000 of this note and refinanced the remaining principal of $1,750,000 under four separate term notes, all due upon maturity in May 2007.  The note is subordinate to the line-of-credit and term notes discussed above.  Interest accruing on the outstanding debt is payable quarterly at the rate of 11% per annum.  The default interest rate is 12% per annum.  The Company had accrued interest totaling $750,000 on the note, which had not been paid as of November 2002.  In connection with refinancing the note, the terms on the outstanding interest were revised.  The $750,000 in accumulated interest is now due upon the maturity of the notes in May 2007.  Interest is accruing on the $750,000 at the rate of 11% per annum and is also due in May 2007.

 

$

1,750,000

 

$

1,750,000

 

$

2,500,000

 

 

Term notes for $2,000,000 with the sellers of ENTEK, pursuant to the ENTEK acquisition (see Note B).  Principal due upon maturity in May 2007.  Interest accruing on the outstanding debt is payable in kind at the rate of 12% per annum, due upon maturity.  Default interest rate is 13% compounded monthly.  The notes are subordinate to the line-of-credit and term notes discussed above.

 

$

2,000,000

 

$

2,000,000

 

$

 

 

 

 

 

 

 

 

 

Term note for $12,500,000, maturing in December 2002.  Principal payments were due quarterly.  Interest accrued on the outstanding debt was payable monthly at 6.75% at March 31, 2002.

 

$

 

$

 

$

6,500,000

 

 

 

 

 

 

 

 

 

Other various notes.

 

$

4,358

 

$

7,050

 

$

11,089

 

 

 

 

 

 

 

 

 

Less:  current portion

 

$

(1,132,050

)

$

(1,132,050

)

$

(6,504,022

)

 

 

 

 

 

 

 

 

 

 

$

16,656,239

 

$

17,359,097

 

$

2,507,067

 

 

The line-of-credit is secured by substantially all of the Company’s assets.  Collateral on the senior secured term notes (both Term A and Term B) includes substantially all of the Company’s assets.  The agreement for the line-of-credit includes various financial covenants.

 

Scheduled principal payments for notes payable are as follows:

 

Year ending March 31,

 

 

 

 

 

 

 

2004

 

$

1,132,050

 

2005

 

1,500,000

 

2006

 

3,000,000

 

2007

 

9,109,097

 

2008

 

3,750,000

 

 

 

 

 

 

 

18,491,147

 

Less:  current maturities

 

(1,132,050

)

 

 

 

 

 

 

$

17,359,097

 

 

20



 

NOTE G—EMPLOYEE BENEFIT PLANS

 

Retirement Plan

 

The Company maintains a 401(k) retirement plan.  The plan is available to all employees at least 20.5 years of age with service of three months or more who have worked more than a minimum of 250 hours in a three-month consecutive period.  Participants may elect to defer up to 20 percent of their compensation and receive a 50 percent matching employer contribution on a maximum of 6 percent of their compensation after one full year of employment.  The plan also provides for an elective, discretionary employer contribution.  For the 12 months ended March 31, 2003 and 2002 and the 15 months ended March 31, 2001, contribution expense for the plans was approximately $509,000 and $616,000, and $704,000, respectively.  Contribution expense for the plans was approximately $491,794 for the nine months ending December 31, 2003.

 

In fiscal year 2002, the Company maintained a CIGNA Cash Minimum Premium (CMP) health insurance plan.  The CIGNA CMP was a traditional fully-insured health policy with provisions for cash flow advantages to the Company.  Under the CMP program, the premium covered insurance and administration, but allowed reserves to be held by the Company.  The Company reimbursed claims paid by CIGNA as they were presented for payment up to a maximum of the current month’s premium.  If, at the end of the plan year, CIGNA’s claim payments exceeded the Company’s total monthly premiums, the Company was not required to pay the excess.  The Company maintained a reserve, which was estimated to cover outstanding claims in the event of plan termination; the Company would pay the reserve amount to CIGNA in cash and have no further obligation regarding the outstanding claims.  Premiums were adjusted annually by CIGNA on the basis of the Company’s claim experience.  For the 12 months ended March 31, 2003 and 2002 and the 15 months ended March 31, 2001, the Company’s cost for claims totaled $1,473,869, $2,044,600 and $2,251,900, respectively.  The Company’s final cost for settlement of claims from prior periods totaled $140,000 for the nine months ending December 31, 2003.  As of September 30, 2002, the Company changed insurance plans and is no longer required to reimburse claims under the CMP program.

 

NOTE H—COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases office space and computer equipment under operating leases.  The Company maintains various sublease agreements for certain office space.  Minimum future rental payments under non-cancelable operating leases with remaining terms in excess of one year as of March 31, 2003, are as follows:

 

21



 

Year ending March 31,

 

Minimum Lease
Commitments

 

Sublease
Income

 

Net Lease
Commitments

 

 

 

 

 

 

 

 

 

2004

 

$

1,864,778

 

$

124,451

 

$

1,740,327

 

2005

 

1,590,927

 

106,614

 

1,484,313

 

2006

 

1,174,189

 

 

1,174,189

 

2007

 

716,095

 

¾

 

716,095

 

 

 

 

 

 

 

 

 

 

 

$

5,345,989

 

$

231,065

 

$

5,114,924

 

 

Minimum rental expense is recognized on a straight-line basis over the term of the lease, regardless of when payments are due.  Rent expense for the 12 months ended March 31, 2003 and 2002 and 15 months ended March 31, 2001, was approximately $1,777,039, $1,381,177, and $1,180,489 net of sublease income of $79,162, $93,292, and $-0-, respectively.  Rent expense for the nine months ended December 31, 2003 was $2,043,345 net of sublease income of $58,794.

 

Litigation and Claims

 

Various lawsuits and other legal actions arise in the ordinary course of the Company’s business.  After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that any potential liability arising from such claims will not materially affect the Company’s financial position or results of operations.

 

Consulting Agreement

 

The Company entered into a consulting agreement with a former officer of the company to perform and support strategic business development efforts, including performance of due diligence reviews and analysis of potential merger, sale and recapitalization opportunities.  The Company paid $27,500 per month for these services, and the term of the agreement was for the period from April 1, 2002 through March 31, 2003.

 

22



 

NOTE I—INCOME TAXES

 

Provision for (benefit from) income taxes consists of the following:

 

 

 

Twelve months
ended
March 31,
2003

 

Twelve months
ended
March 31,
2002

 

Fifteen months
ended
March 31,
2001

 

Current

 

 

 

 

 

 

 

Federal

 

$

(313,887

)

$

534,465

 

$

(137,103

)

State

 

(20,310

)

107,739

 

(35,237

)

 

 

 

 

 

 

 

 

 

 

(334,197

)

642,204

 

(172,340

)

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Federal

 

999,351

 

2,257

 

(391,098

)

State

 

176,356

 

251

 

(69,017

)

 

 

 

 

 

 

 

 

 

 

1,175,707

 

2,508

 

(460,115

)

 

 

 

 

 

 

 

 

Income tax provision

 

$

841,510

 

$

644,712

 

$

(632,455

)

 

The income tax provisions for the 12 months ended March 31, 2003 and 2002 and 15 months ended March 31, 2001 differ from those computed by applying the statutory U.S. federal tax rate of 34 percent to pre-tax income as set forth below:

 

 

 

12 months
ended
March 31,
2003

 

12 months
ended
March 31,
2002

 

15 months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

Expected tax expense (benefit), computed at statutory rate

 

$

703,078

 

$

339,014

 

$

(734,198

)

State taxes, net of federal benefit

 

82,715

 

39,884

 

(86,376

)

Non-deductible goodwill

 

 

142,877

 

178,596

 

Non-deductible expenses

 

38,227

 

26,771

 

30,327

 

Penalties

 

5,045

 

80,079

 

5,927

 

Other

 

12,445

 

16,087

 

(26,731

)

 

 

 

 

 

 

 

 

 

 

$

841,510

 

$

644,712

 

$

(632,455

)

 

The provision for income taxes recorded for the nine months ended December 31, 2003 and 2002 (unaudited) was based on the Company’s effective tax rate for the twelve months ended March 31, 2003.

 

23



 

Deferred tax assets and liabilities result from temporary differences applied to tax rates expected to be in effect during the periods in which temporary differences reverse.  The tax effect of temporary differences that give rise to the deferred tax assets and liabilities as of March 31, 2003 and 2002 are presented below.

 

March 31,

 

2003

 

2002

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Accrued vacation

 

$

354,361

 

$

361,411

 

Accrued bonus

 

39,416

 

 

Allowance for doubtful accounts

 

29,802

 

29,802

 

Health insurance accrual

 

 

174,414

 

Other

 

16,108

 

43,543

 

 

 

 

 

 

 

 

 

$

439,687

 

$

609,170

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Deductible goodwill

 

$

(492,254

)

$

(250,879

)

Award fees

 

(564,465

)

(96,798

)

Revenue in excess of contract funding

 

(289,520

)

 

Retainage

 

(159,432

)

(121,896

)

Rate variance

 

(67,125

)

(147,868

)

Other

 

(50,869

)

 

 

 

 

 

 

 

 

 

(1,623,665

)

(617,441

)

Net deferred tax liability

 

(1,183,978

)

(8,271

)

Less: net long-term deferred tax liabilities

 

(527,885

)

(207,336

)

 

 

 

 

 

 

Net current deferred tax (liability) asset

 

$

(656,093

)

$

199,065

 

 

NOTE J—EQUITY

 

Preferred Stock

 

The Company has Series A, B, C, D-1 and D-2 preferred stock, with the attributes under each series as follows:

 

24



 

Series A Senior Redeemable–This series gives the holder certain rights, including the election of two members of the Board of Directors, cumulative dividends, distribution preferences, redemption rights (at the liquidation value either under certain conditions or more than six years, March 1, 2005), and preemptive approval rights concerning certain significant transactions of the Company.  The liquidation value is $100 per share.  Dividends accumulate at 12 percent of the liquidation value annually, compounded quarterly.  However, no dividends have been declared because of restrictive provisions in the Company’s articles of incorporation.  Series A accumulated dividends were $4,710,935 as of December 31, 2003.

 

Series B Senior Convertible–This series gives the holder certain rights, including the election of one member of the Board of Directors, cumulative dividends, distribution preferences, conversion rights under certain conditions, and redemption rights (at the liquidation value either under certain conditions or more than six years, March 1, 2005).  The liquidation value is $100 per share.  Dividends accumulate at 7 percent annually.  However, no dividends have been declared because of restrictive provisions in the Company’s articles of incorporation.  Series B accumulated dividends were $1,083,178 as of December 31, 2003.

 

Series C Junior Convertible–This series gives the holder certain rights; certain of these rights are subordinate to the rights of the Series A senior redeemable preferred stock and Series B senior convertible preferred stock.  They include the election of two members of the Board of Directors, cumulative dividends, conversion rights at any time, and redemption rights (at the liquidation value either under certain conditions or more than six years, March 1, 2005).  The liquidation value is $100 per share.  Dividends shall accrue at 6 percent of the liquidation value annually, compounded quarterly.  However, no dividends have been declared because of restrictive provisions in the Company’s articles of incorporation.  Series C accumulated dividends were $1,168,175 as of December 31, 2003.

 

Series D-1 Redeemable and Convertible–The Company issued 781,250 shares of Series D-1 preferred stock to the sellers of ENTEK to be held in escrow pursuant to the ENTEK acquisition (see Note B).  The release of the shares from the escrow agent is contingent upon meeting certain earnings targets and will be delivered to the sellers no later than December 3, 2003, if the earnings targets are met.  Effective October 1, 2003, the earnings targets were achieved and all of the shares were delivered to the sellers.

 

This series gives the holder certain rights; certain of these rights are subordinate to the rights of the Series A senior redeemable preferred stock and Series B senior convertible preferred stock.  They include cumulative dividends, conversion rights at any time, and redemption rights (at the liquidation value either under certain conditions or on March 1, 2005).  The liquidation value is $3.20 per share.  Dividends shall accrue interest on a daily basis at 8 percent per annum of the liquidation value.  However, no dividends have been declared because of restrictive provisions in the Company’s articles of incorporation.  Series D-1 accumulated dividends were $221,918 as of December 31, 2003.

 

25



 

Series D-2 Redeemable – The Company issued 312,500 shares of Series D-1 preferred stock to the sellers of ENTEK to be held in escrow pursuant to the ENTEK acquisition (see Note B).  The release of the shares from the escrow agent is contingent upon meeting certain earnings targets and will be delivered to the sellers no later than December 3, 2003, if the earnings targets are met.  Effective October 31, 2003, the earnings targets were achieved and all of the shares were delivered to the sellers.

 

This series gives the holder certain rights; certain of these rights are subordinate to the rights of the Series A senior redeemable preferred stock and Series B senior convertible preferred stock.  They include cumulative dividends and redemption rights (at the liquidation value either under certain conditions or on March 1, 2005).  The liquidation value is $3.20 per share.  Dividends shall accrue interest on a daily basis at 8 percent per annum of the liquidation value.  However, no dividends have been declared because of restrictive provisions in the Company’s articles of incorporation.  Series D-2 accumulated dividends were $88,767 as of December 31, 2003.

 

Common Stock

 

The Company has Class A and Class B common stock.  The Class B stock, which is reserved for issuance to employees under the stock option and restricted stock purchase plan, is identical in all respects to the Class A except that holders thereof have no voting rights unless otherwise required by law.

 

Notes Receivable from Stockholders

 

On March 31, 2003, the Company had two notes receivable due from stockholders totaling $410,000.  The notes are due on December 15, 2005 and have interest at an annual rate of 5 percent.

 

NOTE K—INCENTIVE STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN

 

The Company maintains an incentive stock option and restricted stock purchase plan accounted for under APB Opinion No. 25 and related interpretations.  The plan allows the Company to grant options and issue restricted stock to employees.  The options, which have a term of 10 years when issued, are granted at various times during the year.  When granted, 20 percent of the options vest immediately and the remaining percentage vest proportionately over the first four anniversary dates.  The options expire six years after they become vested.  The fair value of each option grant is established on the date of grant using the minimum value method, with the following assumptions used for grants in the 12 months ended March 31, 2003 and 2002, and the 15 months ended March 31, 2001, respectively: no dividends yield; risk-free interest rates of approximately 3.97 percent, 4.91 percent and 5.12 percent; and expected life of 10 years.  The weighted-average fair value per share was $0.19, $0.04 and $0.55, respectively.

 

26



 

As of March 31, 2003 and 2002, there were 512,734 and 923,734 options available for grant, respectively.  The following table depicts activity in the plan for the years ended March 31, 2003 and 2002:

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

 

 

 

 

 

 

Outstanding, March 31, 2001

 

247,500

 

$

1.66

 

 

 

 

 

 

 

Options granted

 

360,500

 

0.13

 

Options canceled

 

(244,500

)

1.27

 

 

 

 

 

 

 

Outstanding, March 31, 2002

 

363,500

 

0.43

 

 

 

 

 

 

 

Options granted

 

436,000

 

0.80

 

Options canceled

 

(25,000

)

1.00

 

Options exercised

 

(2,000

)

1.00

 

 

 

 

 

 

 

Outstanding, March 31, 2003

 

772,500

 

$

0.60

 

 

The following table summarizes information about all stock options outstanding as of March 31, 2003:

 

 

 

Stock Options Outstanding

 

Stock Options Exercisable

 

Range of
Exercise
Prices

 

Number
Outstanding
at Period
End

 

Weighted-
Average
Remaining
Contract
Life

 

Weighted-
Average
Exercise
Price

 

Number
Exercisable
at Period
End

 

Weighted-
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.10

 

256,000

 

8.4

 

$

0.10

 

153,600

 

$

0.10

 

0.8–1.00

 

503,000

 

8.5

 

0.83

 

150,200

 

0.89

 

2.00

 

13,500

 

6.8

 

2.00

 

10,800

 

2.00

 

 

27



 

The Company continues to apply APB No. 25 in accounting for stock-based compensation for the stock option plan.  To date all stock options have been issued at market value; accordingly, no compensation cost has been recognized.  Had the Company determined costs for this plan in accordance with SFAS No. 123, the Company’s proforma net income (loss) would have been as follows:

 

 

 

12 months
ended
March 31,
2003

 

12 months
ended
March 31,
2002

 

15 months
ended
March 31,
2001

 

 

 

 

 

 

 

 

 

Net income (loss) as reported

 

$

1,226,365

 

$

352,387

 

$

(1,526,952

)

Proforma net income (loss)

 

1,213,789

 

350,461

 

(1,570,450

)

 

Under the restricted stock purchase plan, the Company issued 410,000 non-vested shares of Class B non-voting stock, on December 15, 2002, to two of the Company’s officers at a price of $1.00 per share.  The fair value of these shares was determined to be $0.73 per share.  The shares vested 6.25 percent on March 15, 2003.  The remaining shares are scheduled to vest 6.25 percent for each of the following 15 quarters, with an accelerated vesting clause providing that the shares will become fully vested at 100 percent if the Company is sold on or prior to December 15, 2003.

 

28



 

SI International

Unaudited Pro Forma Condensed Consolidated Financial Statements

 

On January 21, 2004, SI International, Inc. (“the Company”) completed the purchase of Matcom International Corporation (“Matcom”) for approximately $65.8 million in cash plus transaction costs.   The following unaudited pro forma condensed consolidated balance sheet as of December 27, 2003 and the unaudited pro forma condensed consolidated statements of operations for the fiscal year ended December 27, 2003 give effect to the Company’s purchase of Matcom. The acquisition has been accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations.

 

The pro forma condensed consolidated balance sheet presents the financial position of the Company as if the acquisition of Matcom occurred on December 27, 2003.  The pro forma condensed consolidated statements of operations have been prepared as if the acquisition occurred on December 29, 2002.

 

The pro forma condensed consolidated financial statements, which have been prepared in accordance with rules prescribed by Article 11 of Regulation S-X, are provided for informational purposes only and are not necessarily indicative of the past or future results of the operations or financial position of the Company.

 

This information should be read in conjunction with the previously filed Current Report on Form 8-K, dated January 28, 2004, the previously filed historical consolidated financial statements and accompanying notes of the Company, contained in its Annual Report on Form 10-K for the fiscal year ended December 27, 2003, and in conjunction with the historical financial statements and accompanying notes of Matcom included in this report on Form 8-K/A.

 

29



 

SI International, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Consolidated Balance Sheets

(Amounts in thousands)

 

 

 

SI Int’l
December
27, 2003

 

Matcom
December
31, 2003

 

Pro Forma
Adjustments

 

 

 

Pro Forma
December
27, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$