Form 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
¨ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
001-31334
SRA International, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware |
|
54-1360804 |
(State of Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification
No.) |
4350 Fair Lakes Court, Fairfax, Virginia |
|
22033 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrants telephone number, including area code: (703)
803-1500
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. x Yes ¨ No
As
of October 31, 2002, there were 11,670,886 shares outstanding of the registrants class A common stock and 9,082,711 shares outstanding of the registrants class B common stock.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002
TABLE OF CONTENTS
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Page
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Part I. FINANCIAL INFORMATION |
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1 |
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1 |
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3 |
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4 |
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5 |
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10 |
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32 |
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32 |
Part II. OTHER INFORMATION |
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33 |
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33 |
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33 |
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33 |
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33 |
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34 |
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35 |
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36 |
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
|
|
June 30, 2002
|
|
|
Sept. 30, 2002
|
|
|
|
|
|
|
(Unaudited) |
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
87,137 |
|
|
$ |
90,958 |
|
Short-term investments |
|
|
|
|
|
|
6,953 |
|
Accounts receivable, net |
|
|
95,862 |
|
|
|
96,492 |
|
Prepaid expenses and other |
|
|
6,283 |
|
|
|
4,645 |
|
Deferred income taxes, current |
|
|
4,573 |
|
|
|
5,059 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
193,855 |
|
|
|
204,107 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
14,955 |
|
|
|
15,611 |
|
Furniture, equipment, and software |
|
|
44,435 |
|
|
|
45,635 |
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
59,390 |
|
|
|
61,246 |
|
Accumulated depreciation and amortization |
|
|
(40,183 |
) |
|
|
(41,816 |
) |
|
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
|
19,207 |
|
|
|
19,430 |
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Deferred income taxes, noncurrent |
|
|
4,185 |
|
|
|
4,349 |
|
Deferred compensation trust |
|
|
3,394 |
|
|
|
3,085 |
|
Goodwill |
|
|
2,957 |
|
|
|
2,957 |
|
Identified intangibles, net |
|
|
2,092 |
|
|
|
2,022 |
|
Investments and other |
|
|
603 |
|
|
|
1,171 |
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
13,231 |
|
|
|
13,584 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
226,293 |
|
|
$ |
237,121 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
1
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Liabilities and Stockholders Equity
|
|
June 30, 2002
|
|
|
Sept. 30, 2002
|
|
|
|
|
|
|
(Unaudited) |
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
13,267 |
|
|
$ |
13,086 |
|
Accrued payroll and employee benefits |
|
|
20,942 |
|
|
|
24,842 |
|
Accrued expenses |
|
|
19,997 |
|
|
|
21,158 |
|
Current portion of long-term debt |
|
|
1,600 |
|
|
|
1,600 |
|
Billings in excess of revenues recognized |
|
|
6,480 |
|
|
|
7,794 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
62,286 |
|
|
|
68,480 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
|
400 |
|
|
|
|
|
Other long-term liabilities |
|
|
4,163 |
|
|
|
3,776 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
66,849 |
|
|
|
72,256 |
|
|
|
|
|
|
|
|
|
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Commitments and contingencies |
|
|
|
|
|
|
|
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Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.20 per share; 5,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Class A common stock, par value $0.004 per share; 180,000,000 shares authorized; 17,695,297 and 17,847,383 shares issued
as of June 30, 2002 and September 30, 2002; 11,528,773 and 11,672,991 shares outstanding as of June 30, 2002 and September 30, 2002 |
|
|
74 |
|
|
|
74 |
|
Class B common stock, par value $0.004 per share; 55,000,000 shares authorized; 11,123,887 and 11,023,887 shares issued
as of June 30, 2002 and September 30, 2002; 9,182,711 and 9,082,711 shares outstanding as of June 30, 2002 and September 30, 2002 |
|
|
43 |
|
|
|
42 |
|
Additional paid-in capital |
|
|
129,567 |
|
|
|
130,097 |
|
Treasury stock, at cost |
|
|
(45,422 |
) |
|
|
(45,628 |
) |
Notes receivable from stockholders |
|
|
(78 |
) |
|
|
(40 |
) |
Deferred stock-based compensation |
|
|
(720 |
) |
|
|
(667 |
) |
Retained earnings |
|
|
75,980 |
|
|
|
80,987 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
159,444 |
|
|
|
164,865 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
226,293 |
|
|
$ |
237,121 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
2
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
Revenues |
|
$ |
77,594 |
|
|
$ |
101,538 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
55,997 |
|
|
|
72,633 |
|
Selling, general and administrative |
|
|
17,900 |
|
|
|
19,814 |
|
Depreciation and amortization |
|
|
1,723 |
|
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
75,620 |
|
|
|
94,471 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,974 |
|
|
|
7,067 |
|
Interest expense |
|
|
(100 |
) |
|
|
(47 |
) |
Interest income |
|
|
36 |
|
|
|
435 |
|
Gain on equity method investment |
|
|
373 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2,283 |
|
|
|
8,486 |
|
Provision for income taxes |
|
|
1,086 |
|
|
|
3,479 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,197 |
|
|
$ |
5,007 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
13,855,464 |
|
|
|
20,727,703 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
15,766,380 |
|
|
|
23,400,370 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
3
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,197 |
|
|
$ |
5,007 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,768 |
|
|
|
2,044 |
|
Stock-based compensation |
|
|
814 |
|
|
|
53 |
|
Tax benefits of stock option exercises |
|
|
3,304 |
|
|
|
352 |
|
Deferred income taxes |
|
|
(5,709 |
) |
|
|
(650 |
) |
Amortization of unearned rent abatements |
|
|
(21 |
) |
|
|
(33 |
) |
Gain on equity method investment |
|
|
(373 |
) |
|
|
(1,031 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
16,138 |
|
|
|
(192 |
) |
Prepaid expenses and other |
|
|
1,721 |
|
|
|
1,638 |
|
Accounts payable |
|
|
(9,485 |
) |
|
|
(181 |
) |
Accrued payroll and employee benefits |
|
|
240 |
|
|
|
3,900 |
|
Accrued expenses |
|
|
180 |
|
|
|
1,161 |
|
Billings in excess of revenues recognized |
|
|
423 |
|
|
|
1,314 |
|
Other |
|
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,197 |
|
|
|
13,512 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,174 |
) |
|
|
(2,728 |
) |
Proceeds from equity method investment |
|
|
373 |
|
|
|
1,031 |
|
Purchases of short-term investments |
|
|
|
|
|
|
(6,953 |
) |
Purchase of long-term investment |
|
|
|
|
|
|
(650 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(801 |
) |
|
|
(9,300 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of equipment loan |
|
|
(546 |
) |
|
|
|
|
Repayment of term loan |
|
|
(400 |
) |
|
|
(400 |
) |
Issuance of common stock |
|
|
520 |
|
|
|
215 |
|
Purchase of treasury stock |
|
|
(3,188 |
) |
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(3,614 |
) |
|
|
(391 |
) |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
5,782 |
|
|
|
3,821 |
|
Cash and cash equivalents, beginning of period |
|
|
8 |
|
|
|
87,137 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,790 |
|
|
$ |
90,958 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period |
|
|
|
|
|
|
|
|
Interest |
|
$ |
130 |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
378 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
Cash received during the period |
|
|
|
|
|
|
|
|
Interest |
|
$ |
36 |
|
|
$ |
361 |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
4
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended September 30, 2001 and 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of SRA International, Inc. (SRA or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the
Company believes that the disclosures made are adequate to make the information presented not misleading.
In the
opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the periods
presented. The results for the three months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the Companys latest annual report to the Securities and Exchange Commission on Form 10-K for the year ended June 30, 2002.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The associated asset retirement cost would be capitalized as part
of the carrying amount of the long-lived asset. The Company adopted this new standard as of July 1, 2002 and it had no impact on the Companys financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces
SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting
of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company
adopted this new standard as of July 1, 2002 and it had no impact on the Companys financial position, results of operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS No. 145
rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the amendment to SFAS No. 4, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through this rescission, SFAS
No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS No. 145 is effective for transactions
occurring after May 15, 2002. The Company adopted this new standard as of July 1, 2002 and it had no impact on the Companys financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective January 1, 2003. SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
5
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Three Months Ended September 30, 2001 and 2002
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that an exit or disposal activity-related cost be recognized when the liability is incurred instead of when an
entity commits to an exit plan. The adoption of this new standard is not expected to have a material impact on the Companys financial position, results of operations, or cash flows.
2. Nature of Business
SRA is a leading provider of information technology services and solutions primarily to a wide variety of federal government clients in three principal markets: national security, health care and public health, and civil government.
Since SRAs founding in 1978, the Company has derived substantially all of its revenues from services provided to federal government clients, and SRA expects that services provided to federal government clients will continue to account for
substantially all of its revenues.
Revenues from contracts with federal government agencies were 93 percent and
96 percent of total revenues for the years ended June 30, 2001 and 2002, respectively, and 97 percent of total revenues for the three months ended September 30, 2001 and 2002.
Revenues were generated from the following contract types for the periods indicated. Software license revenues are included in the fixed-price contract item below:
|
|
Fiscal Years Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
Cost-plus-fee |
|
62 |
% |
|
52 |
% |
|
59 |
% |
|
43 |
% |
Time-and-materials |
|
23 |
|
|
31 |
|
|
26 |
|
|
38 |
|
Fixed-price |
|
15 |
|
|
17 |
|
|
15 |
|
|
19 |
|
3. Earnings Per Share and Stock Options
Basic earnings per share (EPS) is computed by dividing reported net income by the weighted-average number of common shares
outstanding. Diluted EPS considers the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The difference between basic and diluted weighted-average common
equivalent shares with respect to the Companys EPS calculation is due entirely to the assumed exercise of stock options. The dilutive effect of stock options is as follows:
|
|
Three Months Ended September 30,
|
|
|
2001
|
|
2002
|
Basic weighted-average common shares outstanding |
|
13,855,464 |
|
20,727,703 |
Effect of potential exercise of stock options |
|
1,910,916 |
|
2,672,667 |
|
|
|
|
|
Diluted-weighted average common shares outstanding |
|
15,766,380 |
|
23,400,370 |
|
|
|
|
|
In August 2002, the Company granted 937,630 stock options to
employees to purchase shares of class A common stock at an exercise price of $24.80 per share, the fair value of class A common stock on the date of grant. These options vest annually over a 4 year period.
6
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Three Months Ended September 30, 2001 and 2002
4. Accounts Receivable:
Accounts receivable, net consisted of the following (in thousands):
|
|
June 30, 2002
|
|
|
Sept. 30, 2002
|
|
Billed and billable, net of allowance of $1,050 as of June 30, 2002 and September 30, 2002 |
|
$ |
88,089 |
|
|
$ |
89,077 |
|
|
|
|
|
|
|
|
|
|
Unbilled: |
|
|
|
|
|
|
|
|
Retainages |
|
|
3,188 |
|
|
|
3,293 |
|
Revenues recorded in excess of billings on fixed price contracts |
|
|
4,360 |
|
|
|
4,463 |
|
Revenues recorded in excess of contractual authorization, billable upon receipt of contractual
amendments/documents |
|
|
1,070 |
|
|
|
90 |
|
Indirect costs incurred and charged to cost-plus-fee contracts in excess of provisional billing rates |
|
|
707 |
|
|
|
708 |
|
Allowance for contract disallowances |
|
|
(1,552 |
) |
|
|
(1,139 |
) |
|
|
|
|
|
|
|
|
|
Total unbilled |
|
|
7,773 |
|
|
|
7,415 |
|
|
|
|
|
|
|
|
|
|
Total accounts receivable |
|
$ |
95,862 |
|
|
$ |
96,492 |
|
|
|
|
|
|
|
|
|
|
The billable receivables included in the billed and billable line
item above represent primarily revenues earned in the final month of the reporting period that were billable as of the balance sheet date. These billable receivables are typically billed and collected within 90 days of the balance sheet date.
5. Commitments and Contingencies:
Government Contracting
Payments to the Company on cost-plus-fee contracts are provisional and are subject to adjustment upon audit by the Defense Contract Audit Agency. Audits through June 30, 2001 have been completed. In the opinion of management, audit
adjustments that may result from audits for periods after June 30, 2001, are not expected to have a material effect on the Companys financial position, results of operations, or cash flows.
Additionally, federal government contracts, by their terms, generally can be terminated at any time by the federal government, without cause, for the convenience of
the federal government. If a federal government contract is so terminated, SRA would be entitled to receive compensation for the services provided and costs incurred through the time of termination, plus a negotiated amount of profit. Federal
government contractors who fail to comply with applicable government procurement-related statutes and regulations may be subject to potential contract termination, suspension and debarment from contracting with the government, or other remedies.
Management believes the Company has complied with all such statutes and regulations.
Litigation
The Company is involved in various legal proceedings concerning matters in the ordinary course of business.
The Company currently believes that any ultimate liability arising out of these proceedings will not have a material adverse impact on the Companys financial position, results of operations, or cash flows.
7
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Three Months Ended September 30, 2001 and 2002
Stock Purchase Agreement
The Company previously retained $80 million of term life insurance on its chief executive officer. In September 2002, certain agreements
were amended to reduce the amount of insurance retained to $10 million. An amended stock purchase agreement with the Companys chief executive officer requires the Company to maintain this $10 million of insurance through December 2010. In the
event this policy ceases to be available before the end of 2010, the Company has agreed it will purchase and maintain new life insurance policies providing the maximum coverage for the remainder of that period that can be purchased with the same
overall annual premiums of approximately $53,000. The Company is the sole beneficiary of this policy and is required to use any proceeds received to repurchase shares from the chief executive officers estate upon his death.
6. Gain on Equity Method Investment:
In February 2001, the Company recognized a pre-tax gain of $11.8 million on the sale of its minority interest in Mail2000, Inc. At that time, the Company deferred
recognition of contingent gains attributable to the portion of its sales proceeds that were deposited in escrow to cover certain contingencies. In the three months ended September 30, 2001 and 2002, additional pre-tax gains of $373,000 and $1.0
million were recognized when the Company received its portion of proceeds from the settlement of indemnification escrow agreements. Certain customary indemnification obligations extend beyond the settlement periods for these escrows. Since the
February 2001 closing of this transaction no losses related to the surviving indemnification obligations have been asserted by the purchasers and management believes that the probability of loss pursuant to these indemnification obligations is
remote.
7. Investment in Mantas, Inc.:
Since May 24, 2001, the Company has maintained a non-controlling equity interest in Mantas, Inc., formerly one of the Companys service offerings. As of September 30,
2002, the Company owns approximately 8 million shares of Mantas, Inc. class A common stock, representing approximately 25 percent of the outstanding shares of Mantas, Inc. The Company has no cost basis in this investment and does not fund, nor is
there any obligation to fund, the on-going operations of Mantas, Inc. The Company has made certain performance guarantees to Mantas, Inc. customers that were under contract with SRA prior to May 24, 2001, but management believes the Companys
potential for loss under these commitments is remote. Additionally, Mantas, Inc. continues to utilize certain services provided by the Company. Mantas, Inc. reimburses the Company for the cost of such services. Mantas, Inc. leases space from the
Company and receives other support services related to its occupancy. Sublease income and amounts due for other support services provided were approximately $381,000 and $276,000 for the three months ended September 30, 2001 and 2002, respectively.
Mantas, Inc. obtains certain travel and insurance-related services utilizing the Companys existing relationships with vendors. The total of such services received by Mantas, Inc. was approximately $335,000 and $353,000 for the three months
ended September 30, 2001 and 2002, respectively. Additionally, the Company provides labor services when requested by Mantas, Inc. to support its administrative and client support activities. Approximately $314,000 and $90,000 of such labor services
were provided for the three months ended September 30, 2001 and 2002, respectively. At September 30, 2002, amounts due from Mantas, Inc. for all services utilized were approximately $162,000.
8
SRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Three Months Ended September 30, 2001 and 2002
8. Segment Reporting:
As of and for the three months ended September 30, 2001 and 2002, SRA reports two operating segments Consulting & Systems
Integration (C&SI) and Emerging Technologies (ET). The C&SI segment focuses on the Companys three principal markets: national security, health care and public heath, and civil government. The ET segment historically performed advanced
technology research and development, sought commercial applications for this research and development, and managed and maintained the Companys proprietary software product offerings. As of July 1, 2002, all ET segment activities had ceased
with the exception of the Assentor solutions business.
Reportable Segments (in thousands)
Three Months Ended September 30, 2001
|
|
C&SI
|
|
ET
|
|
|
Total
|
Revenues |
|
$ |
76,384 |
|
$ |
1,210 |
|
|
$ |
77,594 |
Depreciation and amortization |
|
|
1,619 |
|
|
104 |
|
|
|
1,723 |
Operating income (loss) |
|
|
4,950 |
|
|
(2,976 |
) |
|
|
1,974 |
Accounts receivable, net at September 30, 2001 |
|
|
81,102 |
|
|
209 |
|
|
|
81,311 |
|
Three Months Ended September 30, 2002
|
|
C&SI
|
|
ET
|
|
|
Total
|
Revenues |
|
$ |
100,637 |
|
$ |
901 |
|
|
$ |
101,538 |
Depreciation and amortization |
|
|
2,011 |
|
|
13 |
|
|
|
2,024 |
Operating income |
|
|
7,011 |
|
|
56 |
|
|
|
7,067 |
Accounts receivable, net at September 30, 2002 |
|
|
95,531 |
|
|
961 |
|
|
|
96,492 |
9. Acquisition of The Marasco Newton Group Ltd.:
In January 2002, the Company acquired, by merger, all of the outstanding stock of The Marasco Newton Group
Ltd. (Marasco Newton). An initial payment of approximately $6.2 million was made to Marasco Newton stockholders, with another $1.0 million deposited in escrow to secure indemnification obligations of Marasco Newton. Approximately $2.2 million of the
initial payment was allocated to identified intangibles and approximately $3.0 million to goodwill. In connection with the acquisition, the Company assumed and subsequently repaid debt of approximately $5.2 million. Approximately $9.1 million of
additional purchase price may become due to Marasco Newton stockholders in the future if Marasco Newton achieves specified operating results and additions to contract backlog. Under the terms of the merger agreement, these additional payments, if
any, would likely be determined and made in two parts between March 1, 2003 and June 30, 2003. The Company is presently evaluating the possibility of accelerating settlement of the Marasco Newton earn out with the intent of facilitating an earlier
integration of the Marasco Newton business.
10. Subsequent Event
In October 2002, the Company sold its Assentor solutions business to a third party. At the time of its sale, the Assentor solutions
business was the only remaining activity within the ET segment. The Company expects to report a gain on the sale of this business of approximately $4.7 million in the quarter ending December 31, 2002.
9
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
FORWARD LOOKING STATEMENTS
The matters discussed in this Managements Discussion and
Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-Q, include forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our
actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can
identify these statements by forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, plan, potential,
should, will, and would or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of
our financial position, or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict or control
accurately. Factors that could cause actual results to differ materially from forward-looking statements include our dependence on our contracts with federal government agencies, particularly within the U.S. Department of Defense, for substantially
all of our revenues, our ability to maintain our GSA schedule contracts, our position as a prime contractor on government-wide acquisition contracts, and other factors discussed in the section entitled RISK FACTORS in this Item 2. These
factors, as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.
We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point
in the future, we specifically disclaim any obligation to do so.
OVERVIEW
We are a leading provider of information technology services and solutions to federal government clients in three principal markets: national security, health care and
public health, and civil government. Since our founding in 1978, we have derived substantially all of our revenues from services provided to federal government clients. We expect that federal government clients will continue to account for
substantially all of our revenues for the foreseeable future. During each of our last three fiscal years and the three months ended September 30, 2002, we recognized more than 94% of our revenues from contract engagements in which we acted as a
prime contractor. Our contract base is diversified among federal government clients. No single engagement accounted for more than 5% of our revenues during the last three fiscal years or the three months ended September 30, 2002. The Internal
Revenue Service, our largest client group, accounted for approximately 12% of our revenues in fiscal 2000, 8% in fiscal 2001, 10% in fiscal 2002, and 7% for the three months ended September 30, 2002. No other client or client group accounted for
more than 10% of our revenues in these periods.
Our backlog as of September 30, 2002 was approximately $1.089
billion, of which $159.1 million was funded. Our backlog as of June 30, 2002 was $1.034 billion, of which $158.7 million was funded. We define our backlog to include both funded and unfunded orders for services under existing signed contracts,
assuming the exercise of all priced options relating to those contracts. We currently expect to recognize revenues during the remainder of fiscal 2003 from approximately 19% of our total backlog as of September 30, 2002. Our backlog includes orders
under contracts that in some cases extend for several years, with the latest expiring at the end of calendar year 2011.
We have two operating segments for financial reporting purposes. Our reportable segments include the consulting and systems integration business, or C&SI, and the emerging technologies business, or ET.
|
|
|
The C&SI segment represents our core business and includes high-end consulting services and information technology solutions primarily for federal
government clients. This segment focuses on our
|
10
|
three principal markets: national security, health care and public health, and civil government. As of September 30 2002, the C&SI segment represents substantially all of our ongoing
operations. |
|
|
|
The ET segment historically performed advanced technology research and development, sought commercial applications for this technology, and managed our
commercial software products and services offerings including Assentor. Substantially all ET segment activities had ceased as of June 30, 2002. As of July 1, 2002, the only remaining activity in the ET segment was our Assentor Solutions business. In
October 2002, we sold our Assentor solutions business to a third party. |
The following table
summarizes the percentage of total revenues for each period represented by each of our reportable segments.
Segment
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
Consulting & systems integration |
|
98.4 |
% |
|
99.1 |
% |
Emerging technologies |
|
1.6 |
|
|
0.9 |
|
Revenues
Most of our revenues are generated on the basis of services provided to the federal government, either by our employees or by our subcontractors. To a lesser degree, the
revenues we earn may include third-party hardware and software that we purchase and integrate when requested by the client as a part of the solutions that we provide to our clients.
Contract Types. When contracting with our government clients, we enter into one of three basic types of contracts: cost-plus-fee,
time-and-materials, and fixed-price.
|
|
|
Cost-plus-fee contracts. Cost-plus-fee contracts provide for reimbursement of allowable costs and the payment of a fee, which is
our profit. Cost-plus-fixed-fee contracts specify the contract fee in dollars. Cost-plus-award-fee contracts typically provide for a base fee amount, plus an award fee that varies, within specified limits, based upon the clients assessment of
our performance as compared to contractual targets for factors such as cost, quality, schedule, and performance. The majority of our cost-plus-fee contracts are cost-plus-fixed-fee. |
|
|
|
Time-and-materials contracts. Under a time-and-materials contract, we are paid a fixed hourly rate for each direct labor hour
expended and we are reimbursed for allowable material costs and out-of-pocket expenses. To the extent our actual hourly labor rates vary from those provided in the contract, we will generate more or less profit. |
|
|
|
Fixed-price contracts. Under a fixed-price contract, we agree to perform the specified work for a pre-determined price. To the
extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less than the anticipated amount of profit or could incur a loss. Some fixed-price contracts have a performance-based component, pursuant
to which we can earn incentive payments or incur financial penalties based on our performance. We have not undertaken complex, high-risk work under fixed-price terms. |
Critical Accounting Policies Relating to Revenue Recognition. Our critical accounting policies primarily relate to revenue recognition and
cost estimation. We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. We have a standard management process that
we use to determine whether all required criteria for revenue recognition have been met. This standard management process includes a monthly in-process review for each contract. This review covers, among other matters, outstanding action items,
progress against schedule, effort and staffing, requirements stability, quality, risks and issues, subcontract management, cost, and
11
commitments. This monthly in-process review is designed to determine whether the overall progress on a contract is consistent with the effort expended and revenue recognized to date.
Absent evidence to the contrary, we recognize revenue as follows. Revenues on cost-plus-fee contracts are
recognized to the extent of costs actually incurred plus a proportionate amount of the fee earned. We consider fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs actually incurred in performance of the
contract. Revenues on time-and-materials contracts are recognized based on the hours actually incurred at the negotiated contract billing rates, plus the cost of any allowable material costs and out-of-pocket expenses. Revenues on fixed-price
contracts are recognized using the percentage-of-completion method of contract accounting. Unless it is determined as part of a monthly in-process review that overall progress on a contract is not consistent with costs expended to date, we determine
the percentage completed based on the percentage of costs incurred to date in relation to total estimated costs expected upon completion of the contract. We consider performance-based fees, including award fees, under any contract type to be earned
only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a client that the fee has been earned.
Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under contract, the cost of the effort, and an
ongoing assessment of our progress toward completing the contract. From time to time, as part of our standard management processes, facts develop that require us to revise our estimated total costs or revenues. In most cases, these revisions relate
to changes in the contractual scope of our work. To the extent that a revised estimate affects contract profit or revenue previously recognized, we record the cumulative effect of the revision in the period in which the facts requiring the revision
become known. The full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes known.
Cost of Services
Cost of services includes the direct costs to provide our
services and business solutions to clients. The most significant of these costs are the salaries and wages, plus associated fringe benefits, of our employees directly serving clients. Cost of services also includes the cost of subcontractors and
outside consultants, third-party materials, such as hardware or software that we purchase and provide to the client as part of an integrated solution, and any other direct costs such as travel expenses incurred to support contract efforts.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include the salaries and wages, plus associated fringe benefits, of our employees not performing work directly for
clients. Among the functions covered by these costs are asset and facilities management, business development, research and development, contracts and legal, finance and accounting, executive and senior management, human resources, and information
system support. Facilities-related costs are also included in selling, general, and administrative expenses.
Stock-Based Compensation Expense
Stock-based compensation expense reflects expenses
related to stock option grants for which pre-existing grant terms were modified or for which grants were issued below fair market value. Stock-based compensation expenses are included in selling, general, and administrative expenses. Stock-based
compensation expenses were $814,000 and $53,000 for the three months ended September 30, 2001 and 2002, respectively. As of September 30, 2002, we had $667,000 of deferred stock-based compensation expense, which will be recognized ratably over the
38 month remaining vesting period of the related stock options.
12
Depreciation and Amortization
Depreciation and amortization includes depreciation of computers and other equipment, the amortization of software we use internally, the
amortization of leasehold improvements, and the amortization of identified intangibles. The amortization of computer software developed for sale to clients is included in cost of services.
Gain on Equity Method Investment
We use the equity method of accounting for investments in which we do not have a controlling interest but exercise significant influence. Under the equity method, investments are carried at cost and then are adjusted to reflect our
portion of increases and decreases in the net assets of the investee. Our investment in Mail2000, Inc. was accounted for under the equity method until it was sold in February 2001. The gains we recognized upon the sale of our minority interest in
Mail2000, Inc. and when we subsequently received payments upon the release of funds pursuant to the terms of indemnification escrow agreements established at the time of sale are included in gains and losses on equity method investments. Our
investment in Mantas, Inc. has been accounted for under the equity method since its formation in May 2001. We are required to recognize our proportionate interest in Mantas, Inc.s losses to the extent we have a cost basis in the investment on
our balance sheet. We have no cost basis in Mantas, Inc. because we did not previously capitalize our internal investments in the Mantas service offerings. Accordingly, we have not recognized any portion of Mantas, Inc.s losses through
September 30, 2002.
ACQUISITION
In January 2002, we acquired, by merger, all of the outstanding stock of The Marasco Newton Group Ltd. (Marasco Newton). We made initial cash payments of approximately $6.2 million to Marasco Newton
stockholders, and deposited another $1.0 million in escrow to secure indemnification obligations of Marasco Newton to us. Approximately $2.2 million of the purchase price was allocated to identifiable intangible assets and approximately $3.0 million
to goodwill. In connection with the acquisition, we also assumed debt of approximately $5.2 million, which we repaid in March 2002. We may be required to pay up to approximately $9.1 million of additional purchase price in the future if Marasco
Newton achieves specified operating results and additions to contract backlog. Under the terms of the merger agreement, these additional payments, if any, would likely be determined and made in two parts between March 1, 2003 and June 30, 2003.
Based on the results achieved by Marasco Newton through September 30, 2002, we believe it is likely they will earn substantially all of the additional purchase price. We are presently evaluating the possibility of accelerating settlement of the
Marasco Newton earn out with the intent of facilitating our earlier integration of the Marasco Newton business.
13
RESULTS OF OPERATIONS
The following tables set forth some items from our consolidated statements of operations, and these items expressed as a percentage of revenues, for the periods indicated.
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
|
(unaudited, in thousands) |
|
Revenues |
|
$ |
77,594 |
|
|
$ |
101,538 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
55,997 |
|
|
|
72,633 |
|
Selling, general, and administrative |
|
|
17,900 |
|
|
|
19,814 |
|
Depreciation and amortization |
|
|
1,723 |
|
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
75,620 |
|
|
|
94,471 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,974 |
|
|
|
7,067 |
|
Interest (expense) income, net |
|
|
(64 |
) |
|
|
388 |
|
Gain on equity method investment |
|
|
373 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2,283 |
|
|
|
8,486 |
|
Provision for income taxes |
|
|
1,086 |
|
|
|
3,479 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,197 |
|
|
$ |
5,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited, as a percentage of
revenues) |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
72.2 |
|
|
|
71.5 |
|
Selling, general, and administrative |
|
|
23.1 |
|
|
|
19.5 |
|
Depreciation and amortization |
|
|
2.2 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
97.5 |
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2.5 |
|
|
|
7.0 |
|
Interest (expense) income, net |
|
|
(0.1 |
) |
|
|
0.4 |
|
Gain on equity method investment |
|
|
0.5 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2.9 |
|
|
|
8.4 |
|
Provision for income taxes |
|
|
1.4 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1.5 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
14
The following tables set forth revenues,
operating costs and expenses and operating income (loss) for each of our reportable business segments, as well as those items expressed as a percentage of the segments revenues, for the periods indicated.
Consulting & Systems Integration Segment
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
|
(unaudited, in thousands) |
|
Revenues |
|
$ |
76,384 |
|
|
$ |
100,637 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
55,010 |
|
|
|
72,050 |
|
Selling, general, and administrative |
|
|
14,805 |
|
|
|
19,565 |
|
Depreciation and amortization |
|
|
1,619 |
|
|
|
2,011 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
71,434 |
|
|
|
93,626 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
4,950 |
|
|
$ |
7,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited, as a percentage of consulting & systems integration revenues)
|
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
72.0 |
|
|
|
71.6 |
|
Selling, general, and administrative |
|
|
19.4 |
|
|
|
19.4 |
|
Depreciation and amortization |
|
|
2.1 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
93.5 |
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6.5 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
Emerging Technologies Segment
|
|
Three Months Ended September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
|
(unaudited, in thousands) |
|
Revenues |
|
$ |
1,210 |
|
|
$ |
901 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
987 |
|
|
|
583 |
|
Selling, general, and administrative |
|
|
3,095 |
|
|
|
249 |
|
Depreciation and amortization |
|
|
104 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
4,186 |
|
|
|
845 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
$ |
(2,976 |
) |
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
Gain on equity method investment |
|
$ |
373 |
|
|
$ |
1,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited, as a percentage of emerging technologies revenues) |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of services |
|
|
81.6 |
|
|
|
64.7 |
|
Selling, general, and administrative |
|
|
255.8 |
|
|
|
27.7 |
|
Depreciation and amortization |
|
|
8.6 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
346.0 |
|
|
|
93.8 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(246.0 |
)% |
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
Gain on equity method investment |
|
|
30.8 |
% |
|
|
114.4 |
% |
|
|
|
|
|
|
|
|
|
15
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
For the three months ended September 30, 2002, total revenues increased 30.9% to $101.5 million, from $77.6 million for the three months ended September 30, 2001. The
C&SI segment revenues increased 31.8% to $100.6 million for the three months ended September 30, 2002, from $76.4 million for the three months ended September 30, 2001. Revenue growth in this segment resulted primarily from new national security
contracts and revenues related to the January 2002 acquisition of Marasco Newton. The ET segment revenues decreased 25.5% to $901,000 for the three months ended September 30, 2002, from $1.2 million for the three months ended September 30, 2001. The
revenue decline in this segment was due primarily to a decrease in support provided to Mantas, Inc. customers.
Cost of Services
For the three months ended September 30, 2002, total cost of
services increased 29.7% to $72.6 million, from $56.0 million for the three months ended September 30, 2001. As a percentage of total revenues, total cost of services decreased to 71.5% for the three months ended September 30, 2002, from 72.2% for
the three months ended September 30, 2001. The C&SI segment cost of services increased 31.0% to $72.1 million for the three months ended September 30, 2002, from $55.0 million for the three months ended September 30, 2001, reflecting services
provided under new contract awards and the cost of services attributable to Marasco Newton contracts. As a percentage of C&SI revenues, C&SI cost of services decreased to 71.6% for the three months ended September 30, 2002, from 72.0% for
the three months ended September 30, 2001. This decrease as a percentage of C&SI revenues is attributable to a shift in services now being provided under more profitable time and materials and fixed price contracts, which decreases the ratio of
cost of services to revenues. The ET segment cost of services declined 40.9% to $583,000 for the three months ended September 30, 2002, from $987,000 for the three months ended September 30, 2001, reflecting lower professional services delivered
primarily to Mantas, Inc. customers. As a percentage of ET revenues, ET cost of services decreased to 64.7% for the three months ended September 30, 2002, from 81.6% for the three months ended September 30, 2001. This decrease as a percentage of ET
revenues is attributable to the decline in professional services delivered to Mantas, Inc. customers.
Selling, General, and Administrative Expenses
For the three months ended September
30, 2002, total selling, general, and administrative expenses increased 10.7% to $19.8 million, from $17.9 million for the three months ended September 30, 2001. As a percentage of total revenues, total selling, general, and administrative expenses
decreased to 19.5% for the three months ended September 30, 2002, from 23.1% for the three months ended September 30, 2001. Total selling, general, and administrative expenses for the three months ended September 30, 2002 included stock-based
compensation of $53,000 compared to $814,000 for the three months ended September 30, 2001. The C&SI segment selling, general, and administrative expenses increased 32.2% to $19.6 million for the three months ended September 30, 2002, from $14.8
million for the three months ended September 30, 2001. As a percentage of C&SI revenues, C&SI selling, general, and administrative expenses were unchanged at 19.4%. While C&SI selling, general and administrative expenses remained
unchanged in proportion to C&SI revenues, there was a shift in the underlying nature of these costs. We increased our incremental spending on business development and proposal activities by constraining the cost growth of other corporate support
functions. The ET segment selling, general and administrative expenses declined 92.0% to $249,000 for the three months ended September 30, 2002, from $3.1 million for the three months ended September 30, 2001, reflecting the elimination of research
and development and other business development activities focused on the commercialization of technologies unrelated to our core C&SI customer requirements.
16
Depreciation and Amortization
For the three months ended September 30, 2002, total depreciation and amortization increased by 17.5% to $2.0 million, from $1.7 million
for the three months ended September 30, 2001. As a percentage of total revenues, total depreciation and amortization decreased to 2.0% for the three months ended September 30, 2002, from 2.2% for the three months ended September 30, 2001. This
decrease as a percentage of revenues reflects management actions taken to constrain capital purchases in relation to revenue growth.
Interest (Expense) Income, net
For the three months ended September 30,
2002, interest income, net was $388,000 compared to interest expense, net of $64,000 for the three months ended September 30, 2001. This change reflects reduced borrowings and increased cash and investment balances resulting from improved operating
income, lower days sales outstanding in accounts receivable, and proceeds received as a result of our May 2002 initial public offering.
Gain on Equity Method Investment
The gain on equity method investment
reflected in each period represents cash we received when indemnification escrows associated with the February 2001 sale of our interest in Mail2000, Inc. were released.
Income Taxes
For the
three months ended September 30, 2002, our effective income tax rate decreased to 41.0%, from 47.6% for the three months ended September 30, 2001. This decrease was due primarily to lower nondeductible stock-based compensation expenses for tax
purposes in the three months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs have historically been to finance the costs of operations pending the billing and collection of accounts
receivable, to acquire capital assets, to invest in research and development, and to repurchase our stock from our employees. We have historically relied on cash flow from operations and borrowings under our credit facility for liquidity. In May
2002, we completed an initial public offering of 5,750,000 shares of class A common stock that resulted in net proceeds to us of approximately $94 million. As a public company focused on growing our core C&SI business, we expect future liquidity
needs will be primarily to finance the cost of operations pending the billing and collection of accounts receivable, to acquire capital assets, and to make selected strategic acquisitions to accelerate our growth. As a public company, repurchasing
stock from employees is no longer a liquidity requirement as we have discontinued our internal stock repurchase plan. We expect the combination of cash flows from operations, our cash and cash equivalents and short-term investments, and the
available borrowing capacity on our credit facility to meet our normal operating liquidity and capital expenditure requirements for at least the next twelve months. Our operating cash flow is primarily affected by the overall profitability of our
contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. Our ability to borrow funds is generally related to the level of receivables we have due from clients and the amount of
cash flow we generate from our operating activities.
Our cash and cash equivalents and short-term investments
were $97.9 million, or 41% of our total assets, as of September 30, 2002, up from $87.1 million, or 39% of our total assets, as of June 30, 2002. We had no borrowings outstanding under our credit facility as of either June 30, 2002 or September 30,
2002. Accounts receivable represent our largest working capital requirement. We typically bill our clients monthly after services are rendered.
17
Cash Flow
Net cash provided by operating activities was $13.5 million for the three months ended September 30, 2002, an increase of $3.3 million from the three months ended
September 30, 2001. This increase in operating cash flow was primarily attributable to higher net income with changes in other working capital items offsetting between periods. Net cash used by investing activities was $9.3 million for the three
months ended September 30, 2002, an increase of $8.5 million from the three months ended September 30, 2001. This increase in investing cash outflows was primarily due to the purchase of short-term investments. Additionally, our capital expenditures
increased as we completed construction of a network operations center being operated for the benefit of a national security customer. Net cash used by financing activities was $391,000 for the three months ended September 30, 2002, a decrease of
$3.2 million from the three months ended September 30, 2001. This decrease in financing cash outflows was primarily due to lower stock repurchases.
Credit Facility
We maintain a $60 million credit
facility that expires on December 31, 2003. The current commitment under this facility is $40 million and we have the option, provided no event of default under the agreement exists, of increasing the amount committed in two increments of $10
million. We may use this facility for general corporate purposes including working capital financing, capital purchases, acquisitions, and stock repurchases. As of September 30, 2002, we had no borrowings outstanding under the credit facility.
RELATED PARTY TRANSACTIONS
We have an agreement, as amended in September 2002, with Ernst Volgenau, our chief executive officer, requiring us to maintain $10 million of term life insurance on his life through 2010, and to use
the proceeds of such insurance to repurchase shares of our common stock owned by Dr. Volgenau upon his death. We are required to pay annual premiums on this insurance of $53,200 through 2010.
We have maintained an equity interest in Mantas, Inc. since May 24, 2001. As of September 30, 2002, we own approximately 8 million shares of Mantas, Inc. class A
common stock, representing approximately 25 percent of the outstanding shares of Mantas, Inc. We have no cost basis in this investment and do not fund, nor is there any obligation to fund, the on-going operations of Mantas, Inc. We have made certain
performance guarantees to Mantas, Inc. customers that were under contract with us prior to May 24, 2001, but believe the potential for loss under these commitments is remote. Additionally, Mantas, Inc. continues to utilize certain services we
provide. Mantas, Inc. reimburses us for the cost of such services. Mantas, Inc. leases space from us and receives other support services related to its occupancy. Sublease income and amounts due for other support services provided were approximately
$381,000 and $276,000 for the three months ended September 30, 2001 and 2002, respectively. Mantas, Inc. obtains certain travel and insurance-related services utilizing our existing relationships with vendors. The total of such services received by
Mantas, Inc. was approximately $335,000 and $353,000 for the three months ended September 30, 2001 and 2002, respectively. Additionally, we provide labor services when requested by Mantas, Inc. to support its administrative and client support
activities. Approximately $314,000 and $90,000 of such labor services were provided for the three months ended September 30, 2001 and 2002, respectively. At September 30, 2002, amounts due from Mantas, Inc. for all services utilized were
approximately $162,000.
COMMITMENTS AND CONTINGENCIES
Government Contracting
Payments to us on cost-plus-fee contracts are provisional and are subject to adjustment upon audit by the Defense Contract Audit Agency. Audits through June 30, 2001 have been completed. We do not expect audit adjustments that may
result from audits for periods after June 30, 2001, to have a material effect on our financial position, results of operations, or cash flows.
18
Commitments
The following table summarizes our contractual obligations as of September 30, 2002 that require us to make future cash payments:
|
|
Payments due by period
|
|
|
Total
|
|
Less than 1 year
|
|
1-3 Years
|
|
4-5 Years
|
|
After 5 Years
|
|
|
(in thousands) |
Operating lease commitments, net |
|
$ |
125,090 |
|
$ |
11,922 |
|
$ |
23,204 |
|
$ |
20,440 |
|
$ |
69,524 |
Term loan |
|
|
1,600 |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
Term life insurance |
|
|
426 |
|
|
53 |
|
|
106 |
|
|
106 |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
127,116 |
|
$ |
13,575 |
|
$ |
23,310 |
|
$ |
20,546 |
|
$ |
69,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table does not reflect potential payments of up to $9.1
million in connection with the acquisition of The Marasco Newton Group Ltd. discussed in the section ACQUISITION above.
RISK FACTORS
Risks Related To Our Business
We depend on contracts with U.S. federal government agencies, particularly clients within the Department of Defense, for substantially all of our revenues, and if our relationships
with these agencies were harmed, our business would be threatened.
Revenues from contracts with U.S.
federal government agencies accounted for 88%, 93%, and 96% of our revenues for fiscal 2000, 2001, and 2002, respectively, and 97% of our revenues for the three months ended September 30, 2002. Revenues from contracts with clients in the Department
of Defense accounted for 43%, 47%, 53%, and 54% of our revenues for the same periods. We believe that federal government contracts will continue to be the source of substantially all of our revenues for the foreseeable future. For this reason, any
issue that compromises our relationship with agencies of the federal government in general, or within the Department of Defense in particular, would cause serious harm to our business. Among the key factors in maintaining our relationships with
federal government agencies and departments are our performance on individual contracts and delivery orders, the strength of our professional reputation, and the relationships of our key executives with client personnel. To the extent that our
performance does not meet client expectations, or our reputation or relationships with one or more key clients are impaired, our revenues and operating results could be materially harmed.
Loss of our General Services Administration (GSA) schedule contracts or our position as a prime contractor on one or more of our government-wide acquisition contracts (GWACs) or our
other multiple-award contracts would impair our ability to win new business.
We believe that one of the
key elements of our success is our position as the holder of four GSA schedule contracts, and as a prime contractor under four GWACs and more than 12 indefinite delivery/indefinite quantity contracts. For the fiscal years ended June 30, 2000, 2001,
and 2002, and the three months ended September 30, 2002, revenue from GSA schedule contracts, GWACs, and other indefinite delivery/indefinite quantity contracts accounted for approximately 84%, 87%, 91%, and 90%, respectively, of our revenues from
federal government clients. As these types of contracts have increased in importance in the last several years, we believe our position as a prime contractor on these contracts has become increasingly important to our ability to sell our services to
federal government clients. If we were to lose our position on one or more of these contracts, we could lose revenues and our operating results could suffer.
GSA schedule contracts, GWACs, and other indefinite delivery/indefinite quantity contracts typically have a one- or two-year initial term with multiple options that are exercisable by our government
clients to extend the contract for one or more years. We cannot assure you that our clients will exercise these options.
19
We may not receive the full amount of our backlog, which could harm our business.
Our backlog was $1.089 billion as of September 30, 2002, of which $159.1 million was funded. We currently
expect to recognize revenues during the remainder of fiscal 2003 from approximately 19% of our total backlog as of September 30, 2002. Our backlog includes orders under contracts that in some cases extend for several years, with the latest expiring
at the end of calendar year 2011. We define backlog to include both funded and unfunded orders for services under existing signed contracts, assuming the exercise of all priced options relating to those contracts. Congress often appropriates funds
for our clients on a yearly basis, even though their contract with us may call for performance that is expected to take a number of years. As a result, contracts typically are only partially funded at any point during their term, and all or some of
the work to be performed under the contracts may remain unfunded unless and until Congress makes subsequent appropriations and the procuring agency allocates funding to the contract. We define funded backlog to be the portion of backlog for which
funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing authority, less the amount of revenue we have previously recognized under the contract. We define unfunded
backlog as the total value of signed contracts, less funding to date. Unfunded backlog includes all contract options that have been priced but not yet funded. Our estimate of the portion of the backlog as of September 30, 2002 from which we expect
to recognize revenues in the remainder of fiscal 2003 is likely to be inaccurate because the receipt and timing of any of these revenues is subject to various contingencies, many of which are beyond our control. In addition, we may never realize
revenues from some of the engagements that are included in our backlog, and there is a higher degree of risk in this regard with respect to unfunded backlog. The actual accrual of revenues on engagements included in backlog may never occur or may
change because a program schedule could change or the program could be canceled, or a contract could be reduced, modified, or terminated early. If we fail to realize revenues from engagements included in our backlog as of September 30, 2002, our
revenues and operating results for our 2003 fiscal year as well as future reporting periods may be materially harmed.
The loss of
a key executive could impair our relationships with government clients and disrupt the management of our business.
We believe that our success depends on the continued contributions of the members of our senior management. We rely on our executive officers and senior management to generate business and execute programs successfully. In addition,
the relationships and reputation that many members of our senior management team have established and maintain with government personnel contribute to our ability to maintain good client relations and to identify new business opportunities. We do
not have any employment agreements providing for a specific term of employment with any member of our senior management. The loss of any member of our senior management could impair our ability to identify and secure new contracts, to maintain good
client relations, and otherwise to manage our business.
If we fail to attract and retain skilled employees, we might not be able
to sustain our profit margins and revenue growth.
We must continue to hire significant numbers of highly
qualified individuals who have advanced information technology and technical services skills and who work well with our clients in a government or defense-related environment. These employees are in great demand and are likely to remain a limited
resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be limited. If we encounter a tight labor market, as we did in the first half of
fiscal 2001, we could be required to engage larger numbers of subcontractor personnel, which could cause our profit margins to suffer. In addition, some of our contracts contain provisions requiring us to commit to staff an engagement with personnel
the client considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the client may terminate the contract, and we may not be able to recover our costs.
20
If subcontractors on our prime contracts are able to secure positions as prime contractors, we may
lose revenues.
For each of the past several years, as the GSA schedule contracts and GWACs have
increasingly been used as contract vehicles, we have received substantial revenues from government clients relating to work performed by other information technology providers acting as subcontractors to us. In some cases, companies that have not
held GSA schedule contracts or secured positions as prime contractors on GWACs have approached us in our capacity as a prime contractor, seeking to perform services as our subcontractor for a government client. Some of these providers that are
currently acting as subcontractors to us may in the future secure positions as prime contractors upon renewal of the GSA schedule or a GWAC contract. If one or more of our current subcontractors are awarded prime contractor status in the future, it
could reduce or eliminate our revenues for the work they were performing as subcontractors to us.
We may not be successful in
identifying acquisition candidates; and if we undertake acquisitions, they could be expensive, increase our costs or liabilities, and disrupt our business.
One of our strategies is to pursue growth through acquisitions. We have very limited acquisition experience to date. We may not be able to identify suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the acquisition,
finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting
management attention away from day-to-day operations. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. The difficulties of integration
may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not realize cost efficiencies or synergies
that we anticipated when selecting our acquisition candidates. In addition, we may need to record write downs from future impairments of identified intangible assets and goodwill, which could reduce our future reported earnings. At times,
acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Any costs, liabilities, or disruptions associated with any future acquisitions we may pursue could harm
our operating results.
If we are unable to integrate The Marasco Newton Group, Ltd. into our business successfully or to achieve
the expected benefits of the acquisition, our revenues and operating results may be impaired.
In January
2002, we acquired The Marasco Newton Group, Ltd. for its expertise in the environmental market, as well as for the opportunity to offer our services to the existing clients of Marasco Newton to increase our revenues. We expect to complete the
integration of Marasco Newton during fiscal 2003. If we are unable to successfully integrate Marasco Newton, our revenues and operating results could suffer. In addition, we may not be successful in achieving the anticipated synergies from the
acquisition, including expanding the current services provided to Marasco Newtons existing clients.
We face intense
competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability, and loss of market share.
We operate in highly competitive markets and generally encounter intense competition to win contracts. If we are unable to successfully compete for new business, our
revenue growth and operating margins may decline. Many of our competitors are larger and have greater financial, technical, marketing, and public relations resources, larger client bases, and greater brand or name recognition than we do. Such larger
competitors include federal systems integrators such as Computer Sciences Corporation and Science Applications International Corporation, divisions of large defense contractors such as Lockheed Martin Corporation and Northrop Grumman Corporation,
and consulting firms such as Accenture Ltd and KPMG Consulting, Inc. Our larger
21
competitors may be able to compete more effectively for very large-scale government contracts. Our larger competitors also may be able to provide clients with different or greater capabilities or
benefits than we can provide in areas such as technical qualifications, past performance on large-scale contracts, geographic presence, price, and the availability of key professional personnel. Our competitors also have established or may establish
relationships among themselves or with third parties, including mergers and acquisitions, to increase their ability to address client needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge.
We derive significant revenues from contracts awarded through a competitive bidding process, which can impose substantial costs upon us, and we
will lose revenues if we fail to compete effectively.
We derive significant revenues from federal
government contracts that are awarded through a competitive bidding process. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding imposes substantial costs
and presents a number of risks, including:
|
|
|
the need to bid on engagements in advance of the completion of their design, which may result in unforeseen difficulties in executing the engagement and cost
overruns; |
|
|
|
the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us;
|
|
|
|
the need to accurately estimate the resources and cost structure that will be required to service any contract we are awarded; and
|
|
|
|
the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any
such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract. |
To the extent we engage in competitive bidding and are unable to win particular contracts, we not only incur substantial costs in the bidding process that would negatively
affect our operating results, but we may be precluded from operating in the market for services that are provided under those contracts for a number of years. Even if we win a particular contract through competitive bidding, our profit margins may
be depressed as a result of the costs incurred through the bidding process.
We may lose money on some contracts if we miscalculate
the resources we need to perform under the contract.
We provide services to the federal government under
three types of contracts: cost-plus-fee, time-and-materials, and fixed-price. For the three months ended September 30, 2002, we derived 43%, 38%, and 19% of our revenues from cost-plus fee, time-and-materials, and fixed-price contracts,
respectively. For fiscal 2002, we derived 52%, 31%, and 17% of our revenues from cost-plus-fee, time-and-materials, and fixed-price contracts, respectively. For fiscal 2001, the corresponding percentages were 62%, 23%, and 15%, respectively. For
fiscal 2000, the corresponding percentages were 54%, 29%, and 17%, respectively. Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit
we earn or lead to a financial loss on the contract.
|
|
|
Under cost-plus-fee contracts, which are subject to a ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or
performance-based. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. |
|
|
|
Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses, and we assume the risk that our
costs of performance may exceed the negotiated hourly rates. |
22
|
|
|
Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus-fee contracts and time-and-materials contracts, fixed-price
contracts involve greater financial risk because we bear the impact of cost overruns. |
For all
three contract types, we bear varying degrees of risk associated with the assumptions we use to formulate our pricing for the work. To the extent our working assumptions prove inaccurate, we may lose money on the contract, which would adversely
affect our operating results.
Our margins and operating results may suffer if cost-plus-fee contracts increase in proportion to
our total contract mix.
In general, cost-plus-fee contracts are the least profitable of our contract
types. Our government clients typically determine what type of contract that we enter into. Cost-plus-fee contracts accounted for 54%, 62%, 52%, and 43% of our revenues for fiscal 2000, fiscal 2001, and fiscal 2002, and the three months ended
September 30, 2002, respectively. To the extent that we enter into more cost-plus-fee contracts in proportion to our total contract mix in the future, our margins and operating results may suffer.
If our subcontractors fail to perform their contractual obligations, our performance and reputation as a prime contractor and our ability to obtain future
business could suffer.
As a prime contractor, we often rely significantly upon other companies as
subcontractors to perform work we are obligated to deliver to our clients. Revenues derived from work performed by our subcontractors represented approximately 35% of our revenues for each of the last three fiscal years and for the three months
ended September 30, 2002. A failure by one or more of our subcontractors to satisfactorily perform the agreed-upon services on a timely basis may compromise our ability to perform our obligations as a prime contractor. In some cases, we have limited
involvement in the work performed by the subcontractor and may have exposure to problems incurred by the subcontractor. In extreme cases, performance deficiencies on the part of our subcontractors could result in a government client terminating our
contract for default. A default termination could expose us to liability for the agencys costs of reprocurement, damage our reputation, and hurt our ability to compete for future contracts.
Unfavorable government audit results could force us to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.
The federal government audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with
applicable laws, regulations, and standards. Like most large government contractors, our contracts are audited and reviewed on a continual basis by federal agencies, including the Defense Contract Audit Agency. An audit of our work, including an
audit of work performed by companies we have acquired or may acquire or subcontractors we have hired or may hire, could result in a substantial adjustment to our previously reported operating results. For example, any costs which were originally
reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded and operating margins may be reduced.
If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits,
suspension of payments, fines, and suspension or debarment from doing business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not
true. Although audits have been completed on our incurred contract costs through fiscal 2001, audits for costs incurred or work performed after fiscal 2001 have not yet been completed. In addition, non-audit reviews by the government may still be
conducted on all our government contracts.
23
If we were suspended or debarred from contracting with the federal government
generally, or any specific agency, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenues
and operating results would be materially harmed.
If we experience systems and service failure, our reputation could be harmed and
our clients could assert claims against us for damages or refunds.
We create, implement, and maintain
information technology solutions that are often critical to our clients operations, including those of both our government and our commercial clients. We have experienced and may in the future experience some systems and service failures,
schedule or delivery delays, and other problems in connection with our work. If our solutions, services, products, or other applications have significant defects or errors, are subject to delivery delays, or fail to meet our clients
expectations, we may:
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lose revenues due to adverse client reaction; |
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be required to provide additional services to a client at no charge; |
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receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain clients; or |
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suffer claims for substantial damages against us. |
In addition to any costs resulting from product or service warranties, contract performance, or required corrective action, these failures may result in increased costs or loss of revenues if clients
postpone subsequently scheduled work or cancel or fail to renew contracts.
While many of our contracts limit our
liability for consequential damages that may arise from negligence in rendering services to our clients, we cannot assure you that these contractual provisions will be legally sufficient to protect us if we are sued. In addition, our errors and
omissions and product liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. The
successful assertion of any large claim against us could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs, may be a distraction to our management and may harm our reputation.
Our failure to obtain and maintain necessary security clearances may limit our ability to perform
classified work for government clients, which could cause us to lose business.
Some government contracts
require us to maintain facility security clearances, and require some of our employees to maintain individual security clearances. If our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, the
government client can terminate the contract or decide not to renew it upon its expiration. As a result, to the extent we cannot obtain the required security clearances for our employees working on a particular contract, or we fail to obtain them on
a timely basis, we may not derive the revenue anticipated from the contract, which, if not replaced with revenue from other contracts, could harm our operating results.
Security breaches in sensitive government systems could result in loss of clients and negative publicity.
Many of the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security, and other sensitive or
classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for federal government
clients. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance. Damage to our reputation or limitations on our eligibility for additional work resulting
from a security breach in one of our systems could materially reduce our revenues.
24
Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our class A common stock to decline.
We expect our
revenues and operating results to vary significantly from quarter to quarter. In addition, we cannot predict our future revenue or results of operations. As a consequence, our operating results may fall below the expectations of securities analysts
and investors, which could cause the price of our class A common stock to decline. Factors that may affect our operating results include:
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fluctuations in revenues earned on contracts; |
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commencement, completion, or termination of contracts during any particular quarter; |
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variable purchasing patterns under GSA schedule contracts, GWACs, and other indefinite delivery/indefinite quantity contracts; |
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additions and departures of key personnel; |
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strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business
strategy; |
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contract mix and the extent of use of subcontractors; |
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changes in presidential administrations and senior federal government officials that affect the timing of technology procurement; and
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changes in policy or budgetary measures that adversely affect government contracts in general. |
Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our
expenses are fixed in the short-term. We may incur significant operating expenses during the start-up and early stages of large contracts and may not receive corresponding payments in that same quarter. We may also incur significant or unanticipated
expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and
administration approval in a timely manner.
We depend on our intellectual property and our failure to protect it could enable
competitors to market products and services with similar features that may reduce demand for our products.
Our success depends in part upon the internally developed technology, proprietary processes, and other intellectual property that we utilize to provide our services and incorporate in our products. If we are unable to protect our
intellectual property, our competitors could market services or products similar to our services and products, which could reduce demand for our offerings. Federal government clients typically retain a perpetual, world-wide, royalty-free right to
use the intellectual property we develop for them in any manner they deem appropriate, including providing it to our competitors in connection with their performance of other federal government contracts. We typically seek governmental authorization
to re-use intellectual property developed for the federal government or to secure export authorization. Federal government clients typically grant contractors the right to commercialize software developed with federal funding. However, if we were to
improperly use intellectual property even partially funded by the federal government, the federal government could seek damages or royalties from us, sanction us, or prevent us from working on future government contracts.
We may be unable to prevent unauthorized parties from attempting to copy or otherwise obtain and use our technology. Policing unauthorized
use of our technology is difficult, and we may not be able to prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our intellectual property as fully as those in the United States. Others,
including our employees, may circumvent the trade secrets and other intellectual property that we own. Although we require our employees to execute non-disclosure and intellectual property assignment agreements, these agreements may not be legally
or practically sufficient to protect our rights. Litigation may be necessary to enforce our intellectual property rights, to protect
25
our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources, with no assurance of
success.
We may be harmed by intellectual property infringement claims.
We may become subject to claims from our employees or third parties who assert that software and other forms of intellectual property that
we use in delivering services and business solutions to our clients infringe upon intellectual property rights of such employees or third parties. Our employees develop much of the software and other forms of intellectual property that we use to
provide our services and business solutions to our clients, but we also license technology from other vendors. If our vendors, our employees, or third parties assert claims that we or our clients are infringing on their intellectual property, we
could incur substantial costs to defend those claims. In addition, if any of these infringement claims are ultimately successful, we could be required to:
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cease selling or using products or services that incorporate the challenged software or technology; |
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obtain a license or additional licenses from our vendors or other third parties; or |
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redesign our products and services that rely on the challenged software or technology. |
Our employees may engage in misconduct or other improper activities, which could harm our business.
We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include intentional failures to comply with federal government
procurement regulations, engaging in unauthorized activities, or falsifying time records. Employee misconduct could also involve the improper use of our clients sensitive or classified information, which could result in regulatory sanctions
against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which
could harm our business.
Risks Related To Our Industry
A reduction in the U.S. defense budget could result in a substantial decrease in our revenues.
Revenues from contracts with clients in the Department of Defense accounted for 43%, 47%, and 53% of our revenues for fiscal 2000, fiscal 2001, and fiscal 2002, respectively, and 54% of our revenues
for the three months ended September 30, 2002. A decline in overall U.S. military expenditures could cause a decrease in our revenues and profitability. The reduction in the U.S. defense budget during the early 1990s caused some defense-related
government contractors to experience decreased sales, reduced operating margins and, in some cases, net losses. Current government spending levels may not be sustainable, and future levels of expenditures and authorizations for existing programs may
decline, remain constant, or shift to agencies or programs in areas where we do not currently have contracts. A significant decline in government expenditures, or a shift in expenditures away from agencies or programs that we support, could cause a
material decline in our revenues.
Changes in the spending policies or budget priorities of the federal government could cause us
to lose revenues.
We derived 88%, 93%, and 96% of our revenues for fiscal 2000, fiscal 2001, and fiscal
2002, respectively, and 97% of our revenues for the three months ended September 30, 2002, from contracts with federal government agencies. We believe that contracts with federal government agencies and departments will continue to be the primary
source of our revenues for the foreseeable future. Accordingly, changes in federal government fiscal or spending policies could directly affect our financial performance. Among the factors that could harm our federal government contracting business
are:
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curtailment of the federal governments use of technology services firms; |
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a significant decline in spending by the federal government, in general, or by specific departments or agencies in particular; |
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reductions in federal government programs or requirements; |
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the adoption of new laws or regulations that affect companies that provide services to the federal government; |
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delays in the payment of our invoices by government payment offices; |
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federal governmental shutdowns, such as the shutdown that occurred during the governments 1996 fiscal year, and other potential delays in the government
appropriations process; and |
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general economic and political conditions. |
These or other factors could cause federal government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, or not to exercise options to
renew contracts, any of which could cause us to lose revenues. We have substantial contracts in place with many federal departments and agencies, and our continued performance under these contracts, or award of additional contracts from these
agencies, could be materially harmed by federal government spending reductions or budget cutbacks at these departments or agencies.
The adoption of new procurement laws or regulations could reduce the amount of services that are outsourced by the federal government and could cause us to lose revenues.
New legislation, procurement regulations, or union pressure could cause federal agencies to adopt restrictive procurement practices
regarding the use of outside information technology providers. For example, the American Federation of Government Employees, the largest federal employee union, strongly endorses bills that are currently before Congress that may restrict the
procedure by which services are outsourced to government contractors. This proposed legislation, the Truthfulness, Responsibility, and Accountability in Contracting Act, or TRAC, would effectively reduce the volume of services that are outsourced by
the federal government. TRAC would provide for an internal review by an agency to determine the estimated cost for government employees to perform a task that is proposed for outsourcing. If the internal review shows that services could be delivered
for a lower cost by government employees than the lowest bid offered through the price competition held in connection with the procurement process, the task may not be outsourced. If the TRAC legislation, or similar legislation, were to be enacted,
it would likely reduce the amount of information technology services that could be outsourced by the federal government, which could materially reduce our revenues.
The recent Office of Management and Budget moratorium on some homeland security spending by several agencies of the federal government could reduce or delay federal information technology
spending and cause us to lose revenues.
The Office of Management and Budget, which supervises spending by
federal agencies, issued a directive in July 2002 requiring the review and consolidation of information technology spending programs among the component agencies of the proposed Department of Homeland Security. This directive imposed a moratorium on
several agencies information technology infrastructure system development and planned modernization efforts in excess of $500,000. During this moratorium, the agencies information technology investments will be reviewed by a newly-formed
Homeland Security IT Investment Review Group. After this review, the IT Investment Review Group will make recommendations for reducing information technology spending across the proposed Department of Homeland Security. The moratorium and any
subsequent spending reductions could cause Department of Homeland Security component agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts, to decline to exercise options to renew existing
contracts, or to postpone or cancel proposed information technology acquisition programs. Any of these outcomes could have a material adverse impact on our revenues and our financial performance, because we have contracts with component agencies of
the proposed Department of Homeland Security.
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Federal government contracts contain provisions giving government clients a variety of rights that
are unfavorable to us, including the ability to terminate a contract at any time for convenience.
Federal
government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other
things, to:
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terminate existing contracts, with short notice, for convenience, as well as for default; |
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reduce or modify contracts or subcontracts; |
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terminate our facility security clearances and thereby prevent us from receiving classified contracts; |
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cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; |
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decline to exercise an option to renew a multi-year contract; |
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claim rights in products, systems, and technology produced by us; |
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prohibit future procurement awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for
the agency that would give a contractor an unfair advantage over competing contractors; |
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subject the award of GSA schedule contracts, GWACs, and other indefinite delivery/indefinite quantity contracts to protest by competitors, which may require the
contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit bids for the contract or in the termination, reduction, or modification of the awarded contract;
and |
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suspend or debar us from doing business with the federal government or with a particular governmental agency. |
If a government client terminates one of our contracts for convenience, we may recover only our incurred or committed costs, settlement
expenses, and profit on work completed prior to the termination. If a federal government client were to unexpectedly terminate, cancel, or decline to exercise an option to renew with respect to one or more of our significant contracts or suspend or
debar us from doing business with government agencies, our revenues and operating results would be materially harmed.
Our failure
to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.
We must comply with laws and regulations relating to the formation, administration, and performance of federal government contracts, which affect how we do business with our government clients and may impose added costs on
our business. Among the most significant regulations are:
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the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the
formation, administration, and performance of government contracts; |
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the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with some contract negotiations;
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the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under some cost-based government contracts; and
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laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of
specified products and technical data. |
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If a government review or investigation uncovers improper or illegal activities,
we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with federal government
agencies. The government may in the future reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new
contracts. Any failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with the federal government, each of which could lead to a material
reduction in our revenues.
Other Risks Related To Our Stock
A public market for our class A common stock has existed only for a brief period of time, and our stock price could be volatile and could decline, resulting in a substantial loss on your
investment.
Prior to May 24, 2002, there was no public market for any class of our common stock. An
active trading market for our class A common stock may not be sustained, which could affect your ability to sell your shares and could depress the market price of your shares.
The stock market in general, and the market for technology-related stocks in particular, has been highly volatile. As a result, the market price of our class A common stock
is likely to be similarly volatile, and investors in our class A common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our class A common stock could
be subject to wide fluctuations in response to a number of factors, including those listed in this Risk Factors section and others such as:
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our operating performance and the performance of other similar companies; |
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actual or anticipated differences in our quarterly operating results; |
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changes in our revenue or earnings estimates or recommendations by securities analysts; |
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publication of research reports about us or our industry by securities analysts; |
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additions and departures of key personnel; |
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contract mix and the extent of use of subcontractors; |
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strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments, or changes in business
strategy; |
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federal government spending levels, both generally and by our particular government clients; |
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the passage of legislation or other regulatory developments that adversely affect us or our industry; |
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speculation in the press or investment community; |
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changes in the government information technology services industry; |
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changes in accounting principles; |
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general market conditions, including economic factors unrelated to our performance. |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs and divert our managements attention and resources.
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Our chief executive officer, whose interests may not be aligned with yours, will continue to
control our company, which could result in actions of which you or other stockholders do not approve.
As
of October 31, 2002, Ernst Volgenau, our chief executive officer, beneficially owned 710,145 shares of class A common stock and 6,908,270 shares of class B common stock, representing approximately 67.9% of the combined voting power of our
outstanding common stock. As of October 31, 2002, our executive officers and directors as a group beneficially owned an aggregate of 5,054,934 shares of class A common stock and 9,082,711 shares of class B common stock, representing approximately
92.1% of the combined voting power of our outstanding common stock. As a result, these individuals acting together, or Dr. Volgenau acting alone, will be able to control the outcome of all matters that our stockholders vote upon, including the
election of directors, amendments to our certificate of incorporation, and mergers or other business combinations. In addition, upon the death of Dr. Volgenau and the conversion of his class B common stock into class A common stock, William K.
Brehm, the chairman of our board of directors, if he survives Dr. Volgenau, would beneficially own all of the outstanding class B common stock and could exercise control or significant influence over corporate matters requiring stockholder approval.
This concentration of ownership and voting power may also have the effect of delaying or preventing a change in control of our company and could prevent stockholders from receiving a premium over the market price if a change in control is proposed.
A substantial number of shares will be eligible for sale in the near future, which could cause our class A common stock price to
decline significantly.
If our stockholders sell, or the market perceives that our stockholders intend to
sell, substantial amounts of our class A common stock in the public market, the market price of our class A common stock could decline significantly. These sales also might make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem appropriate. As of October 31, 2002, we had outstanding 20,753,597 shares of common stock, assuming no exercise of outstanding options. Of these shares, 6,445,005 are freely tradable. On November 20, 2002,
12,190,947 additional shares of common stock will be available for sale in the public market following the expiration of lock-up agreements between our stockholders and the underwriters, and 2,117,645 more shares will become available for sale in
the public market in October 2003 following the expiration of the lock-up between us and the entities affiliated with General Atlantic Partners, LLC. Salomon Smith Barney, on behalf of the underwriters, may release stockholders from their 180 day
lock-up agreements expiring November 20, 2002, with the underwriters at any time and without notice, which would allow for earlier sale of shares in the public market. As restrictions on resale end, the market price of our common stock could drop
significantly if the holders of restricted shares sell them or are perceived by the market as intending to sell them.
In addition, we have offered, and expect to continue to offer, a significant number of stock options to our employees. As of October 31, 2002, there were 3,584,834 shares of class A common stock issuable upon the exercise of fully
vested outstanding stock options. An additional 2,113,348 options to purchase shares of class A common stock vest between October 2002 and August 2006. To the extent these outstanding options are or become exercisable, and are ultimately exercised,
the shares issued upon such exercise will be generally tradable.
Provisions of our charter documents and Delaware law may inhibit
potential acquisition bids that you and other stockholders may consider favorable, and the market price of our class A common stock may be lower as a result.
There are provisions in our certificate of incorporation and by-laws that make it more difficult for a third party to acquire, or attempt to acquire, control of our
company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights,
preferences, privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of
our class
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A common stock and the voting and other rights of our stockholders may be adversely affected. This issuance of shares of preferred stock may result in the loss of voting control to other
stockholders.
Our charter documents contain other provisions that could have an anti-takeover effect, including:
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the high-vote nature of our class B common stock; |
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only one of the three classes of directors is elected each year; |
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stockholders have limited ability to remove directors without cause; |
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stockholders cannot take actions by written consent; |
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stockholders cannot call a special meeting of stockholders; and |
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stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings. |
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our
class A common stock. These provisions may also prevent changes in our management.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject us to credit risk consist primarily of cash equivalents, short- and long-term investments, and accounts receivable.
We believe that concentrations of credit risk with respect to cash equivalents and investments are limited due to the high credit quality of these investments. Our
investment policy presently requires that investments be in direct obligations of the U.S. government, certain U.S. government sponsored entities, and a limited number of other investment vehicles that are secured by direct or sponsored U.S.
government obligations. We are presently evaluating our investment policy and may broaden eligible investments, subject to Board approval, to include certain high-quality corporate and municipal obligations.
Investments in both fixed and floating rate interest earning instruments carry a degree of interest rate risk. Fixed securities may have
their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of
expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value because of changes in interest rates. Investments are made in accordance with an investment
policy approved by our Board of Directors. Under this policy, no investment securities can have maturities exceeding two years and the average duration of the portfolio can not exceed nine months.
We believe that concentrations of credit risk with respect to accounts receivable are limited as they are primarily federal government
receivables.
At June 30, 2002 and September 30, 2002, the carrying value of financial instruments approximated
fair value.
To the extent borrowings are outstanding under our credit facility, we have some interest rate risk
based on the variable interest rate of our revolving credit facility. Based on the average credit facility balance in the three months ended September 30, 2001 and 2002, a one percentage point increase in the average interest rate would have
resulted in approximately $8,000 and $0, respectively, of increased interest payments for those periods.
Item 4. Controls and Procedures
Based on their evaluation of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and are operating in an effective manner.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
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Part IIOTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are
involved in various legal proceedings concerning matters arising in the ordinary course of business. We currently believe that any ultimate liability arising out of these proceedings will not have a material adverse effect on our financial position,
results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
We are
furnishing the following information with respect to the use of proceeds from our initial public offering of class A common stock, $0.004 par value per share, which first closed in May 2002. The effective date of the Registration Statement on Form
S-1 for the offering was May 23, 2002, and the commission file number of the Registration Statement is 333-83780. The offering commenced on May 23, 2002. The offering terminated on June 4, 2002, the date of the exercise of the underwriters
over-allotment option. All of the shares of class A common stock registered for our account were sold prior to the termination of the offering. The managing underwriters for the offering were Salomon Smith Barney Inc., UBS Warburg LLC, Legg Mason
Wood Walker, Incorporated, Raymond James & Associates, Inc., Adams, Harkness & Hill, Inc., and BB&T Capital Markets, a Division of Scott & Stringfellow, Inc. We registered 5,750,000 shares of our class A common stock, $0.004 par
value per share, in the offering. The aggregate offering price of the shares registered and sold by us was $103.5 million. The total underwriting discount was approximately $7.2 million and we incurred other expenses (including filing, legal and
accounting fees) of approximately $2.1 million, none which were paid to our directors, officers, general partners or their associates, persons owning 10% or more of our equity securities, or our affiliates.
Our net offering proceeds after expenses were approximately $94.2 million. From May 23, 2002 until June 30, 2002 we used $2.0 million to
repay outstanding debt, $606,000 for capital expenditures, and $29.8 million for working capital expenditures. From July 1, 2002 until September 30, 2002, we used $400,000 to repay outstanding debt, $1.9 for capital expenditures, and the remainder
of our net offering proceeds of $59.5 million for working capital expenditures. Such payments, other than amounts paid as employment compensation, were to persons other than our directors, officers, general partners or their associates, persons
owning 10% or more of our equity securities, or our affiliates. Since our May 23, 2002 offering, we have continued to collect outstanding receivables and generate positive cash flow from operations. As a result, our actual cash and cash equivalents
and short-term investment balance as of September 30, 2002 was $97.9 million.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
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Description
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99.1 |
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Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
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99.2 |
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Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
None
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the county of Fairfax, Virginia on the 13th day of November, 2002.
SRA INTERNATIONAL, INC. |
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By: |
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/s/ ERNST
VOLGENAU
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Ernst Volgenau, President and
Chief Executive Officer |
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I, Ernst Volgenau, certify that:
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I have reviewed this quarterly report on Form 10-Q of SRA International, Inc.; |
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2. |
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Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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4. |
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The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
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a) |
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designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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b) |
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evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and |
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c) |
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presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
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5. |
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The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function): |
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a) |
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all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
|
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
|
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6. |
|
The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: November 13, 2002 |
|
|
|
/s/ ERNST VOLGENAU
Ernst Volgenau President, Chief Executive Officer
and Director (Principal Executive Officer) |
36
I, Stephen C. Hughes, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of SRA International, Inc.; |
|
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
|
4. |
|
The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
|
a) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
|
b) |
|
evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and |
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c) |
|
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function): |
|
a) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
|
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
|
|
6. |
|
The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: November 13, 2002 |
|
/s/ STEPHEN C.
HUGHES
Stephen C.
Hughes Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
37