| ANALEX CORP Item 1A Risk Factors Risks Related To Our Business We depend on contracts with US federal government agencies, particularly clients within the Department of Defense and NASA, for substantially all of our revenue, and if our relationships with these agencies were impaired, our business could be materially adversely affected |
| Revenue derived from US federal government agencies and their prime contractors represented 99prca, 100prca and 99prca of our total revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively |
| The Department of Defense, our principal US government customer, accounted for approximately 69prca, 55prca and 42prca of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively |
| NASA generated 30prca, 44prca and 57prca of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively |
| Approximately 20prca, 28prca and 30prca of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively, came from one prime contract with NASA, which will continue until September 2011 if the remaining option is exercised in 2008 |
| In the event that the remaining option term is not exercised, we will not be able to recognize the full value of the contract awarded |
| In addition, the Homeland Security Group’s contract with one Department of Defense customer generated 11prca, 16prca and 17prca of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively, and 44prca, 62prca and 72prca of our operating income for the fiscal years ended December 31, 2005, 2004 and 2003, respectively |
| We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future |
| If we were suspended or debarred from contracting with the federal government generally, the Department of Defense, NASA or any significant agency in the intelligence community, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased 10 ______________________________________________________________________ the amount of business it does with us, our business, operating results, financial condition and business prospects could be materially adversely affected |
| Changes in the spending priorities of the federal government can materially adversely affect our business |
| Our business depends upon continued federal government expenditures on defense, intelligence, aerospace and other programs that we support |
| Our contracts with the US government are subject to the availability of funds through annual appropriations |
| These contracts may be terminated by the government for its convenience at any time, and generally do not require the purchase of a fixed quantity of services or products |
| Reductions in the US government defense, intelligence or aerospace spending could adversely affect our operating results |
| Any reductions in the US government spending on specific defense, intelligence, or aerospace-related programs or contracts can have a material adverse effect on our business and revenue in the future |
| A significant change in the spending priorities of the federal government could cause it and its many agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty, or not to exercise options to renew contracts |
| Any such actions could cause our actual results to differ materially in an adverse manner from those anticipated |
| Among the factors that could adversely affect our business are: • changes in federal government programs or requirements; • budgetary priorities limiting or delaying federal government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or reduction in available funding; • governmental shutdowns (such as that which occurred during the government’s 1996 fiscal year) and other potential delays in the government appropriations process; • an increase in set-asides for small businesses that could result in our inability to compete directly for certain prime contracts; and • curtailment of the federal government’s use of technology solutions firms |
| The failure by Congress to approve budgets in a timely manner could cause the federal agencies we support to delay or reduce spending and that could cause us to lose revenue |
| On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies we support |
| In the past, when Congress was unable to agree on budget priorities, and was therefore unable to pass the annual budget on a timely basis, Congress has enacted a continuing resolution |
| A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle |
| When government agencies must operate on the basis of a continuing resolution it may delay funding we expect to receive from clients for work we are already performing and will likely result in any new initiatives being delayed, and in some cases being cancelled |
| 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 future revenue |
| New legislation, procurement regulations, or union pressure could cause federal agencies to adopt restrictive procurement practices regarding the use of third party service providers |
| For example, the American Federation of Government Employees, the largest federal employee union, strongly endorses legislation that may restrict the procedure by which services are outsourced to government contractors |
| If such legislation were to be enacted, it would likely reduce the amount of services that could be outsourced by the federal government, which could materially reduce our future revenue |
| 11 ______________________________________________________________________ The Office of Management and Budget process for ensuring that government agencies would properly support capital planning initiatives, including information technology investments, could reduce or delay federal information technology spending and cause us to lose revenue |
| The Office of Management and Budget, or OMB, supervises spending by federal agencies, including enforcement of the Government Performance Results Act |
| This Act requires, among other things, that federal agencies make an adequate business justification to support capital planning initiatives, including all information technology investments |
| The factors considered by OMB include, among others, whether the proposed information technology investment is expected to achieve an appropriate return on investment, whether related processes are contemporaneously reviewed, whether inter-operability with existing systems and the capacity for these systems to share data across government has been considered, and whether existing off-the-shelf products are being utilized to the extent possible |
| If our clients do not adequately justify proposed information technology investments to the OMB, the OMB may refuse funding for their new or continuing information technology investments, and we may lose revenue as a result |
| 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 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 |
| Although we have stock and bonus incentives for senior management, we do not have any employment agreements providing for a specific term of employment with any member of our senior management (with the exception of Mr |
| Sterling E Phillips, our Chief Executive Officer) |
| The loss of any member of our senior management could impair our ability to identify new business opportunities, secure new contracts, maintain good client relations, and successfully manage our business |
| 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 |
| If we are unable to successfully compete for new business or win recompetitions of existing 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 |
| Larger competitors include federal systems integrators such as SRA International, CACI International Inc, ManTech Corporation, Computer Sciences Corporation and Science Applications International Corporation, divisions of large defense contractors such as General Dynamics Corporation, Lockheed Martin Corporation, and Northrop Grumman Corporation, and consulting firms such as Booz Allen Hamilton |
| Our larger 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, the ability to provide a broader range of services without creating conflicts of interest or intra-organizational conflicts of interest, price, and the availability of key professional personnel |
| Our competitors also have established or may establish relationships among themselves or with third parties, including through joint ventures, teaming arrangements or mergers and acquisitions, to increase their ability to address client needs |
| Accordingly, it is possible that new competitors or alliances among competitors may continue to emerge |
| 12 ______________________________________________________________________ We may not receive the full amount authorized under contracts and we may not accurately estimate our backlog |
| Although some of our federal government contracts require performance over a number of years, Congress appropriates funds for these contracts for only one year at a time |
| As a result, our contracts typically are only partially funded at any point during their term, and all or some of the work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency |
| Nonetheless, in calculating the amount of our backlog, we include amounts from future years of government contracts under which the government has the right, but not the obligation, to exercise an option for us to perform services |
| Our backlog of orders, based on remaining contract value, believed to be firm as of December 31, 2005 was approximately dlra291dtta7 million |
| However, because we may not receive the full amount we expect under a contract, our estimate of our backlog may be inaccurate and we may post results that differ materially in an adverse manner from those anticipated |
| We derive significant revenue from contracts awarded through a competitive bidding process, which can impose substantial costs upon us, and we will fail to maintain our current and projected revenue if we fail to compete effectively |
| We derive significant revenue 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 |
| Such risks include, but are not limited to • 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 costs that will be required to service any contract we are awarded; • 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; and • the opportunity cost of not bidding on and winning other contracts we might otherwise pursue |
| 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 underestimate 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-material, and fixed-price |
| For the fiscal year ended December 31, 2005, 42prca of our contracts were cost-plus-fee, 34prca were time-and-material, and 24prca were fixed-price |
| Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of fulfilling the contract |
| In the event that the 13 ______________________________________________________________________ assumptions we use to formulate our pricing for the work prove to be inaccurate, we may lose money on the contract, which would adversely affect our operating results |
| • Cost-plus-fee contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component |
| These contracts establish a ceiling amount that the contractor may not exceed without the approval of the contracting officer |
| 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 |
| • Time-and-material contracts provide for acquiring services on the basis of direct labor hours at specified fixed hourly rates |
| Profit margins on time-and-material contracts fluctuate based on the difference between negotiated billing rates and actual labor and overhead costs directly charged or allocated to such contracts |
| We assume the risk that its costs of performance may exceed the negotiated hourly rates |
| • Fixed-price contracts provide for delivery of products or services for a price that is negotiated in advance on the basis of the contractor’s cost experience |
| The price is not subject to adjustment and that means we assume the financial risk of costs overruns |
| 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 government contractors, our contracts are audited and reviewed on a continual basis |
| An audit of our work, including an audit of work performed by companies we may acquire or subcontractors we have engaged or may engage, 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 US 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 |
| Failure to maintain strong relationships with other contractors could result in a decline in our revenue |
| Approximately 27prca, 32prca and 43prca of our revenue for the years ended December 31, 2005, 2004 and 2003, respectively, were generated as a subcontractor to various prime contractors to the federal government |
| Although we intend to focus on retaining and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships, we may not succeed in doing so |
| If not, we will continue to depend on relationships with these and other contractors for a significant portion of our revenue in the foreseeable future |
| Our business, prospects, financial condition or operating results could be adversely affected if these and other contractors eliminate or reduce their subcontracts with us, either because they choose to establish relationships with our competitors or because they choose to directly offer services that compete with our business, or if the government terminates or reduces these other contractors’ programs or does not award them new contracts |
| We must continue to recruit and retain qualified skilled employees |
| An integral part of our future success is dependent upon our continued ability to provide employees who have advanced information technology and technical services skills and who have excellent customer relationships within the defense, aerospace and intelligence communities |
| As described below, many of these employees are required by our federal government clients to have security clearances of various levels issued by the appropriate agency |
| These employees are in great demand and are likely to remain a limited resource in the 14 ______________________________________________________________________ foreseeable future |
| If we are unable to recruit and retain a sufficient number of these highly skilled employees, especially those requiring security clearances, our ability to maintain and grow our business could be adversely affected |
| In addition, some of our contracts contain provisions requiring us to commit to staff a program with certain personnel the customer 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 its costs in the event the contract is terminated |
| Our business is dependent upon obtaining and maintaining required security clearances |
| Many of our federal government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with federal agencies’ requirements |
| Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances |
| If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances leave us, the client whose work requires cleared employees could terminate the contract or decide not to renew it upon its expiration |
| In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and perform work with employees who hold specified types of security clearances |
| To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively re-bid on expiring contracts |
| Employee or subcontractor misconduct, including security breaches, could result in the loss of clients and our suspension or disbarment from contracting with the federal government |
| We may not be able to prevent our employees or subcontractors from engaging in misconduct, fraud or other improper activities that could adversely affect our business and reputation |
| Misconduct could include the failure to comply with federal government procurement regulations, regulations regarding the protection of classified information and legislation regarding the pricing of labor and other costs in government contracts |
| Many of the systems we develop involve managing and protecting information involved in national security and other sensitive government functions |
| A security breach in one of these systems could prevent us from having access to such critically sensitive systems |
| The precautions we take to prevent and detect this activity may not be effective, and we could face unknown risks or losses |
| As a result of employee or subcontractor misconduct, we could face fines and penalties, loss of security clearance and suspension or debarment from contracting with the federal government, which could materially adversely affect our business, operating results and financial condition |
| If our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business could be materially and adversely impacted and our actual results could differ materially in an adverse manner from those anticipated |
| Our performance of government contracts regularly involves the issuance of subcontracts to other companies upon which we rely to perform all or a portion of the work we are obligated to deliver to our clients |
| There is a risk that we may have disputes from time to time with our subcontractors, including disputes regarding the quality and timeliness of the work performed |
| A failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as a prime contractor |
| A subcontractor’s performance deficiency could result in the government terminating our contract for default |
| A default termination could expose us to liability for excess costs of re-procurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders |
| Such problems with subcontractors could materially adversely affect our business, operating results and financial condition |
| 15 ______________________________________________________________________ Federal government contracts contain provisions giving government customers 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, under certain conditions, to: • terminate existing contracts at any time, with short notice, for convenience, as well as for default; • modify contracts or subcontracts; • terminate our facility security clearances and thereby prevent us from receiving classified contracts; • cancel multi-year contracts and related orders if funding for contract performance for any subsequent year becomes unavailable; • decline to exercise an option to renew a multi-year contract; • claim rights in products, systems, and technology developed or provided by us; • 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; • subject the award of 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 • subject to applicable laws and regulations and for certain causes, suspend or debar us from doing business with the federal government or with a particular governmental agency |
| If a government customer 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 customer 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 revenue and operating results would be materially adversely affected |
| We must comply with a variety of laws and regulations, and our failure to comply could cause our actual results to differ materially in an adverse manner from those anticipated |
| We must observe laws and regulations relating to the formation, administration and performance of federal government contracts which affect how we do business with our clients and may impose added costs on our business |
| For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that: • allow our federal government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence; • require us to disclose and certify cost and pricing data in connection with contract negotiations; and • require us to prevent unauthorized access to classified information |
| Our failure to comply with these or other laws and regulations could result in contract termination, loss of security clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business, operating results and financial condition |
| 16 ______________________________________________________________________ We may have difficulty identifying and executing acquisitions on favorable terms; 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 completed a limited number of acquisitions in our history |
| We intend to acquire businesses that complement or expand our current capabilities |
| These businesses are especially in demand in the current market, and other prospective purchasers who have substantially greater resources than we do may offer to acquire such businesses upon such economic terms that are hard for us to match |
| We may not be able to acquire candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us |
| We may desire to use our common stock as consideration in acquisitions, and therefore any decline in the market price of our common stock or any unwillingness of owners of businesses we wish to acquire to accept our common stock as part of the purchase price could adversely affect our ability to complete acquisitions or require us to use more of our cash or incur additional financing to do so |
| After an appropriate acquisition candidate has been identified, we may not be able to successfully negotiate the terms of the acquisition, finance the acquisition or, if the acquisition occurs, successfully 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 equity ownership |
| We may also not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates |
| Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through our due diligence investigation prior to the acquisition |
| Any costs, liabilities, or disruptions associated with any future acquisitions we may pursue could adversely affect our operating results |
| To the extent we are unable to pursue our acquisition strategy, we will be required to rely exclusively on internal growth to expand our business |
| We may need to raise additional capital to fund future acquisitions or be unable to raise such additional capita |
| We expect that the borrowing availability under our credit facility, together with cash provided by operations, will be sufficient to fund our normal operations for at least the next twelve months |
| However, we anticipate that we will need to obtain additional financing either through sale of equity and debt securities or from our credit facility to fund our acquisitions |
| We may seek additional funds by incurring additional indebtedness, issuing additional equity securities, or by other means |
| There is no assurance that additional financing could be obtained when we need it |
| If additional financing is raised through sale of our equity securities, there could be a significant dilutive effect on the ownership interests and voting rights of our existing stockholders and warrant and option holders |
| Currently, we have no agreements, arrangements or understandings with respect to acquisition of any entity or business |
| We may also need to obtain additional financing over the next twelve months if our current plans or projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties |
| Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interest |
| These factors may make the timing, amount, terms and conditions of any financing unattractive |
| Our substantial convertible preferred stock and debt could adversely affect our financial and operating flexibility |
| On December 9, 2003, we sold dlra10 million in aggregate principal amount of Series A Convertible Notes (“Series A Convertible Note”) |
| The Series A Convertible Notes bear interest at an annual rate of 7prca and mature on December 9, 2007 |
| On December 9, 2003, we also issued for dlra15 million, 6cmam726cmam457 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and 1cmam345cmam291 Common Stock Warrants exercisable at dlra3dtta28 per share |
| The Series A Preferred Stock accrues dividends at 6prca per annum payable quarterly in cash |
| In 17 ______________________________________________________________________ May 2004, we issued in aggregate principal amount of dlra12 million of convertible secured senior subordinated promissory notes (“Series B-1 Notes”) and 857cmam142 Common Stock Warrants exercisable at dlra4dtta32 per share |
| In April 2005, the Company issued for dlra25 million, an additional 7cmam142cmam856 shares of Series B Convertible Preferred Stock (“Series B-2 Preferred Stock”) and 1cmam785cmam713 Common Stock Warrants exercisable at dlra4dtta29 per share |
| All Series B Convertible Preferred Stock accrues dividends at 6prca per annum payable quarterly in cash |
| Our quarterly preferred stock dividend expense is approximately dlra800cmam000 |
| No assurance can be given that sufficient funds will be available to meet our operating needs, to pay the dividends on the Series A Preferred Stock, the Series B Preferred Stock, or to redeem the Series A Convertible Note, the Series A Preferred Stock and the Series B Preferred Stock in accordance with their respective terms |
| In connection with the acquisition of ComGlobal, we amended our credit agreement with Bank of America |
| Our revolving credit facility with Bank of America was increased to dlra40 million |
| We drew down dlra22 million from the credit facility on April 1, 2005 in connection with our acquisition of ComGlobal |
| As of December 31, 2005, the Company had an outstanding balance under its credit facility with Bank of America of approximately dlra27dtta6 million |
| The balance outstanding on our revolving credit facility is serviced by our operating cash flows |
| This may affect our ability to meet the interest and dividend obligations of the Series A and Series B instruments |
| Our debt instruments contain numerous financial and operational covenants that further limit our operational flexibility |
| Our credit facility with Bank of America contains financial covenants setting forth certain maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage |
| The credit facility also restricts our ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of Series A and Series B Preferred Stock) or other distributions, create liens on assets, enter into certain leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates |
| The credit facility is generally secured by all the assets of our business |
| Our ability to comply with the financial covenants in our credit agreement will be affected by our financial performance as well as events beyond our control, including prevailing economic, financial and industry conditions |
| The breach of any of the covenants in our credit agreements could result in a default, which would permit Bank of America to declare all amounts borrowed thereunder, together with accrued and unpaid interest, to be due and payable |
| If we are unable to repay our indebtedness, Bank of America could exercise its security rights against our accounts receivable and other assets which are the collateral securing the indebtedness |
| We cannot predict the results of legal proceedings which may arise from time to time in the ordinary course of business or in relation to our acquisition activities |
| From time to time we are involved in legal proceedings arising in the ordinary course of our business |
| We cannot predict the nature, extent and timing of such legal proceedings |
| Furthermore, we cannot predict whether the outcome of such legal proceedings could have a material adverse effect on our operating results or cash flows |
| We were served on October 9, 2003 with a complaint filed by Swales & Associates, Inc |
| (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA We entered into a Settlement Agreement dated July 22, 2004 with Swales |
| Under the terms of the Settlement Agreement, we paid dlra1cmam000cmam000 to Swales in July 2004 |
| Included in the dlra1cmam000cmam000 settlement is approximately dlra320cmam000 for work performed by Swales prior to termination |
| We have received an opinion from legal counsel that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA Therefore, we established a receivable of approximately dlra1dtta0 million related to the expected reimbursement of these costs |
| In May 2005, we received oral customer feedback that the costs were allowable 18 ______________________________________________________________________ and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA Based on the opinion of legal counsel and management’s assessment of relevant facts, we believed and continue to believe that the costs incurred are allowable, allocable and reasonable |
| During the quarter ended December 31, 2005, we met with NASA procurement personnel who indicated to us that prior NASA communications with respect to allowability and allocability should not be relied upon |
| While we continue to believe that the full amount is allowable, allocable and reasonable, and therefore should be recoverable under the ELVIS contract with NASA, we have concluded that a reserve of dlra500cmam000 is appropriate as of December 31, 2005 |
| We intend to continue to use all reasonable efforts to recover the full amount of our costs from NASA We were served on April 29, 2005 with a complaint filed by H&K Strategic Business Solutions, LLC (“HKSBS”) in Virginia Circuit Court alleging breach of contract and other claims relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004, which we terminated on February 14, 2005 |
| Under the complaint, HKSBS is seeking damages of dlra830cmam000 together with legal fees and expenses |
| This matter is scheduled for trial on March 20 and 21, 2006, and in the event that HKSBS prevails, we could be held liable for up to the full amount of the damages sought; and that result could have a material adverse effect on our operating results and cash flows |
| We have filed a counter-claim against HKSBS seeking reimbursement of prior retainer payments made to HKSBS of approximately dlra110cmam000, plus certain legal fees |
| Risks Related to Our Common Stock It is likely that we will continue to report net losses to common shareholders due to certain non-cash accretions arising from our financing instruments |
| It is likely that we will continue to report net losses to common shareholders due to non-cash accretions related to the outstanding Series A Convertible Note, Series A Preferred Stock and Series B Preferred Stock |
| An aggregate of 3cmam428cmam571 shares of Series B Preferred Stock were issued and sold in connection with our acquisition of Beta Analytics, Inc (“BAI”) in 2004 |
| An aggregate of 7cmam142cmam856 shares of Series B Preferred Stock were issued in connection with our acquisition of ComGlobal in April 2005 |
| Pursuant to the US Generally Accepted Accounting Principles, accounting for the Series A Convertible Note, the Series A Preferred Stock and Series B Preferred Stock and related Warrants (collectively, the “Financing Instruments”) will include cash and non-cash charges each year for as long as the Financing Instruments remain outstanding and are not converted into our common stock |
| We incur quarterly non-cash interest and accretion charges of approximately dlra2dtta0 million on our outstanding Financing Instruments and cash charges of approximately dlra1dtta0 million |
| In addition, a significant portion of these charges are not tax deductible |
| Investors, whose interests may not be aligned with yours, will have the ability to exercise significant influence over the Company, which could result in actions of which you or other stockholders may not approve |
| Using the method of calculation in accordance with the SEC rules on beneficial ownership, General Electric Pension Trust (“GEPT”) and New York Life Capital Partners II, LP (“NYL”) together with Pequot Private Equity Fund III, LP and Pequot Offshore Private Equity Partners III, LP (collectively, “Pequot,” and together with GEPT and NYL, the “Investors”) currently beneficially hold approximately 29prca, 23prca, and 52prca of our outstanding voting securities, respectively |
| Pursuant to the provisions of an Amended and Restated Stockholders’ Agreement dated May 28, 2004, the Investors together with certain other principal stockholders, have agreed to vote their securities for a nine-person board comprised of the CEO, two (2) directors designated by a Pequot Majority in Interest (as defined in the Amended and Restated Stockholders’ Agreement), one (1) non-employee director designated by our CEO and reasonably acceptable to the Investors, and five (5) independent directors nominated by our Nominating Committee |
| In the event that we fail to redeem the Series A Preferred Stock or the 19 ______________________________________________________________________ Series B Preferred Stock and such failure continues for a period of nine (9) consecutive months, Pequot or the Investors, if required after September 15, 2008, as the case may be, will have the right to designate additional members to the Board as is necessary for the members of the Board designated by Pequot or the Investors, as the case may be, to constitute a majority of the Board |
| In addition, for as long as 50prca of the Series A Preferred Stock originally issued remains outstanding or 25prca of the Series B Preferred Stock originally issued remains outstanding, we may not take numerous actions without obtaining the written consent of the holders of a majority of the Series A Preferred Stock or the Series B Preferred Stock |
| Holders of our Preferred Stock have such a significant ownership interests that it could deter any third party from making an offer to buy our company |
| The significant ownership interest and significant influence of the Investors as a whole could effectively deter a third party from making an offer to acquire our company, which might involve a premium over the current stock price or other benefits for stockholders, or otherwise prevent changes in the control or management of our company |
| Both the Series A Preferred Stock and the Series B Preferred Stock bear a cumulative annual dividend of 6prca |
| If our available cash for operations does not meet certain specified levels or if the cash dividend payment on the Series A Preferred Stock or the Series B Preferred Stock will result in an event of default under our credit facility, dividends will be paid in additional shares of Series A Preferred Stock or Series B Preferred Stock, as the case may be, causing our Investors’ ownership interest to be even higher |
| There are also no restrictions, in the form of a standstill agreement or otherwise, on the ability of the Investors or its affiliates to purchase additional securities of our Company and thereby further consolidate their ownership interest |
| A substantial number of shares are eligible for sale in the near future, which could cause our Common Stock price to decline significantly |
| Future sales of our Common Stock in the public market could lower our stock price and impair our ability to raise funds in any new stock offerings |
| As of December 31, 2005, we had approximately 16dtta3 million outstanding shares of Common Stock that were subject to dilution by: • 6cmam726cmam457 shares of Common Stock that are issuable upon conversion of 6cmam726cmam457 shares of Series A Preferred Stock; • 3cmam321cmam707 shares of Common Stock that are issuable upon conversion of 3cmam321cmam707 shares of Series A Convertible Note; • 13cmam214cmam283 shares of Common Stock that are issuable upon conversion of 10cmam571cmam427 shares of Series B Preferred Stock; • 4cmam652cmam487 shares of Common Stock that are issuable upon the exercise of the Common Stock Warrants; and • 3cmam802cmam771 shares of Common Stock issuable upon the exercise of the outstanding vested stock options and/or warrants |
| Sales of a substantial amount of Common Stock in the public market, or the perception that these sales may occur, could adversely affect the market price of our Common Stock prevailing from time to time in the public market and could impair our ability to raise funds in additional stock offerings |
| The price of our Common Stock could be volatile |
| Our Common Stock is listed on the American Stock Exchange and has experienced, and may experience in the future, significant price and volume fluctuations which could adversely affect the market price of our Common Stock without regard to our operating performance |
| In addition, the trading price of our Common Stock could be subject to significant fluctuations in response to actual or anticipated variations in our quarterly 20 ______________________________________________________________________ operating results announcements by us or our competitors, factors affecting the defense, intelligence and/or aerospace industries generally, changes in national or regional economic conditions, changes in securities analysts’ estimates for our competitors’ or industry’s future performance or general market conditions |
| The market price of our Common Stock could also be affected by general market price declines or market volatility in the future or future declines or volatility in the prices of stocks for companies in our industry |
| As a result of the preferential rights of Series A and Series B Preferred Stock, holders of Common Stock may receive no payment at all upon a liquidation of our Company |
| Upon any liquidation, dissolution or winding up of our Company, holders of Series A Preferred Stock and Series B Preferred Stock are entitled to receive, out of our assets available for stockholder distributions and prior to distributions to junior securities (including our Common Stock), an amount equal to, in the case of Series A Preferred Stock, the Series A Preferred Stock purchase price plus any accrued but unpaid dividends, and in the case of Series B Preferred Stock, the Series B Preferred Stock purchase price plus any accrued but unpaid dividends |
| No distribution upon liquidation may be made to the holders of Common Stock until the holders of the Series A Preferred Stock and Series B Preferred Stock have been paid their liquidation preferences |
| As a result, it is possible that, upon liquidation, all amounts available for the holders of our equity would be paid to the holders of the Series A Preferred Stock and Series B Preferred Stock, and that the holders of Common Stock would not receive any payment |