| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended June 30, 2004 |
|
OR |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to __________________ |
Commission File Number 000-50420
DIGITALNET HOLDINGS, INC. |
|---|
| (Exact name of registrant as specified in its Charter) |
Delaware |
52-2339233 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2525 Network Place, Herndon, Virginia |
20171 | |
| (Address of principal executive offices) | (Zip Code) |
(703) 563-7500 |
|---|
| (Registrant's telephone number, including area code) |
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. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes |_| No |X|
As of July 31, 2004, there were 16,342,780 shares outstanding of the registrant’s common stock, par value $0.001 per share.
| Page No. | ||
PART I: |
FINANCIAL INFORMATION | 3 |
Item 1. |
Consolidated Financial Statements (Unaudited) | 3 |
Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004 (Unaudited) |
3 | |
Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2003 and | ||
2004 |
4 | |
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2003 and 2004 |
5 | |
Notes to Consolidated Financial Statements (Unaudited) |
6 | |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 21 |
Item 4. |
Controls and Procedures | 21 |
PART II: |
OTHER INFORMATION | 22 |
Item 1. |
Legal Proceedings | 22 |
Item 2. |
Changes in Securities and Use of Proceeds | 22 |
Item 3. |
Defaults upon Senior Securities | 22 |
Item 4. |
Submission of Matters to a Vote of Security Holders | 22 |
Item 5. |
Other Information | 22 |
Item 6. |
Exhibits and Reports on Form 8-K | 22 |
SIGNATURES |
24 |
2
| December 31, 2003 |
June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 23,635 | $ | 8,739 | ||||
| Accounts receivable (net of allowance for doubtful accounts | ||||||||
| of $2,526 and $2,995 at December 31, 2003 and June 30, 2003, | ||||||||
| respectively) | 66,197 | 70,459 | ||||||
| Inventory | 7,692 | 5,509 | ||||||
| Prepaid expenses and other current assets | 9,162 | 3,967 | ||||||
| Total current assets | 106,686 | 88,674 | ||||||
Other assets | 8,438 | 6,994 | ||||||
| Property and equipment, net | 12,008 | 10,260 | ||||||
| Intangible assets, net | 173,128 | 216,094 | ||||||
| Total assets | $ | 300,260 | $ | 322,022 | ||||
Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 7,621 | $ | 7,051 | ||||
| Accrued expenses | 35,029 | 33,040 | ||||||
| Deferred revenues | 5,630 | 2,149 | ||||||
| Current portion of long-term debt | -- | 4,000 | ||||||
| Total current liabilities | 48,280 | 46,240 | ||||||
Long-term debt, net of current portion | 81,250 | 96,250 | ||||||
| Other liabilities | 11,277 | 10,242 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; no | ||||||||
| shares issued or outstanding | -- | -- | ||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; | ||||||||
| 16,290,158 and 16,336,425 shares issued and outstanding as of | ||||||||
| December 31, 2003 and June 30, 2004, respectively | 17 | 17 | ||||||
| Additional paid-in capital | 173,478 | 173,650 | ||||||
| Warrants | 379 | 254 | ||||||
| Deferred compensation | (888 | ) | (653 | ) | ||||
| Accumulated deficit | (13,533 | ) | (3,978 | ) | ||||
| Total stockholders' equity | 159,453 | 169,290 | ||||||
| Total liabilities and stockholders' equity | $ | 300,260 | $ | 322,022 | ||||
See accompanying notes.
3
| Three months ended June 30 |
Six months ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2004 |
2003 |
2004 | |||||||||||
Revenues |
$ | 82,410 | $ | 97,572 | $ | 160,312 | $ | 178,296 | ||||||
| Costs of revenues (includes depreciation expense of $1,394 and $746 for the | ||||||||||||||
| three months ended June 30, 2003 and 2004, respectively, and $3,258 and $1,878 | ||||||||||||||
| for the six months ended June 30, 2003 and 2004, respectively) | 64,936 | 74,899 | 126,820 | 136,842 | ||||||||||
| Gross profit | 17,474 | 22,673 | 33,492 | 41,454 | ||||||||||
Operating expenses: | ||||||||||||||
Selling, general and administrative (includes depreciation expense of $537 and $338 | ||||||||||||||
| for the three months ended June 30, 2003 and 2004, respectively, and $706 and $559 | ||||||||||||||
| for the six months ended June 30, 2003 and 2004, respectively, and stock-based | ||||||||||||||
| compensation of $96 and $66 for the three months ended June 30, 2003 and 2004, respectively, | ||||||||||||||
| and $485 and $144 for the six months ended June 30, 2003 and 2004, respectively) | 8,916 | 10,151 | 17,371 | 17,855 | ||||||||||
| Acquisition and related expenses | -- | -- | -- | (366 | ) | |||||||||
| Amortization of intangibles | 2,649 | 2,282 | 5,298 | 4,163 | ||||||||||
| Total operating expenses | 11,565 | 12,433 | 22,669 | 21,652 | ||||||||||
| Income from operations | 5,909 | 10,240 | 10,823 | 19,802 | ||||||||||
| Other income (expense): | ||||||||||||||
| Interest income | 33 | 63 | 80 | 176 | ||||||||||
| Interest expense | (4,037 | ) | (2,295 | ) | (8,141 | ) | (4,385 | ) | ||||||
| Other, net | (39 | ) | (3 | ) | (33 | ) | 12 | |||||||
| Total other income (expense) | (4,043 | ) | (2,235 | ) | (8,094 | ) | (4,197 | ) | ||||||
| Income before provision for income taxes | 1,866 | 8,005 | 2,729 | 15,605 | ||||||||||
| Provision for income taxes | 765 | 3,076 | 1,274 | 6,050 | ||||||||||
| Net income | $ | 1,101 | $ | 4,929 | $ | 1,455 | $ | 9,555 | ||||||
Dividends and accretion on preferred stock | (1,449 | ) | -- | (2,861 | ) | -- | ||||||||
| Net income (loss) attributable to common stockholders | $ | (348 | ) | $ | 4,929 | $ | (1,406 | ) | $ | 9,555 | ||||
Net income (loss) per common share: | ||||||||||||||
Basic net income (loss) attributable to common stockholders per common share | $ | (0.06 | ) | $ | 0.30 | $ | (0.25 | ) | $ | 0.59 | ||||
Basic weighted average common shares outstanding | 5,581,628 | 16,303,454 | 5,541,831 | 16,296,806 | ||||||||||
Diluted net income (loss) attributable to common stockholders per common share | $ | (0.06 | ) | $ | 0.30 | $ | (0.25 | ) | $ | 0.58 | ||||
Diluted weighted average common shares outstanding | 5,581,628 | 16,488,706 | 5,541,831 | 16,481,409 | ||||||||||
See accompanying notes.
4
| Six Months Ended June 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2004 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,455 | $ | 9,555 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | 3,964 | 2,437 | ||||||
| Loss (gain) on sale of equipment | 41 | (12 | ) | |||||
| Amortization of intangible assets | 5,298 | 4,163 | ||||||
| Amortization of deferred financing costs | 2,021 | 375 | ||||||
| Amortization of discount on debt | 360 | -- | ||||||
| Amortization of deferred compensation | 485 | 144 | ||||||
| Deferred income taxes | 1,274 | 6,050 | ||||||
| Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||
| Accounts receivable | 5,187 | 3,622 | ||||||
| Inventory | (6,043 | ) | 2,183 | |||||
| Prepaid expenses and other assets | (3,060 | ) | 1,665 | |||||
| Accounts payable, accrued expenses and other liablities | (6,159 | ) | (10,396 | ) | ||||
| Deferred revenues | 7,909 | (3,481 | ) | |||||
| Net cash provided by operating activities | 12,732 | 16,305 | ||||||
Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (3,554 | ) | (2,047 | ) | ||||
| Proceeds from sale of equipment | 10 | 1,813 | ||||||
| Acquisitions, net of cash acquired | (9,477 | ) | (50,105 | ) | ||||
| Net cash collected on behalf of and due to our predecessor's parent | 4,800 | -- | ||||||
| Net cash used in investing activities | (8,221 | ) | (50,339 | ) | ||||
Cash flows from financing activities: | ||||||||
| Net borrowings (repayments) under revolving credit facility | (3,900 | ) | 19,000 | |||||
| Repayments on term loan facility | (1,250 | ) | -- | |||||
| Proceeds from stock option excerises | -- | 138 | ||||||
| Payments on management notes receivable | 119 | -- | ||||||
| Net cash (used in) provided by financing activities | (5,031 | ) | 19,138 | |||||
Net decrease in cash and cash equivalents | (520 | ) | (14,896 | ) | ||||
| Cash and cash equivalents, beginning of period | 3,894 | 23,635 | ||||||
| Cash and cash equivalents, end of period | $ | 3,374 | $ | 8,739 | ||||
Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 6,330 | $ | 4,166 | ||||
See accompanying notes.
5
| 1. | Description of Business and Basis of Presentation |
DigitalNet Holdings, Inc. (DigitalNet or the Company) is a provider of strategic consulting services, managed network services, information security solutions, and application development and integration services to U.S. defense, intelligence and civilian federal government agencies. Substantially all of the Company’s revenues are derived from contracts with the U.S. government, directly as a prime contractor or as a subcontractor.
The accompanying unaudited consolidated financial statements 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 accounting principles generally accepted in the United States, have been condensed or 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 condensed consolidated financial statements reflect all necessary adjustments (all of which are of a normal and recurring nature) that are necessary for fair presentation for the periods presented. The results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full fiscal year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Certain prior year amounts have been reclassified to conform to the current year presentation.
| 2. | Stock Based Compensation |
The Company accounts for stock based employee compensation arrangements using the intrinsic value method in accordance with provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock Based Compensation. Under APB Opinion No. 25, compensation cost is generally recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, which prescribes certain disclosures and provides guidance on how to transition from the intrinsic value method of accounting for stock based employee compensation under APB No. 25 to the fair value method of accounting of SFAS No. 123, Accounting for Stock Based Compensation, if a company so elects. The Company continues to account for its stock based compensation in accordance with APB No. 25 and its related interpretations.
For the three and six months ended June 30, 2003 there would be no effect on the net loss attributable to common stockholders if the Company had applied the fair value method of SFAS No. 123. The following table illustrates the effect on the net income attributable to common shareholders and the net income attributable to common stockholders per common share if the Company had applied the fair value method of SFAS No. 123 for the three and six months ended June 30, 2004 (dollars in thousands, except per share data).
6
| Three months ended June 30, |
Six months ended June 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2004 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net income attributable to common stockholders, as reported | $ | 4,929 | $ | 9,555 | ||||
| Add: Stock-based employee compensation cost, net of related tax effects, | ||||||||
| included in the determination of net income | 40 | 88 | ||||||
| Deduct: Stock-based employee compensation expense determined under fair | ||||||||
| value based method, net of related tax effects | (170 | ) | (270 | ) | ||||
| Pro forma net income attributable to common stockholders | $ | 4,799 | $ | 9,373 | ||||
| Net income per common share: | ||||||||
| Basic income attributable to common stockholders per common share- as reported | $ | 0.30 | $ | 0.59 | ||||
| Diluted income attributable to common stockholders per common share- as reported | $ | 0.30 | $ | 0.58 | ||||
| Basic income attributable to common stockholders per common share- pro forma | $ | 0.29 | $ | 0.58 | ||||
| Diluted income attributable to common stockholders per common share- pro forma | $ | 0.29 | $ | 0.57 | ||||
In accordance with SFAS No. 123, the fair values of options were estimated at the grant date using a Black Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of approximately 3%; no dividends; expected life of the options of four years; and volatility from 42% to 74%. The effect of applying the fair value method prescribed by SFAS No. 123 as described above is not necessarily representative of the effects on the reported net income for future years due to, among other things, the vesting period of the stock options and the fair value of additional stock option grants in future years.
| 3. | Accounts Receivable and Significant Customers |
Accounts receivable consisted of the following as of the dates indicated (dollars in thousands):
| December 31, 2003 |
June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| Billed and currently billable accounts receivable | $ | 65,302 | $ | 70,351 | ||||
| Unbilled accounts receivable | 3,421 | 3,103 | ||||||
| Allowance for doubtful accounts | (2,526 | ) | (2,995 | ) | ||||
| Account receivable, net | $ | 66,197 | $ | 70,459 | ||||
For the three and six months ended June 30, 2003, revenues from the Company’s subcontract with Lockheed Martin on the National Aeronautics and Space Administration (NASA) Consolidated Space Operations Contract (CSOC) represented approximately 14% of total revenues. The Company had no contracts representing greater than 10% of total revenues for the three and six months ended June 30, 2004.
7
| 4. | Acquisitions |
On April 1, 2004, the Company acquired all of the outstanding stock of User Technology Associates, Inc. (UTA) in a transaction accounted for using the purchase method of accounting. UTA’s results of operations have been included in the Company’s consolidated statement of operations from the date of its acquisition. At closing, consideration for the acquisition consisted of $50.0 million in cash. This consideration was subject to adjustment based upon a final determination of the amount of net working capital, as defined, as of the date of acquisition. As a result of this final determination, the purchase price was reduced by $0.6 million, and the seller paid this amount to the Company in July 2004. Accordingly, the Company included this amount in the determination of the aggregate purchase price for the acquisition.
The aggregate consideration was determined as follows (dollars in thousands) (unaudited):
| Cash paid to seller at closing | $ | 50,000 | |||
| Working capital adjustment | (609 | ) | |||
| Transaction costs and other | 993 | ||||
| $ | 50,384 | ||||
Based upon its preliminary assessment, the Company has allocated the purchase price based upon the estimated fair values of the assets acquired and the liabilities assumed. The purchase consideration has been allocated on a preliminary basis as follows (dollars in thousands) (unaudited):
| Tangible assets acquired | $ | 8,732 | |||
| Deferred income taxes | 208 | ||||
| Non-compete agreement | 35 | ||||
| Customer relationships | 6,543 | ||||
| Goodwill | 40,550 | ||||
| Liabilities assumed | (5,684 | ) | |||
| $ | 50,384 | ||||
The goodwill recorded is expected to be fully deductible for income tax purposes. The customer relationships and non-compete agreement intangibles are being amortized using the accelerated and straight-line method, respectively, over 10 and 3 years, respectively.
In connection with the UTA acquisition in April 2004, the Company recognized approximately $0.5 million in liabilities as the cost of abandoning certain leased UTA facilities and terminating certain UTA employees. The accrual consisted primarily of lease costs and severance and other employee termination costs related to the consolidation of certain operations and a duplicate facility. Payments related to these obligations will be made through March 2005.
8
| 5. | Accrued Expenses |
Accrued expenses consisted of the following as of the dates indicated (dollars in thousands):
| December 31, 2003 |
June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| Accrued compensation and benefits | $ | 11,923 | $ | 13,860 | ||||
| Accrued contract costs | 7,303 | 3,653 | ||||||
| Accrued acquisition and related costs | 2,738 | 2,555 | ||||||
| Accrued interest | 3,616 | 3,461 | ||||||
| Other | 9,449 | 9,511 | ||||||
| Total accrued expenses | $ | 35,029 | $ | 33,040 | ||||
In connection with the DigitalNet Government Solutions, LLC (DGS) acquisition in November 2002, the Company recognized approximately $8.2 million in liabilities related to the abandonment of certain leased DGS facilities and the termination of certain DGS employees. The accrual consisted primarily of lease costs and severance and other employee termination costs related to the expiration of a contract and the consolidation of certain other operations. For the six months ended June 30, 2004, the Company charged approximately $1.4 million against the accrual for amounts paid.
In connection with the DGS acquisition, the Company consolidated its facilities resulting in the closure of its Bethesda, Maryland office. As a result, the Company recorded a restructuring charge for the related lease costs of approximately $446,000, which had been included in acquisition and related expenses for the year ended December 31, 2002. The office space has been sublet to a tenant that had an option to terminate the sublease in certain circumstances. The option to terminate this lease expired during the six months ended June 30, 2004, and as a result, the liability for the abandoned facility was reduced by approximately $366,000 with the related benefit included in acquisition and related expenses in the statement of operations for the six months ended June 30, 2004.
| 6. | Initial Public Offering |
In October 2003, the Company completed the initial public offering (IPO) of its common stock, issuing 5,750,000 shares of common stock at $17.00 per share, which generated proceeds, net of offering costs, of approximately $89.1 million. The net proceeds of the IPO, together with the proceeds of $848,000 from the repayment of certain management notes, were used to redeem approximately $43.8 million in aggregate principal amount of the outstanding 9% senior notes due 2010 issued by DigitalNet, Inc., a wholly-owned subsidiary of the Company, for approximately $47.7 million, and $27.0 million was used to purchase all of the Company’s outstanding Class B Preferred Stock. At the completion of the IPO, all of the outstanding Class A Preferred Stock, including accrued dividends, converted into shares of common stock.
| 7. | Earnings Per Share |
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. The diluted earnings (loss) per common share data is computed using the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock equivalents are anti-dilutive.
In connection with the Company’s IPO, the Class A Preferred Stock, including accrued dividends, converted into 3,807,132 shares of common stock and a portion of the net proceeds from the IPO were used to purchase all of the outstanding shares of Class B Preferred Stock. For the three and six months ended June 30, 2003, the effect of the outstanding shares of Class A Preferred Stock and Class B Preferred Stock converting into shares of common stock was not included in the computation of diluted loss per common share as the effect would have been anti-dilutive. For the three and six months ended June 30, 2003, the outstanding shares of unvested Reserved Stock, Carried Stock and Restricted Stock were not included in the computation of basic loss per common share and the treasury stock effect of those unvested shares was not included in the computation of diluted loss per common share prior to vesting because the effect would have been anti-dilutive. In addition, warrants to purchase 94,868 shares of common stock that were outstanding as of June 30, 2003 were excluded from the computation of diluted loss per common share for the three and six months ended June 30, 2003 as their effect would have been anti-dilutive. In June 2004, a portion of these warrants were exercised resulting in the issuance of 31,249 common shares.
9
The following details the computation of the net loss per common share for the periods indicated (dollars in thousands, except per share data):
| Three months ended June 30, |
Six months ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2004 |
2003 |
2004 | |||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||
Net income |
$ | 1,101 | $ | 4,929 | $ | 1,455 | $ | 9,555 | ||||||
| Dividends on preferred stock | (1,449 | ) | -- | (2,861 | ) | -- | ||||||||
Net (loss) income attributable to common stockholders | $ | (348 | ) | $ | 4,929 | $ | (1,406 | ) | $ | 9,555 | ||||
Weighted average common share calculation: | ||||||||||||||
| Basic weighted average common shares outstanding | 5,581,628 | 16,303,454 | 5,541,831 | 16,296,806 | ||||||||||
| Treasury stock effect of options and warrants | -- | 185,252 | -- | 184,603 | ||||||||||
Diluted weighted average common shares outstanding | 5,581,628 | 16,488,706 | 5,541,831 | 16,481,409 | ||||||||||
Net (loss) income per common share: | ||||||||||||||
| Basic (loss) income per common share | $ | (0.06 | ) | $ | 0.30 | $ | (0.25 | ) | $ | 0.59 | ||||
| Diluted (loss) income per common share | $ | (0.06 | ) | $ | 0.30 | $ | (0.25 | ) | $ | 0.58 | ||||
| 8. | Commitments and Contingencies |
Audit Review
Substantially all payments to the Company on government cost reimbursable contracts are provisional payments that are subject to adjustment upon audit by certain government audit agencies. The Company’s incurred cost submissions have been completed and audited through December 31, 2002. The 2003 incurred cost audit for the Company is not expected to result in a material adverse effect on the Company’s financial position or results of operations.
Litigation and Claims
The Company is periodically involved in disputes arising from normal business activities. In the opinion of management, resolution of these matters will not have a material adverse effect upon the financial position or future operating results of the Company, and adequate provision for any probable losses has been made in the accompanying consolidated financial statements.
| 9. | Related Party Transactions |
The Company had previously entered into a management services agreement with GTCR that terminated at the IPO. During the six months ended June 30, 2004, the Company paid approximately $583,000 that had been accrued through the date of the IPO related to this agreement.
From March 2003 through December 2003, the Company issued four purchase orders totaling approximately $694,000, on a subcontract basis, to a company owned by the son of the Company’s Chairman and Chief Executive Officer. As of June 30, 2004, the Company has paid approximately $472,000 to the company pursuant to these purchase orders. Through these purchase orders, the company acted as a subcontractor to the Company under two civilian agency contracts, providing professional systems engineering and economic analysis services. These purchase orders were issued in the ordinary course of business and, based on the Company’s historic practices with respect to retaining subcontractors to provide services of a similar nature, management believes these services were provided on terms no less favorable than the Company would anticipate receiving from unrelated parties. In addition, in June 2004, the Company accepted a purchase order of approximately $12,000 to provide strategic consulting services to a government agency as a subcontractor to this company.
10
| 10. | Debt and Guarantor Financial Statements |
On July 3, 2003, the Company issued $125.0 million in aggregate principal amount of its 9% senior notes due 2010 (the Notes). The Company used a portion of the net proceeds of the IPO to redeem approximately $43.8 million in aggregate principal amount of the outstanding Notes for approximately $47.7 million. Concurrent with the completion of the sale of the Notes, the Company obtained its current revolving credit facility (the 2003 Credit Facility) which provides up to $50.0 million in borrowings. In April 2004, the Company borrowed approximately $29.0 million in connection with the acquisition of UTA. During the three months ended June 30, 2004, the Company repaid approximately $10.0 million of the amount borrowed under the 2003 Credit Facility. As of June 30, 2004 the Company had approximately $19.0 million of borrowings outstanding under the 2003 Credit Facility. The Company repaid approximately $4.0 million under the 2003 Credit Facility in July 2004.
The 2003 Credit Facility contains certain restrictive covenants including, among others, requirements related to operating results and leverage, as well as restrictions related to liens, investments, additional indebtedness, disposition of assets, dividends, distributions, issuances of equity securities, transactions with affiliates, capital expenditures, and certain other changes in our business. The financial covenants include the requirements to maintain a minimum consolidated fixed charge coverage ratio, a minimum net worth, and be below a maximum consolidated total leverage ratio. The Company was in compliance with the financial covenants of the 2003 Credit Facility as of June 30, 2004.
The Notes were issued by DigitalNet, Inc., a wholly-owned subsidiary of the Company, and are guaranteed on a full, unconditional, joint and several basis by DigitalNet Holdings, Inc. and DigitalNet, Inc.‘s wholly owned domestic subsidiaries, including DGS.
The following condensed consolidating financial information includes:
| (1) | Condensed consolidating balance sheets as of December 31, 2003 and June 30, 2004, condensed consolidating statements of operations for the three and six months ended June 30, 2003 and 2004, and condensed consolidating statements of cash flows for the six months ended June 30, 2003 and 2004 of: (a) DigitalNet Holdings, Inc., the parent company, (b) DigitalNet, Inc., which is the subsidiary issuer, (c) the guarantor subsidiaries, and (d) the Company on a consolidated basis. |
| (2) | Elimination entries necessary to consolidate DigitalNet Holdings, Inc., the parent company, with DigitalNet, Inc. and its guarantor subsidiaries. |
The condensed consolidating financial statements do not present the financial statements of the Company’s non-guarantor subsidiary, because this subsidiary had no material operations, assets, or liabilities for the periods presented.
Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and intercompany balances and transactions.
11
| As of December 31, 2003 |
As of June 30, 2004 (unaudited) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiary |
Eliminations |
Consolidated |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiaries |
Eliminations |
Consolidated | ||||||||||||||||||||||
| Assets | (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | -- | $ | 23,542 | $ | 93 | $ | -- | $ | 23,635 | $ | -- | $ | 8,148 | $ | 591 | $ | -- | $ | 8,739 | ||||||||||||
| Accounts Receivable, net | -- | -- | 66,197 | -- | 66,197 | -- | -- | 70,459 | -- | 70,459 | ||||||||||||||||||||||
| Intercompany Receivables | 172,822 | -- | -- | (172,822 | ) | -- | 173,045 | -- | -- | (173,045 | ) | -- | ||||||||||||||||||||
| Inventory | -- | -- | 7,692 | -- | 7,692 | -- | -- | 5,509 | -- | 5,509 | ||||||||||||||||||||||
| Prepaids expenses and other current assets | -- | 6,515 | 2,647 | -- | 9,162 | -- | 699 | 3,268 | -- | 3,967 | ||||||||||||||||||||||
| Total current assets | 172,822 | 30,057 | 76,629 | (172,822 | ) | 106,686 | 173,045 | 8,847 | 79,827 | (173,045 | ) | 88,674 | ||||||||||||||||||||
| Other assets | -- | 8,438 | -- | -- | 8,438 | -- | 6,905 | 89 | -- | 6,994 | ||||||||||||||||||||||
| Property and equipment, net | -- | 6 | 12,002 | -- | 12,008 | -- | 2 | 10,258 | -- | 10,260 | ||||||||||||||||||||||
| Investment in consolidated subsidiaries | -- | 76,164 | -- | (76,164 | ) | -- | -- | 101,018 | -- | (101,018 | ) | -- | ||||||||||||||||||||
| Intangibles assets, net | -- | -- | 173,128 | -- | 173,128 | -- | -- | 216,094 | -- | 216,094 | ||||||||||||||||||||||
| Total Assets | $ | 172,822 | $ | 114,665 | $ | 261,759 | $ | (248,986 | ) | $ | 300,260 | $ | 173,045 | $ | 116,772 | $ | 306,268 | $ | (274,063 | ) | $ | 322,022 | ||||||||||
| Liabilities and stockholder's equity | ||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||
| Accounts payable | $ | -- | $ | 142 | $ | 7,479 | $ | -- | $ | 7,621 | $ | -- | $ | 86 | $ | 6,965 | $ | -- | $ | 7,051 | ||||||||||||
| Accrued expenses | -- | 6,728 | 28,301 | -- | 35,029 | -- | 5,349 | 27,691 | -- | 33,040 | ||||||||||||||||||||||
| Intercompany payables | -- | 55,503 | 118,196 | (173,699 | ) | -- | -- | 30,287 | 146,539 | (176,826 | ) | -- | ||||||||||||||||||||
| Investment in consolidated subsidiaries | 13,369 | -- | -- | (13,369 | ) | -- | 3,755 | -- | -- | (3,755 | ) | -- | ||||||||||||||||||||
| Deferred revenue | -- | -- | 5,630 | -- | 5,630 | -- | -- | 2,149 | -- | 2,149 | ||||||||||||||||||||||
| Current portion of long-term debt | -- | -- | -- | -- | -- | -- | 4,000 | -- | -- | 4,000 | ||||||||||||||||||||||
| Total current liabilities | 13,369 | 62,373 | 159,606 | (187,068 | ) | 48,280 | 3,755 | 39,722 | 183,344 | (180,581 | ) | 46,240 | ||||||||||||||||||||
| Long-term debt, net of current portion | -- | 81,250 | -- | -- | 81,250 | -- | 96,250 | -- | -- | 96,250 | ||||||||||||||||||||||
| Other liabilities | -- | -- | 11,277 | -- | 11,277 | -- | -- | 10,242 | -- | 10,242 | ||||||||||||||||||||||
| Stockholder's equity (deficit): | 159,453 | (28,958 | ) | 90,876 | (61,918 | ) | 159,453 | 169,290 | (19,200 | ) | 112,682 | (93,482 | ) | 169,290 | ||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 172,822 | $ | 114,665 | $ | 261,759 | $ | (248,986 | ) | $ | 300,260 | $ | 173,045 | $ | 116,772 | $ | 306,268 | $ | (274,063 | ) | $ | 322,022 | ||||||||||
12
| Three Months Ended June 30, 2003 (unaudited) |
Three Months Ended June 30, 2004 (unaudited) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiary |
Eliminations |
Consolidated |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiaries |
Eliminations |
Consolidated | ||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Revenues | $ | -- | $ | -- | $ | 82,410 | $ | -- | $ | 82,410 | $ | -- | $ | -- | $ | 97,572 | $ | -- | $ | 97,572 | ||||||||||||
| Costs of Revenues | -- | -- | 64,936 | -- | 64,936 | -- | -- | 74,899 | -- | 74,899 | ||||||||||||||||||||||
| Gross Profit | -- | -- | 17,474 | -- | 17,474 | -- | -- | 22,673 | -- | 22,673 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Selling, general, and administrative | -- | 639 | 8,277 | -- | 8,916 | 57 | 1,109 | 8,985 | -- | 10,151 | ||||||||||||||||||||||
| Acquisition and related expenses | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||
| Amortization of Intangibles | -- | -- | 2,649 | -- | 2,649 | -- | -- | 2,282 | -- | 2,282 | ||||||||||||||||||||||
| Total operating expenses | -- | 639 | 10,926 | -- | 11,565 | 57 | 1,109 | 11,267 | -- | 12,433 | ||||||||||||||||||||||
| Income (loss) from operations | -- | (639 | ) | 6,548 | -- | 5,909 | (57 | ) | (1,109 | ) | 11,406 | -- | 10,240 | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Interest income | 4 | 9 | 20 | -- | 33 | -- | 48 | 15 | -- | 63 | ||||||||||||||||||||||
| Interest expense | -- | (4,037 | ) | -- | -- | (4,037 | ) | -- | (2,295 | ) | -- | -- | (2,295 | ) | ||||||||||||||||||
| Other income | -- | -- | (39 | ) | -- | (39 | ) | -- | -- | (3 | ) | -- | (3 | ) | ||||||||||||||||||
| Equity income from consolidated subsidiaries | 1,097 | 6,529 | -- | (7,626 | ) | -- | 4,986 | 11,418 | -- | (16,404 | ) | -- | ||||||||||||||||||||
| Total other income (expense) | 1,101 | 2,501 | (19 | ) | (7,626 | ) | (4,043 | ) | 4,986 | 9,171 | 12 | (16,404 | ) | (2,235 | ) | |||||||||||||||||
| Income (loss) before provision for income taxes | 1,101 | 1,862 | 6,529 | (7,626 | ) | 1,866 | 4,929 | 8,062 | 11,418 | (16,404 | ) | 8,005 | ||||||||||||||||||||
| Provision for income taxes | -- | 765 | -- | -- | 765 | -- | 3,076 | -- | -- | 3,076 | ||||||||||||||||||||||
| Net income (loss) | $ | 1,101 | $ | 1,097 | $ | 6,529 | $ | (7,626 | ) | $ | 1,101 | $ | 4,929 | $ | 4,986 | $ | 11,418 | $ | (16,404 | ) | $ | 4,929 | ||||||||||
13
| Six Months Ended June 30, 2003 (unaudited) |
Six Months Ended June 30, 2004 (unaudited) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiary |
Eliminations |
Consolidated |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiaries |
Eliminations |
Consolidated | ||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Revenues | $ | -- | $ | -- | $ | 160,312 | $ | -- | $ | 160,312 | $ | -- | $ | -- | $ | 178,296 | $ | -- | $ | 178,296 | ||||||||||||
| Costs of Revenues | -- | -- | 126,820 | -- | 126,820 | -- | -- | 136,842 | -- | 136,842 | ||||||||||||||||||||||
| Gross Profit | -- | -- | 33,492 | -- | 33,492 | -- | -- | 41,454 | -- | 41,454 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Selling, general, and administrative | -- | 1,828 | 15,543 | -- | 17,371 | 59 | 2,271 | 15,525 | -- | 17,855 | ||||||||||||||||||||||
| Acquisition and related expenses | -- | -- | -- | -- | -- | -- | (366 | ) | -- | -- | (366 | ) | ||||||||||||||||||||
| Amortization of Intangibles | -- | -- | 5,298 | -- | 5,298 | -- | -- | 4,163 | -- | 4,163 | ||||||||||||||||||||||
| Total operating expenses | -- | 1,828 | 20,841 | -- | 22,669 | 59 | 1,905 | 19,688 | -- | 21,652 | ||||||||||||||||||||||
| Income (loss) from operations | -- | (1,828 | ) | 12,651 | -- | 10,823 | (59 | ) | (1,905 | ) | 21,766 | -- | 19,802 | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Interest income | 9 | 10 | 61 | -- | 80 | -- | 148 | 28 | -- | 176 | ||||||||||||||||||||||
| Interest expense | -- | (8,141 | ) | -- | -- | (8,141 | ) | -- | (4,385 | ) | -- | -- | (4,385 | ) | ||||||||||||||||||
| Other income | -- | -- | (33 | ) | -- | (33 | ) | -- | -- | 12 | -- | 12 | ||||||||||||||||||||
| Equity income from consolidated subsidiaries | 1,446 | 12,679 | -- | (14,125 | ) | -- | 9,614 | 21,806 | -- | (31,420 | ) | -- | ||||||||||||||||||||
| Total other income (expense) | 1,455 | 4,548 | 28 | (14,125 | ) | (8,094 | ) | 9,614 | 17,569 | 40 | (31,420 | ) | (4,197 | ) | ||||||||||||||||||
| Income (loss) before provision for income taxes | 1,455 | 2,720 | 12,679 | (14,125 | ) | 2,729 | 9,555 | 15,664 | 21,806 | (31,420 | ) | 15,605 | ||||||||||||||||||||
| Provision for income taxes | -- | 1,274 | -- | -- | 1,274 | -- | 6,050 | -- | -- | 6,050 | ||||||||||||||||||||||
| Net income (loss) | $ | 1,455 | $ | 1,446 | $ | 12,679 | $ | (14,125 | ) | $ | 1,455 | $ | 9,555 | $ | 9,614 | $ | 21,806 | $ | (31,420 | ) | $ | 9,555 | ||||||||||
14
| Six Months Ended June 30, 2003 (unaudited) |
Six Months Ended June 30, 2004 (unaudited) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flow |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiary |
Eliminations |
Consolidated |
Parent Company |
DigitalNet, Inc |
Guarantor Subsidiaries |
Eliminations |
Consolidated | ||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 1,455 | $ | 1,446 | $ | 12,679 | $ | (14,125 | ) | $ | 1,455 | $ | 9,555 | $ | 9,614 | $ | 21,806 | $ | (31,420 | ) | 9,555 | |||||||||||
| Adjustment to reconcile net income (loss) to net cash provided by (used in) operations | ||||||||||||||||||||||||||||||||
| Depreciation | -- | 4 | 3,960 | -- | 3,964 | -- | 2 | 2,435 | -- | 2,437 | ||||||||||||||||||||||
| Gain on sale of equipment | -- | -- | 41 | -- | 41 | -- | -- | (12 | ) | -- | (12 | ) | ||||||||||||||||||||
| Amortization of intangible assets | -- | -- | 5,298 | -- | 5,298 | -- | -- | 4,163 | -- | 4,163 | ||||||||||||||||||||||
| Amortization of deferred financing costs | -- | 2,021 | -- | -- | 2,021 | -- | 375 | -- | -- | 375 | ||||||||||||||||||||||
| Amortization of discount on debt | -- | 360 | -- | -- | 360 | -- | -- | -- | -- | -- | ||||||||||||||||||||||
| Amortization of deferred compensation | -- | 485 | -- | -- | 485 | -- | -- | 144 | -- | 144 | ||||||||||||||||||||||
| Deferred income taxes | -- | 1,274 | -- | -- | 1,274 | -- | 6,050 | -- | -- | 6,050 | ||||||||||||||||||||||
| Equity (income) loss from consolidated subsidiaries | (1,446 | ) | (12,679 | ) | -- | 14,125 | -- | (9,614 | ) | (21,806 | ) | -- | 31,420 | -- | ||||||||||||||||||
| Changes in operating assests and liabilities, net of effect of acquisitons: | ||||||||||||||||||||||||||||||||
| Accounts receivable | -- | -- | 5,187 | -- | 5,187 | -- | -- | 3,622 | -- | 3,622 | ||||||||||||||||||||||
| Inventory | -- | -- | (6,043 | ) | -- | (6,043 | ) | -- | -- | 2,183 | -- | 2,183 | ||||||||||||||||||||
| Prepaid expenses and other assets | -- | (1,800 | ) | (1,260 | ) | -- | (3,060 | ) | -- | 5,816 | (4,151 | ) | -- | 1,665 | ||||||||||||||||||
| Accounts payable, accrued expenses and other liablities | -- | 437 | (6,596 | ) | -- | (6,159 | ) | -- | (1,379 | ) | (9,017 | ) | -- | (10,396 | ) | |||||||||||||||||
| Deferred revenues | -- | -- | 7,909 | -- | 7,909 | -- | -- | (3,481 | ) | -- | (3,481 | ) | ||||||||||||||||||||
| Net cash provided by (used in) operations | 9 | (8,452 | ) | 21,175 | -- | 12,732 | (59 | ) | (1,328 | ) | 17,692 | -- | 16,305 | |||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||
| Purchases of property and equipment | -- | -- | (3,554 | ) | -- | (3,554 | ) | -- | -- | (2,047 | ) | -- | (2,047 | ) | ||||||||||||||||||
| Proceeds from sale of equipment | -- | -- | 10 | -- | 10 | -- | -- | 1,813 | -- | 1,813 | ||||||||||||||||||||||
| Acquisitions, net of cash acquired | -- | -- | (9,477 | ) | -- | (9,477 | ) | -- | -- | (50,105 | ) | -- | (50,105 | ) | ||||||||||||||||||
| Net cash collected on behalf of and due to our predecessor's parent | -- | -- | 4,800 | -- | 4,800 | -- | -- | -- | -- | -- | ||||||||||||||||||||||
| Net cash used in investing activites | -- | -- | (8,221 | ) | -- | (8,221 | ) | -- | -- | (50,339 | ) | -- | (50,339 | ) | ||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||
| Net borrowings (repayments) under revolving credit facility | -- | (3,900 | ) | -- | -- | (3,900 | ) | -- | 19,000 | -- | -- | 19,000 | ||||||||||||||||||||
| Repayments under term loan facility | -- | (1,250 | ) | -- | -- | (1,250 | ) | -- | -- | -- | -- | -- | ||||||||||||||||||||
| Proceeds from stock option exercises | -- | -- | -- | -- | -- | 138 | -- | -- | -- | 138 | ||||||||||||||||||||||
| Decrease (increase) in intercompany receivables, net | (128 | ) | 15,685 | (15,557 | ) | -- | -- | (79 | ) | (33,066 | ) | 33,145 | -- | -- | ||||||||||||||||||
| Payments on management notes receivable | 119 | -- | -- | -- | 119 | -- | -- | -- | -- | -- | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (9 | ) | 10,535 | (15,557 | ) | -- | (5,031 | ) | 59 | (14,066 | ) | 33,145 | -- | 19,138 | ||||||||||||||||||
| Net increase in cash and cash equivalents | -- | 2,083 | (2,603 | ) | -- | (520 | ) | -- | (15,394 | ) | 498 | -- | (14,896 | ) | ||||||||||||||||||
| Cash and cash equivalents, beginning of period | -- | 490 | 3,404 | -- | 3,894 | -- | 23,542 | 93 | -- | 23,635 | ||||||||||||||||||||||
| Cash and cash equivalents, end of period | $ | -- | $ | 2,573 | $ | 801 | $ | -- | $ | 3,374 | $ | -- | $ | 8,148 | $ | 591 | $ | -- | $ | 8,739 | ||||||||||||
15
You should read the following discussion of the financial condition and results of operations of DigitalNet Holdings, Inc., in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC and available directly from the SEC at www.sec.gov and our unaudited consolidated financial statements and related notes included elsewhere in this quarterly report.
There are statements made herein which may not address historical facts and, therefore, could be interpreted to be forward looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in, or implied by, the forward looking statements. We have attempted, whenever possible, to identify these forward looking statements using words such as “may,” “will,” “should,” “projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,” “believes,” and variations of these words and similar expressions. Similarly, statements herein that describe our business strategy, prospects, opportunities, outlook, objectives, plans, intentions or goals are also forward looking statements. Actual results may differ materially from those indicated by such forward looking statements as a result of various important factors, including: funding decisions of U.S. Government projects; government contract procurement, option exercise and termination risks; competitive factors such as pricing pressures and/or competition to hire and retain qualified employees; our ability to identify, execute or effectively integrate future acquisitions; our ability to successfully raise additional capital; changes to the tax laws relating to the treatment and deductibility of goodwill or any change in tax rates; additional costs related to compliance with the Sarbanes Oxley Act of 2002, any revised NASDAQ listing standards, SEC rule changes or other corporate governance issues; material changes in laws or regulations applicable to our business and other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2003. In addition, the statements in this quarterly report are made as of the date hereof. We expect that subsequent events or developments will cause our views to change. We undertake no obligation to update any of the forward looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. These forward looking statements should not be relied upon as representing our views as of any date subsequent to the date hereof.
We are a leading provider of strategic consulting services, managed network services, information security solutions, and application development and integration services to U.S. defense, intelligence, and civilian federal government agencies as measured by our revenues. Our comprehensive information technology services and solutions allow our federal government clients to outsource some or all of the activities relating to the design, implementation, integration, management, and security of their computer networks and systems. We are focused on increasing network reliability, reducing overall network costs, and simplifying timely migration of mission critical network computing environments to new technologies.
On November 26, 2002, we purchased Getronics Government Solutions, L.L.C., for $225.2 million of total consideration, consisting of $191.7 million in cash and shares of our Class B Preferred Stock with an aggregate liquidation preference of $33.5 million. A portion of the cash purchase price, and associated transaction costs, were financed by a $63.6 million investment in our common stock and Class A Preferred Stock by GTCR, Ken S. Bajaj and Jack Pearlstein and their family entities, a $44.0 million subordinated bridge loan, and approximately $82.9 million of borrowings under a senior secured credit facility.
On July 3, 2003, we applied the net proceeds from the sale of $125.0 million aggregate principal amount of 9% senior notes due 2010 by our wholly-owned subsidiary, DigitalNet, Inc., to repay the indebtedness under our subordinated bridge note and a term loan. Concurrent with the completion of the offering of the 9% senior notes due 2010, we entered into our current credit facility, which provides us with up to $50.0 million in borrowings.
On October 16, 2003, we completed the initial public offering of our common stock and issued 5,750,000 shares at $17.00 per share, which generated proceeds, net of offering costs, of approximately $89.1 million. The net proceeds of our initial public offering, together with proceeds of $848,000 from the repayment of certain management notes, were used to redeem $43.8 million in aggregate principal amount of the outstanding 9% senior notes due 2010 for approximately $47.7 million and $27.0 million was used to purchase all of our outstanding Class B Preferred Stock. At the completion of the IPO, the Class A Preferred Stock, including accrued dividends, converted into 3,807,132 shares of common stock.
On April 1, 2004, we acquired all of the outstanding equity securities of User Technology Associates, Inc. (UTA) for $50.0 million in cash. We utilized cash on hand and approximately $29.0 million in borrowings under our 2003 Credit Facility to fund the purchase price. UTA provides information technology services and solutions to the federal government in areas such as managed network services, systems development, systems engineering and integration, advanced computing, and mission critical outsourcing. UTA’s financial results have been included in our financial results from the date of acquisition.
16
Contracts funded by U.S. government agencies account for substantially all of our revenues. Certain revenues and payments we receive are based on provisional billings and payments that are subject to adjustment under audit. U.S. government agencies and departments have the right to challenge our cost estimates and allocation methodologies with respect to government contracts. In addition, contracts with such agencies are subject to audit and possible adjustment to give effect to unallowable costs under cost-plus contracts or to other regulatory requirements affecting both cost-plus and fixed price contracts.
Contract revenue recognition inherently involves estimation. Examples of such estimates include the level of effort needed to accomplish tasks under the contract, the cost of those efforts, and the continual assessment of our progress toward completion of the contract. From time to time, facts arise that require revisions to estimated total costs or expected revenues. We recognize the cumulative impact of any revisions to estimates and the full impact on anticipated losses on any type of contract in the period in which they become known.
Our most significant expense is costs of revenues, which includes the costs of direct labor, subcontractors, materials, equipment, depreciation, travel, and an allocation of indirect costs. The depreciation included in costs of revenues primarily relates to computer hardware and software that we have purchased on behalf of our clients, for use by them, and to which we retain ownership. Indirect costs consist primarily of fringe benefits, human resources, recruiting, and certain other non-direct costs which are necessary to provide direct labor. The number and types of personnel, their salaries, and other costs, can have a significant impact on our costs of revenues.
Our selling, general, and administrative expenses include costs not directly associated with performing work for our clients. These costs include salaries, wages, plus associated fringe benefits, stock-based compensation charges, rent, depreciation, travel, and insurance. Among the functions covered by these expenses are sales, business development, contracts, purchasing, legal, finance, accounting, management, human resources, information systems, and general management. Most of these costs are allowable costs under the cost accounting standards for contracting with the U.S. government and are recoverable under cost plus contracts.
The following table sets forth the periods indicated, selected statement of operations data and selected statement of operations data expressed as a percentage of revenue (dollars in thousands).
| Three months ended June 30, |
Six months ended June 30, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
2004 | |||||||||||||||||||
| Revenues | $ | 82,410 | $ | 97,572 | 100.0 | % | 100.0 | % | $ | 160,312 | $ | 178,296 | 100.0 | % | 100.0 | % | ||||||||||
| Costs of revenues | 64,936 | 74,899 | 78.8 | 76.8 | 126,820 | 136,842 | 79.1 | 76.7 | ||||||||||||||||||
Gross profit | 17,474 | 22,673 | 21.2 | 23.2 | 33,492 | 41,454 | 20.9 | 23.3 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative | 8,916 | 10,151 | 10.8 | 10.4 | 17,371 | 17,855 | 10.8 | 10.0 | ||||||||||||||||||
| Acquisition and related expenses | -- | -- | -- | -- | -- | (366 | ) | -- | -0.2 | |||||||||||||||||
| Amortization of intangibles | 2,649 | 2,282 | 3.2 | 2.3 | 5,298 | 4,163 | 3.3 | 2.3 | ||||||||||||||||||
| Total operating expenses | 11,565 | 12,433 | 14.0 | 12.7 | 22,669 | 21,652 | 14.1 | 12.1 | ||||||||||||||||||
Income from operations | 5,909 | 10,240 | 7.2 | 10.5 | 10,823 | 19,802 | 6.8 | 11.1 | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||
| Interest income | 33 | 63 | -- | 0.1 | 80 | 176 | -- | 0.1 | ||||||||||||||||||
| Interest expense | (4,037 | ) | (2,295 | ) | (4.9 | ) | (2.4 | ) | (8,141 | ) | (4,385 | ) | -5.1 | -2.5 | ||||||||||||
| Other income, net | (39 | ) | (3 | ) | -- | -- | (33 | ) | 12 | -- | -- | |||||||||||||||
| Total other income (expense) | (4,043 | ) | (2,235 | ) | (4.9 | ) | (2.3 | ) | (8,094 | ) | (4,197 | ) | -5.0 | -2.4 | ||||||||||||
Income before provision for income taxes | 1,866 | 8,005 | 2.3 | 8.2 | 2,729 | 15,605 | 1.7 | 8.8 | ||||||||||||||||||
| Provision for income taxes | 765 | 3,076 | 0.9 | 3.2 | 1,274 | 6,050 | 0.8 | 3.4 | ||||||||||||||||||
Net income | $ | 1,101 | $ | 4,929 | 1.3 | % | 5.1 | % | $ | 1,455 | $ | 9,555 | 0.9 | % | 5.4 | % | ||||||||||
17
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
Revenues. Revenues for the three months ended June 30, 2004 were approximately $97.6 million, compared to revenues of approximately $82.4 million for the three months ended June 30, 2003, representing an increase of approximately $15.2 million, or 18.4%. We estimate the increase was due to an increase of approximately $16.7 million related to work performed under our managed network services revenues, an increase of approximately $8.5 million related to work performed under our strategic consulting engagements and an increase of approximately $1.1 million related to work performed under our application development engagements; partially offset by a decrease of approximately $0.1 million in work related to information security services and by a decrease in revenue from the NASA CSOC contract of approximately $11.0 million.
Costs of Revenues. Costs of revenues for the three months ended June 30, 2004 were approximately $74.9 million, or 76.8% of revenues, compared to costs of revenues of approximately $64.9 million, or 78.8% of revenues, for the three months ended June 30, 2003. We estimate the increase in costs was due to an increase of approximately $13.7 million related to work performed under our managed network services contracts, an increase of approximately $6.3 million related to work performed under our strategic consulting engagements and an increase of approximately $1.3 million related to work performed under our application development engagements; partially offset by a decrease in costs from the NASA CSOC contract of approximately $11.4 million. The gross profit percentage increased due primarily to the gross profit realized from the extension of the NASA CSOC contract. The NASA CSOC contract under which performance was scheduled to terminate on December 31, 2003, was extended on a time-and-materials basis through March 31, 2004. The original contract was a fixed price contract that had no gross profit for the three months ended June 30, 2003.
Selling, General, and Administrative Expenses. For the three months ended June 30, 2004, selling, general, and administrative expenses were approximately $10.2 million, or 10.4% of revenues, compared to approximately $8.9 million, or 10.8% of revenues, for the three months ended June 30, 2003. This increase was primarily related to our acquisition of UTA.
Amortization of Intangibles. For the three months ended June 30, 2004, amortization expense was approximately $2.3 million compared to approximately $2.6 million for the three months ended June 30, 2003. The amortization expense for the three months ended June 30, 2004 was related to the amortization of intangibles resulting from the acquisitions of our predecessor and UTA and the amortization expense for the three months ended June 30, 2003 was solely related to the amortization of intangibles resulting from the acquisition of our predecessor. The decrease in amortization expense is due to our use of an accelerated method of amortization for certain of the intangible assets, partially offset by the increase in amortization from the UTA acquisition.
Operating Income. For the three months ended June 30, 2004, operating income was $10.2 million, compared to $5.9 million for the three months ended June 30, 2003. The increase in operating income was primarily due to additional gross profit realized from the increases in our managed network services revenues, NASA CSOC gross profit, and the reduction in our amortization expense.
Other Income and Expense. For the three months ended June 30, 2004, interest income was approximately $63,000, compared to approximately $33,000 for the three months ended June 30, 2003. This increase was attributable to higher invested cash balances during the period. Interest expense for the three months ended June 30, 2004 was $2.3 million compared to approximately $4.0 million for the three months ended June 30, 2003. The reduction in interest expense is primarily due to the lower outstanding debt balances during the 2004 period.
Provision for Income Taxes. For the three months ended June 30, 2004, our income tax expense was approximately $3.1 million, compared to an income tax expense of approximately $0.8 million for the three months ended June 30, 2003. The effective income tax rate was 38% and 41% for the three months ended June 30, 2004 and 2003, respectively. The higher effective income tax rate for the three months ended June 30, 2003 was due to nondeductible stock-based compensation expense we recorded in the three months ended June 30, 2003.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Revenues. Revenues for the six months ended June 30, 2004 were approximately $178.3 million, compared to revenues of approximately $160.3 million for the six months ended June 30, 2003, representing an increase of approximately $18.0 million, or 11.2%. We estimate the increase was due to an increase of approximately $26.5 million related to work performed under our managed network services revenues, an increase of approximately $10.6 million related to work performed under our strategic consulting engagements and an increase of approximately $3.4 million related to work performed under our application development engagements; partially offset by a decrease of approximately $4.3 million in work related to information security services and by a decrease in revenue from the NASA CSOC contract of approximately $18.2 million.
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Costs of Revenues. Costs of revenues for the six months ended June 30, 2004 were approximately $136.8 million, or 76.7% of revenues, compared to costs of revenues of approximately $126.8 million, or 79.1% of revenues, for the six months ended June 30, 2003. We estimate the increase in costs was due to an increase of approximately $23.6 million related to work performed under our managed network services contracts, an increase of approximately $7.8 million related to work performed under our strategic consulting engagements and an increase of approximately $1.9 million related to work performed under our application development engagements, partially offset by a decrease of approximately $3.6 million related in work related to information security services and by a decrease in costs from the NASA CSOC contract of approximately $19.7 million. The gross profit percentage increased due primarily to the gross profit realized from the extension of the NASA CSOC contract. The NASA CSOC contract under which performance was scheduled to terminate on December 31, 2003, was extended on a time-and-materials basis through March 31, 2004. The original contract was a fixed price contract that had no gross profit for the six months ended June 30, 2003.
Selling, General, and Administrative Expenses. For the six months ended June 30, 2004, selling, general, and administrative expenses were approximately $17.9 million, or 10.0% of revenues, compared to approximately $17.4 million, or 10.8% of revenues, for the six months ended June 30, 2003. This increase was primarily related to our acquisition of UTA, partially offset by a decrease in stock-based compensation expense.
Acquisition and Related Expenses. During the six months ended June 30, 2004, the liability for the abandoned facility related to the consolidation of our facilities in 2002 was reduced by approximately $366,000. The tenant’s right to terminate the lease expired in 2004 resulting in a benefit included in acquisition and related expenses in the statement of operations for the six months ended June 30, 2004. For the six months ended June 30, 2003, we did not incur any acquisition, and related expenses.
Amortization of Intangibles. For the six months ended June 30, 2004, amortization expense was approximately $4.2 million compared to approximately $5.3 million for the six months ended June 30, 2003. The amortization expense for the six months ended June 30, 2004 was related to the amortization of intangibles resulting from the acquisitions of our predecessor and UTA and the amortization expense for the six months ended June 30, 2003 was solely related to the amortization of intangibles resulting from the acquisition of our predecessor. The decrease in amortization expense is due to our use of an accelerated method of amortization for certain of the intangible assets, partially offset by the increase in amortization from the UTA acquisition.
.Operating Income. For the six months ended June 30, 2004, operating income was $19.8 million, compared to $10.8 million for the six months ended June 30, 2003. The increase in operating income was primarily due to additional gross profit realized from the increases in our managed network services revenues, the NASA CSOC gross profit, the reduction in our amortization expense and the benefit recorded related to the reduction in the liability for the abandoned facilities.
Other Income and Expense. For the six months ended June 30, 2004, interest income was approximately $176,000, compared to approximately $80,000 for the six months ended June 30, 2003. This increase was attributable to higher invested cash balances during the period. Interest expense for the six months ended June 30, 2004 was approximately $4.4 million compared to approximately $8.1 million for the six months ended June 30, 2003. The reduction in interest expense is primarily due to the lower outstanding debt balances during 2004 period.
Provision for Income Taxes. For the six months ended June 30, 2004, our income tax expense was approximately $6.1 million, compared to an income tax expense of approximately $1.3 million for the six months ended June 30, 2003. The effective income tax rate was 39% and 47% for the six months ended June 30, 2004 and 2003, respectively. The higher effective income tax rate for the six months ended June 30, 2003 was due to nondeductible stock-based compensation expense we recorded in the six months ended June 30, 2003.
Liquidity and Capital Resources
Our primary liquidity and capital resource needs are to finance the costs of our operations, to make capital expenditures, to service our debt and to fund potential acquisitions. In July 2003, the proceeds from the sale of $125.0 million of our subsidiary’s 9% senior notes due 2010 were used to repay outstanding indebtedness. The proceeds of our initial public offering in October 2003, along with proceeds of approximately $848,000 from the repayment of certain management notes, were used to redeem a portion of the outstanding 9% senior notes due 2010 and to purchase all of our outstanding Class B Preferred Stock. After the redemption of a portion of the 9% senior notes due 2010 and the purchase of our Class B Preferred Stock, approximately $14.3 million of the proceeds of our initial public offering were available for general corporate purposes. On April 1, 2004, we acquired User Technology Associates, Inc. for $50.0 million. We used cash on hand, including the remaining proceeds from our initial public offering, and borrowed $29.0 million under our revolving credit facility to fund the purchase price. During the three months ended June 30, 2004, we repaid $10.0 million of the amount borrowed under our revolving credit facility. We repaid $4.0 million under our revolving credit facility in July 2004. Based upon our current level of operations, we expect that our cash flow from operations, together with cash on hand and amounts we are able to borrow under our credit facility, will be adequate to meet our anticipated needs for the foreseeable future. In addition, we expect that our cash flow from operations will be adequate to meet all contractual obligations under the 9% senior notes due 2010, our credit facility, our operating leases and our other contractual cash obligations.
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Cash provided by operations was approximately $16.3 million for the six months ended June 30, 2004 and approximately $12.7 million for the six months ended June 30, 2003. Cash provided by operations for the six months ended June 30, 2004 was comprised of our net income of approximately $9.6 million, depreciation, amortization, and other non-cash expense items of approximately $13.2 million, partially offset by an increase in net operating assets and liabilities of approximately $6.4 million. The increase in net operating assets and liabilities was primarily due to a decrease in accounts payable, accrued expenses and other liabilities of approximately $10.4 million due primarily from the payment of employee bonuses, interest, lease and severance costs and the decrease in deferred revenue of approximately $3.5 million; partially offset by a decrease in accounts receivable of approximately $3.6 million, a decrease in inventory of approximately $2.2 million, a decrease in prepaid expenses and other assets of approximately $1.7 million primarily due to the return of approximately $2.0 million of a deposit required under a performance bond on our Metropolitan Washington Airport Authority contract. Cash provided by operations for the six months ended June 30, 2003 was attributable to net income of approximately $1.5 million, depreciation, amortization, and other non-cash expense items of approximately $13.4 million and an increase in net operating assets and liabilities of approximately $2.2 million. The increase in net operating assets and liabilities was primarily due to an increase in inventory of approximately $6.0 million related to an increase in customer delivery orders, an increase in prepaid expenses and other assets of approximately $3.1 million related primarily to professional fees related to planned financing transactions, a decrease in accounts payable and accrued expenses of approximately $6.2 million related to the payment of employee bonuses and interest and usage of the NASA CSOC loss reserve; offset by a decrease in accounts receivable of approximately $5.2 million due to the favorable timing of collections, and an increase in deferred revenues of approximately $7.9 million due to prepayments from customers.
Cash used in investing activities was approximately $50.3 million for the six months ended June 30, 2004 and approximately $8.2 million for the six months ended June 30, 2003. Cash used in investing activities for the six months ended June 30, 2004 consisted primarily of expenditures incurred in connection with the acquisition of UTA and purchases of property and equipment. Cash used in investing activities for the six months ended June 30, 2003 consisted primarily of expenditures incurred in connection with the acquisition of our predecessor and purchases of property and equipment, offset by the accounts receivable collected on behalf of our predecessor’s parent.
Cash provided by financing activities was approximately $19.1 million for the six months ended June 30, 2004 and was related primarily to our net borrowings under our revolving credit facility for our acquisition of UTA. Cash used in financing activities for the six months ended June 30, 2003 was approximately $5.0 million and was related primarily to repayments of debt under our revolving credit facility and term loan facility.
Our net working capital was approximately $42.4 million as of June 30, 2004 compared to a net working capital of approximately $58.4 million as of December 31, 2003. The decrease in our net working capital as of June 30, 2004 was due primarily to the acquisition of UTA.
In July 2003 and in connection with the completion of the offering of our 9% senior notes due 2010, we entered into a credit agreement that provides for a $50.0 million revolving credit facility available for working capital and general corporate purposes, including capital expenditures and acquisitions. The borrowing capacity under this credit facility also provides for the issuance of up to $5.0 million in letters of credit. The available borrowings under this credit facility are based upon a percentage of our eligible billed and unbilled accounts receivable, as defined in the credit agreement. At June 30, 2004, we had $1.0 million in outstanding letters of credit issued under this credit facility related to our leased facility in Herndon, Virginia. At June 30, 2004, we had available, but unused borrowing capacity of $30.0 million under this credit facility. In April 2004, we borrowed $29.0 million in connection with the User Technology Associates, Inc. acquisition. The outstanding borrowings as of June 30, 2004 were $19.0 million. We repaid $4.0 million under our revolving credit facility in July 2004, which resulted in us classifying $4.0 million as a current liability in the accompanying balance sheet as of June 30, 2004. Obligations under the credit facility are secured by substantially all of our assets. The credit facility contains certain restrictive covenants including, among others, requirements related to operating results and leverage, as well as restrictions related to liens, investments, additional indebtedness, disposition of assets, dividends, distributions, issuances of equity securities, transactions with affiliates, capital expenditures, and certain other changes in our business. The financial covenants include the requirements to maintain a minimum consolidated fixed charge coverage ratio, a minimum net worth, and be below a maximum consolidated total leverage ratio. As of June 30, 2004, we were in compliance with these covenants.
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In July 2003, DigitalNet, Inc., our wholly owned subsidiary, issued $125.0 million in aggregate principal amount of 9% senior notes due July 15, 2010. The notes are unsecured obligations of DigitalNet, Inc. The notes are guaranteed on a full, unconditional, joint and several basis by DigitalNet Holdings, Inc. and all of DigitalNet, Inc.‘s domestic subsidiaries. A portion of the net proceeds of our initial public offering were used to redeem $43.8 million in aggregate principal amount of our outstanding notes for approximately $47.7 million, or 109% of the aggregate principal amount of the notes redeemed. We are required to make semi-annual interest payments in arrears on January 15 and July 15 of each year the notes are outstanding, commencing on January 15, 2004. As of June 30, 2004, we had approximately $81.3 million in notes outstanding.
The Company had previously entered into a management services agreement with GTCR that terminated upon the consummation of our initial public offering. During the six months ended June 30, 2004, the Company paid approximately $583,000 that had been accrued through the date of our initial public offering related to this agreement.
From March 2003 through December 2003, the Company issued four purchase orders totaling approximately $694,000, on a subcontract basis, to a company owned by the son of the Company’s Chairman and Chief Executive Officer. As of June 30, 2004, the Company has paid approximately $472,000 to the company pursuant to these purchase orders. Through these purchase orders, the company acted as a subcontractor to the Company under two civilian agency contracts, providing professional systems engineering and economic analysis services. These purchase orders were issued in the ordinary course of business and, based on the Company’s historic practices with respect to retaining subcontractors to provide services of a similar nature, management believes these services were provided on terms no less favorable than the Company would anticipate receiving from unrelated parties. In addition, in June 2004, the Company accepted a purchase order of approximately $12,000 to provide strategic consulting services to a government agency as a subcontractor to this company.
Our principal exposure to market risk relates to changes in interest rates. The $81.3 million of indebtedness under our 9% senior notes due 2010 is at a fixed interest rate and only indebtedness under our credit facility will be subject to changes in interest rates. Concurrent with the completion of the offering of our 9% senior notes due 2010, we entered into our current credit facility, which provides us with up to $50.0 million in borrowings. Interest under our current credit facility is based on the British Bankers Association Interest Settlement Rate for deposits in dollars, or based on the higher of Bank of America, N.A.‘s prime rate or the federal funds rate. As of June 30, 2004, we had approximately $19.0 million of borrowings outstanding under our credit facility, with an interest rate of approximately 4.0%. We repaid $4.0 million under our revolving credit facility in July 2004. Each 1% increase in these rates could add an additional $0.2 million to our interest expense, based on an outstanding borrowings under our credit facility of $15.0 million.
(a) Evaluation of disclosure controls and procedures. Our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer) have evaluated our disclosure controls and procedures and have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, these controls and procedures are designed to ensure that information we are required to disclose in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and Form 10-Q. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (15 USC § 78a et seq.) is accumulated and communicated to our management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The principal executive officer and the principal financial officer have also concluded, based upon their evaluation, that there are no significant deficiencies or material weaknesses in these disclosure controls and procedures.
(b) Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
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From time to time, we are involved in various legal proceedings concerning matters arising in the ordinary course of business. We believe that any ultimate liability arising out of these proceedings will not have a material adverse effect on our financial position or results of operations.
On April 1, 2004, we used all of the approximately $14.3 million of remaining proceeds from the October 9, 2003 initial public offering of our common stock to partially fund the $50 million purchase price of our acquisition of all of the outstanding common stock of User Technology Associates, Inc.
None.
Our annual meeting of stockholders was held on June 3, 2004. The only matter presented for a vote at the meeting was the election of eight directors to hold office until the 2005 annual meeting of stockholders and until their successors are duly elected and qualified. Set forth below are the names of each nominee elected, the number of votes cast for each nominee and the number of votes withheld for each nominee. There were no broker non-votes.
| Name | Votes For | Votes Withheld |
| Ken S. Bajaj | 14,401,766 | 342,069 |
| Craig A. Bondy | 14,700,317 | 43,518 |
| Philip A. Canfield | 14,425,699 | 318,136 |
| Alan G. Merten | 14,426,256 | 317,579 |
| Edward C. Meyer | 14,426,256 | 317,579 |
| Richard N. Perle | 14,725,107 | 18,728 |
| Bruce V. Rauner | 14,700,817 | 43,018 |
| Stuart J. Yarbrough | 14,426,256 | 317,579 |
None.
| (a) | Exhibits |
| 10.1 | Supplemental Indenture, dated as of April 1, 2004, among User Technology Associates, Inc., DigitalNet, Inc. and Wells Fargo Bank Minnesota, NA, as Trustee. |
| 10.2 | Subsidiary Guaranty Agreement, dated as of November 26, 2002, by DigitalNet Government Solutions, LLC and Federal Systems Integration Corporation in favor of Bank of America, NA, as Administrative Agent. |
| 10.3 | Subsidiary Guaranty Agreement Supplement, dated as of April 19, 2004, by User Technology Associates, Inc. in favor of Bank of America, NA, as Administrative Agent. |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. |
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| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
| 32.2 | Certification of 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 |
On April 1, 2004, we filed a report on Form 8-K regarding the press release we issued regarding the acquisition of all the outstanding equity securities of User Technology Associates, Inc.
On April 21, 2004, we filed a report on Form 8-K regarding the press release we issued announcing our operating results for the three months ended March 31, 2004, as well as providing initial guidance for the second quarter 2004 and updating guidance for the full year 2004.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: August 4, 2004 | DIGITALNET HOLDINGS, INC. |
| By: /s/ Ken S. Bajaj | |
| Ken S. Bajaj | |
| Chairman, Chief Executive Officer and President | |
| Director | |
| (Principal Executive Officer) | |
| By: /s/ Jack Pearlstein | |
| Jack Pearlstein | |
| Chief Financial Officer, Treasurer and Secretary | |
| (Principal Financial and Accounting Officer) |
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| Exhibit | Description |
| 10.1 | Supplemental Indenture, dated as of April 1, 2004, among User Technology Associates, Inc., DigitalNet, Inc. and Wells Fargo Bank Minnesota, NA, as Trustee. |
| 10.2 | Subsidiary Guaranty Agreement, dated as of November 26, 2002, by DigitalNet Government Solutions, LLC and Federal Systems Integration Corporation in favor of Bank of America, NA, as Administrative Agent. |
| 10.3 | Subsidiary Guaranty Agreement Supplement, dated as of April 19, 2004, by User Technology Associates, Inc. in favor of Bank of America, NA, as Administrative Agent. |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |