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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
or
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the period from                      to                         
 
Commission file number 0-5404
 
 
ANALEX CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
  
71-0869563
(I.R.S. Employer
Identification No.)
 
5904 Richmond Highway
Suite 300
Alexandria, Virginia 22303
(Address of principal executive offices)
 
Registrant’s Telephone number including area code
(703) 329-9400
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes  x  No  ¨
 
As of November 7, 2002, 14,442,702 shares of the Common Stock of the registrant were outstanding.
 

Table of Contents
 
ANALEX CORPORATION
 
TABLE OF CONTENTS
 
Part I    Financial Information:
     
Page No.
Item 1.
   
Financial Statements
       
         
3
         
5
         
6
         
7
Item 2.
        
15
Item 3.
        
19
Item 4.
        
20
Part II    Other Information:
       
Item 1.
        
21
Item 6.
        
21
    
22

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ANALEX CORPORATION
 
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
    
September 30,
2002
   
December 31,
2001
ASSETS
              
Current assets:
              
Cash and cash equivalents
   
$
455,400
   
$
83,100
Accounts receivable, net
   
 
11,325,000
   
 
8,377,600
Prepaid expenses and other
   
 
182,100
   
 
223,300
    
  
Total current assets
   
 
11,962,500
   
 
8,684,000
    
  
Fixed assets, net
   
 
373,000
   
 
260,600
Goodwill
   
 
14,821,200
   
 
15,638,100
Other Intangibles
   
 
654,100
   
 
850,500
Contract Rights
   
 
964,300
   
 
—  
Deferred finance costs
   
 
167,200
   
 
72,500
Other
   
 
61,900
   
 
119,400
    
  
Total other assets
   
 
17,041,700
   
 
16,941,100
    
  
Total assets
   
$
29,004,200
   
$
25,625,100
    
  
 
See Notes to Consolidated Financial Statements

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ANALEX CORPORATION
 
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
 
    
September 30,
     
December 31,
  
    
2002
     
2001
  
LIABILITIES AND SHAREHOLDERS' EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
1,825,900
 
   
$
1,371,400
 
Note payable—line of credit
   
 
1,704,800
 
   
 
1,696,500
 
Note payable—bank term note
   
 
700,000
 
   
 
700,000
 
Notes payable—other
   
 
813,800
 
   
 
838,500
 
Other current liabilities
   
 
6,030,100
 
   
 
4,779,400
 
    
  
Total current liabilities
   
 
11,074,600
 
   
 
9,385,800
 
    
  
Note payable—bank term note
   
 
2,230,300
 
   
 
2,741,600
 
Notes payable—other
   
 
2,661,400
 
   
 
2,262,600
 
Other
   
 
—  
 
   
 
60,000
 
    
  
Total long-term liabilities
   
 
4,891,700
 
   
 
5,064,200
 
    
  
Commitments and contingencies
                  
Total liabilities
   
 
15,966,300
 
   
 
14,450,000
 
    
  
Shareholders’ equity:
                  
Common stock $.02 par; authorized 30,000,000 shares;
                  
issued and outstanding—September 30, 2002 14,442,702 shares
                  
and December 31, 2001, 14,375,975 shares
   
 
288,900
 
   
 
287,500
 
Additional capital
   
 
21,160,800
 
   
 
20,726,300
 
Deferred compensation
   
 
(16,200
)
   
 
(22,300
)
Accumulated other comprehensive loss
   
 
(92,700
)
   
 
—  
 
Accumulated deficit
   
 
(8,302,900
)
   
 
(9,816,400
)
    
  
Total shareholders’ equity
   
 
13,037,900
 
   
 
11,175,100
 
    
  
Total liabilities and shareholders’ equity
   
$
29,004,200
 
   
$
25,625,100
 
    
  
 
See Notes to Consolidated Financial Statements
 

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ANALEX CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2002 and 2001
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenues
   
$
16,318,600
 
   
$
4,137,300
 
   
$
42,282,300
 
   
$
12,724,800
 
Operating costs and expenses:
                                    
Costs of revenue
   
 
13,800,100
 
   
 
3,329,100
 
   
 
36,060,100
 
   
 
10,338,300
 
Selling, general and administrative
   
 
1,194,100
 
   
 
600,000
 
   
 
3,591,400
 
   
 
1,847,500
 
Amortization of goodwill and other intangibles
   
 
92,200
 
   
 
84,000
 
   
 
232,200
 
   
 
252,000
 
    
  
  
  
Total operating costs and expenses
   
 
15,086,400
 
   
 
4,013,100
 
   
 
39,883,700
 
   
 
12,437,800
 
    
  
  
  
Operating income
   
 
1,232,200
 
   
 
124,200
 
   
 
2,398,600
 
   
 
287,000
 
    
  
  
  
Other income (expense):
                                    
Interest income
   
 
600
 
   
 
—  
 
   
 
1,200
 
   
 
—  
 
Interest expense
   
 
(269,700
)
   
 
(25,200
)
   
 
(780,100
)
   
 
(97,200
)
Other expense
   
 
(38,900
)
   
 
(44,900
)
   
 
(82,200
)
   
 
(42,000
)
    
  
  
  
Total other expense
   
 
(308,000
)
   
 
(70,100
)
   
 
(861,100
)
   
 
(139,200
)
    
  
  
  
Income before income taxes
   
 
924,200
 
   
 
54,100
 
   
 
1,537,500
 
   
 
147,800
 
Provision for income taxes
   
 
10,200
 
   
 
—  
 
   
 
23,900
 
   
 
—  
 
    
  
  
  
Net income
   
$
914,000
 
   
$
54,100
 
   
$
1,513,600
 
   
$
147,800
 
    
  
  
  
Net income per share:
                                    
Basic
   
$
0.06
 
   
$
0.01
 
   
$
0.11
 
   
$
0.02
 
    
  
  
  
Diluted
   
$
0.05
 
   
$
0.01
 
   
$
0.09
 
   
$
0.02
 
    
  
  
  
Weighted average number of shares:
                                    
Basic
   
 
14,238,707
 
   
 
6,536,276
 
   
 
14,408,181
 
   
 
6,520,040
 
    
  
  
  
Diluted
   
 
17,013,845
 
   
 
8,186,996
 
   
 
16,981,384
 
   
 
7,971,382
 
    
  
  
  
 
See Notes to Consolidated Financial Statements

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ANALEX CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and 2001
 
 
    
September 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net income
   
$
1,513,600
 
   
$
147,800
 
    
  
Adjustments to reconcile net income to net
                  
cash provided by operating activities:
                  
Depreciation
   
 
73,700
 
   
 
100,500
 
Amortization of goodwill
   
 
—  
 
   
 
252,000
 
Amortization of intangibles
   
 
232,200
 
   
 
—  
 
Non-cash interest expense
   
 
270,700
 
   
 
—  
 
Stock compensation expense
   
 
6,100
 
   
 
4,000
 
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
(2,947,400
)
   
 
356,300
 
Prepaid expenses and other
   
 
41,200
 
   
 
(309,700
)
Other assets
   
 
57,500
 
   
 
(17,300
)
Accounts payable
   
 
454,500
 
   
 
(94,800
)
Other current liabilities
   
 
1,954,900
 
   
 
50,800
 
Other long-term liabilities
   
 
(60,000
)
   
 
—  
 
    
  
Total adjustments
   
 
83,400
 
   
 
341,800
 
    
  
Net cash provided by operating activities
   
 
1,597,000
 
   
 
489,600
 
    
  
Cash flows from investing activities:
                  
Property additions
   
 
(186,200
)
   
 
(72,100
)
    
  
Net cash used in investing activities
   
 
(186,200
)
   
 
(72,100
)
    
  
Cash flows from financing activities:
                  
Proceeds from borrowings on line of credit, net
   
 
8,300
 
   
 
1,347,300
 
Proceeds from stock options exercised
   
 
16,400
 
   
 
3,000
 
Proceeds from sale of common stock
            
 
50,000
 
Proceeds from employee stock purchases
   
 
74,000
 
   
 
17,900
 
Payments on bank loans
   
 
(511,300
)
   
 
(1,968,300
)
Payments on other loans
   
 
(625,900
)
   
 
—  
 
    
  
Net cash used in financing activities
   
 
(1,038,500
)
   
 
(550,100
)
    
  
Net increase (decrease) in cash and cash equivalents
   
 
372,300
 
   
 
(132,600
)
Cash and cash equivalents at beginning of period
   
 
83,100
 
   
 
234,900
 
    
  
Cash and cash equivalents at end of period
   
$
455,400
 
   
$
102,300
 
    
  
 
 
See Notes to Consolidated Financial Statements

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ANALEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.    Name Change, Award of ELVIS Contract and Business Segments
 
Pursuant to an approval voted by Hadron’s shareholders at its annual shareholder meeting held on May 21, 2002, Hadron, Inc. changed its name on July 1, 2002, to Analex Corporation by merging Hadron, Inc. into its wholly-owned subsidiary Analex Corporation. Hadron’s name was changed to Analex to take advantage of Analex’s broader name recognition in both the intelligence and aerospace systems engineering market segments. Under the resulting corporate structure, Analex Corporation wholly owns two subsidiaries, SyCom Services Inc. (“SyCom”) and Advanced Biosystems Inc. (“ABS”).
 
On May 29, 2002, Analex announced that it had been awarded a $164 million Expendable Launch Vehicle Integrated Support (“ELVIS”) contract by NASA, having a nine-year and four-month period of performance (3-year base period and two 3-year option periods). The ELVIS contract was effective on July 1, 2002. With ELVIS, Analex now has approximately 575 employees.
 
Analex conducts its business through three segments: the Homeland Security Group, supporting intelligence systems; the Systems Engineering Group, supporting the development of space-based systems and the operation of terrestrial assets, including the ELVIS contract; and its ABS subsidiary, pursuing research and business opportunities in the areas of defenses against biological warfare agents and other infectious diseases.
 
2.    Comparative Results of Operations
 
The actual results of operations for the three months and nine months ended September 30, 2002 are not directly comparable with the corresponding prior year periods. On November 5, 2001, Hadron, Inc. acquired Analex Corporation in a purchase combination. Thus, the three and nine month periods ended September 30, 2001 are reported without the effect of the combination. In an effort to make the comparative results of operations more meaningful, the Company has provided pro-forma results for the three and nine months ended September 2001 as if the same organizational structure and operating units had been in place in 2001 as are in place for 2002.
 
As mentioned above, with the award of the ELVIS contract, the Company is organized in three segments: The Homeland Security Group is expected to account for approximately 43% of the

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Company’s 2002 revenue. The Homeland Security Group expects to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. This Group provides engineering, scientific and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to various members of the Intelligence community, including the NRO, CIA, NSA, DoD, and major prime contractors.
 
The Systems Engineering Group is expected to account for approximately 45% of the Company’s 2002 revenues. This Group provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle (ELV) engineering, space systems development, and ground support for space operations. This Group’s primary customers, including NASA and major aerospace firms, expect to be beneficiaries of increased defense spending.
 
ABS is expected to account for approximately 12% of the Company’s 2002 revenues. ABS pursues research in the areas of defenses against, and treatments for, biological warfare agents and other infectious diseases. ABS also provides consulting services regarding biological weapons, threats, and defensive strategies.
 
3.    Basis of Presentation
 
The interim consolidated financial statements for Analex Corporation (the “Company”) are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (“2001 Form 10-K”) filed with the Securities and Exchange Commission on March 26, 2002.
 
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will

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continue to be amortized over their useful lives. Goodwill is no longer being amortized, effective January 1, 2002.
 
If SFAS No. 142 had been adopted at the beginning of 2001, the absence of goodwill amortization would have increased net income by $84,000 for the three months ended September 30, 2001, resulting in pro forma three month 2001 net income of $138,100, basic earnings per share of $.02 and diluted earnings per share of $.02. For the nine months ended September 30, 2001, the absence of goodwill amortization would have increased net income by $252,000, resulting in pro forma nine month net income of $345,700, basic earnings per share of $.05 and diluted earnings per share of $.04.
 
4.    Debt
 
On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement (“Agreement”) with Bank of America, N.A. The Agreement provides the Company with a $4,000,000 revolving credit facility (the “Credit Facility”) through November 2, 2006 and a five-year $3,500,000 term loan (“Term Loan”). The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of September 30, 2002, the Credit Facility and Term Loan balances were $1,704,800 and $2,930,300, respectively. The interest rate at September 30, 2002 was 4.56% for the Credit Facility and 5.07% for the Term Loan. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. As of September 30, 2002, the Company is in compliance with these covenants. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.
 
The Company’s $3.5 million Term Loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. Beginning in January 2002, the Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt, now totaling $2,425,000 is swapped into a fixed rate obligation at 4.25%. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.5% at September 30, 2002.
 
The Company’s comprehensive income for the three months ended September 30, 2002 was $873,600, which includes net income

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of $914,000 and other comprehensive loss of $40,400 arising from the interest rate swap. The Company’s comprehensive income for the nine months ended September 30, 2002, was $1,420,900, which includes net income of $1,513,600 and other comprehensive loss of $92,700 arising from the interest rate swap.
 
On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $772,600 with a five-year term, bearing interest at 6%. At September 30, 2002, the Seller Notes had an outstanding balance of approximately $670,000. The Company also entered into non-competition agreements with these sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over various periods.
 
With its purchase of Analex, the Company assumed a note payable to the Department of Justice (“DOJ”). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006. The DOJ note payable balance was $994,300 as of September 30, 2002.
 
In May 1999, the Company issued three-year $998,000 convertible notes, to the former shareholders of ATI in connection with the Company’s acquisition of ATI. In May 2002, the remaining convertible notes totaling $102,000 were paid in full.
 
In connection with the December 1998 purchase of Vail Research and Technology Corporation (“Vail”), the Company issued a non-interest bearing promissory note $100,000. In April 2002, the Company satisfied its obligations with a payment of $30,000.
 
5.    Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share:
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
    
2002
   
2001
   
2002
   
2001
Numerator:
   
$
914,000
   
$
54,100
   
$
1,513,600
   
$
147,800
Net Income
                            
Denominator:
                            
Denominator for basic earnings per share:
                            
weighted average shares outstanding
   
 
14,238,707
   
 
6,536,276
   
 
14,408,181
   
 
6,520,040
Effect of dilutive securities:
                            
Warrants
   
 
1,894,427
   
 
1,379,396
   
 
1,841,337
   
 
1,268,187
Employee stock options
   
 
880,711
   
 
271,324
   
 
731,866
   
 
183,155
    
  
  
  
Denominator for diluted earnings per share
   
 
17,013,845
   
 
8,186,996
   
 
16,981,384
   
 
7,971,382
    
  
  
  
Basic earnings per share
   
$
            .06
   
$
            .01
   
$
            .11
   
$
            .01
    
  
  
  
Diluted earnings per share
   
$
            .05
   
$
            .01
   
$
            .09
   
$
            .01
    
  
  
  

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Shares issuable upon the exercise of stock options or warrants or upon conversion of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive.
 
6.    Income Taxes
 
The provision for income taxes is limited to state taxes and the liability for alternative minimum tax as the majority of income for federal and state tax purposes has been offset by carrying forward net operating losses.
 
7.    Concentration of Business
 
Almost all of the Company’s revenues are derived either directly as prime contractor or indirectly as a subcontractor to other government prime contractors. With the award of the ELVIS contract to the Company, approximately 47% of the Company’s 2002 revenues are expected to be derived, directly and indirectly, from NASA. Approximately 51% of the Company’s 2002 revenues are expected to be derived from various Department of Defense agencies.
 
The majority of the Company’s technical and professional services business with governmental departments and agencies is obtained through competitive procurement and through follow-on services related to existing contracts. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.
 
8.    Equity Capital
 
Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Company’s Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share (“Guaranteed Shares”), if such shares are sold within such period and if certain other conditions are satisfied.
 
The Company was required by Bank of America to obtain personal guarantees in the aggregate amount of $2,000,000, which the Company procured from two individuals, the Company’s Board member Gerald R. McNichols and the president of the Company’s investment banker, J. Richard Knop. The compensation during the

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period of guaranty is in the form of cash and warrants. In January 2002, 198,522 total warrants were issued for the calendar year 2002 pursuant to the guaranty. The Company recorded interest expense of $30,000 and $90,000 and non-cash interest expense of $86,000 and $258,000 for the three and nine months ended September 30, 2002, respectively, related to the issuance of the warrants.
 
9.    Business segments
 
With the award of the ELVIS contract, the Company has reorganized its internal operating structure. Prior to the ELVIS award, the company had three reportable segments, Homeland Security, Aerospace and ABS. With the reorganization, certain divisions of the Aerospace Group were realigned within the Homeland Security Group. The remainder of the Aerospace Group, along with the ELVIS contract, form the Systems Engineering Group.
 
The three active reportable segments are now the Homeland Security Group, the Systems Engineering Group, and ABS. Together, these segments provide engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and technical skills. The Homeland Security Group supports intelligence systems. The Systems Engineering Group supports the development of space-based systems and the operation of terrestrial assets, including the ELVIS contract. ABS pursues research and business opportunities in the areas of defenses against biological warfare agents and other infectious diseases.
 
Operating results are measured at the net income/(loss) level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company’s corporate amounts consist primarily of certain activities and assets not attributable to the reportable segments.

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ANALEX CORPORATION
 
REPORTABLE SEGMENTS
FASB STATEMENT 131
 
Description:
   
Three Months
Ended
Sept. 30,
2002
     
Three Months
Ended
Sept. 30,
2001
     
Nine Months Ended
Sept. 30,
2002
     
Nine Months Ended
Sept. 30,
2001
  
Trade revenues:
                                    
ABS
   
$
1,708,000
 
   
$
1,305,300
 
   
$
4,866,400
 
   
$
3,178,600
 
Homeland Security Group
   
 
6,095,800
 
   
 
2,832,000
 
   
 
18,811,700
 
   
 
9,546,200
 
Systems Engineering Group
   
 
8,514,800
 
            
 
18,604,200
 
         
Corporate
                                    
    
  
  
  
Total trade revenues
   
$
16,318,600
 
   
$
4,137,300
 
   
$
42,282,300
 
   
$
12,724,800
 
    
  
  
  
Net income/(loss):
                                    
ABS
   
$
104,200
 
   
$
143,400
 
   
$
310,500
 
   
$
256,800
 
Homeland Security Group
   
 
771,200
 
   
 
(53,000
)
   
 
1,750,200
 
   
 
(10,900
)
Systems Engineering Group
   
 
347,300
 
            
 
474,900
 
         
Corporate
   
 
(308,700
)
   
 
(36,300
)
   
 
(1,022,000
)
   
 
(98,100
)
    
  
  
  
Total net income
   
$
914,000
 
   
$
54,100
 
   
 
1,513,600
 
   
 
147,800
 
    
  
  
  
Assets:
                                    
ABS
   
$
1,928,300
 
   
$
842,600
 
   
$
1,928,300
 
   
$
842,600
 
Homeland Security Group
   
 
10,338,200
 
   
 
4,094,200
 
   
 
10,338,200
 
   
 
4,094,200
 
Systems Engineering Group
   
 
15,519,300
 
            
 
15,519,300
 
         
Corporate
   
 
1,218,400
 
   
 
404,800
 
   
 
1,218,400
 
   
 
404,800
 
    
  
  
  
Total assets
   
$
29,004,200
 
   
$
5,341,600
 
   
$
29,004,200
 
   
$
5,341,600
 
    
  
  
  
 
10.    Acquisitions
 
Effective November 2001, the Company acquired Analex, a professional services and program management firm whose principal customers are NASA and the U.S. intelligence community. The purchase price was satisfied with cash payments of $6,510,000, 3,572,143 shares of Common Stock valued at $4,723,000, the issuance of promissory notes of $773,000, non-compete arrangements of $892,000, and the satisfaction of other certain liabilities of Analex. Pursuant to the Merger Agreement by which Analex was acquired by Hadron, and with the award of the ELVIS contract, an additional payment amounting to $1 million became due to certain of the sellers of Analex. This $1 million is payable over 3 years.

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The fair value of the assets acquired and liabilities assumed approximated their book value of $5,058,000 and $6,647,000, respectively. The Company incurred financial, legal and accounting costs associated with the Analex purchase of approximately $570,000. Resulting from the acquisition of Analex, the Company recorded goodwill and other intangibles of approximately $15,057,000. In July 2002, the goodwill was adjusted due to resolution of the Analex closing balance sheet. The purchase price has not yet been finalized due to certain contingencies associated with contract rights and other potential adjustments. Accordingly, the final purchase price allocation has not been completed.
 
Goodwill related to the acquisition of Analex in November 2001 is subject to SFAS 142, and accordingly has not been amortized. Other intangible assets identified in connection with the acquisition, including non-compete arrangements and contractual relationships, are amortized on a straight-line basis over their estimated lives ranging from three to ten years.
 
The following table sets forth pro forma results of operations of the Company for the three and nine months ended September 30, 2001, as if Analex had been acquired on January 1, 2001:
 
    
Three months ended
September 30, 2001
   
Nine months ended
September 30, 2001
  
Revenue
   
$
11,927,300
   
$
36,847,000
 
Operating income
   
 
339,100
   
 
1,084,600
 
Net income
   
 
107,200
   
 
(28,100
)
Net income per share:
                
Basic
   
 
.01
   
 
.002
 
Diluted
   
 
.01
   
 
.002
 
 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001
 
Revenues for the three months ended September 30, 2002 were $16,318,600, an increase of $12,181,300 from the $4,137,300 in revenues for the period ended September 30, 2001. This increase is primarily due to revenues generated by the business units acquired from the former Analex Corporation, acquired in November 2001, coupled with the increased revenues of ABS and the revenues generated by the newly-awarded ELVIS contract. Revenues increased $4,391,300, or 37%, in the quarter ended September 30, 2002 as compared to the pro-forma revenues of $11,927,000 for the same period in 2001.
 
Costs of revenue for the quarter ended September 30, 2002 were $13,800,100, an increase of $10,471,000 from the same period of the prior year. The increase is largely due to the costs of revenue of the business units acquired from the former Analex Corporation, coupled with increased ABS costs and costs generated by ELVIS. Costs of revenue as a percentage of revenues were approximately 85% and 80% for the quarters ended September 30, 2002 and 2001, respectively. The decrease is primarily due to the increased volume of NASA contracts which generate smaller profit margins.
 
Selling, general and administrative expenses, including amortization of goodwill and other intangibles, totaled $1,194,100 for the September 30, 2002 quarter, compared with $600,000 for the same period of the prior year. The $594,100 increase is primarily due to the addition of the former Analex Corporation’s costs and costs related to key finance, business development and marketing positions filled, offset by reduced amortization of goodwill due to implementation of the non-amortization provision of SFAS142 in 2002.
 
Operating income for the three months ended September 30, 2002 was $1,232,200, compared to operating income of $124,200 for the period ended September 30, 2001. This $1,108,000 increase is primarily attributable to the profitability of the business units of the former Analex Corporation, coupled with increased profitability of ABS, and profitability derived from ELVIS. Operating income increased $893,100, or 260%, in the quarter ended September 30, 2002 as compared to the pro-forma operating income of $339,000 for the same period in 2001.
 
Interest expense totaled $269,700 for the September 30, 2002 quarter, compared with $25,200 for the same period of the prior year. The $244,500 increase is due to the Company’s increased debt obligations and financing commitments associated with the acquisition of the former Analex Corporation.

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Net income was $914,000 for the quarter ended September 30, 2002, compared to net income of $54,100 for the same period of the prior year. The $859,900 increase resulted primarily from the net income produced by the business units of the former Analex Corporation, ELVIS and ABS respectively, partially offset by increased interest and finance costs associated with the Analex acquisition. Net income increased $806,800 in the three months ended September 30, 2002 as compared to the pro-forma net income for the same period in 2001.
 
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
 
Revenues for the nine months ended September 30, 2002 were $42,282,300, an increase of $29,557,500 from $12,724,800 in revenues for the period ended September 30, 2001. This increase is primarily due to revenues generated by business units of the former Analex Corporation, acquired in November 2001, coupled with the increased revenues of ABS and ELVIS. Revenues increased $5,435,300, or 15%, in the nine months ended September 30, 2002 as compared to the pro-forma revenues of $36,847,000 for the same period in 2001.
 
Costs of revenue for the nine months ended September 30, 2002 were $36,060,100, an increase of $25,721,800 from the same period of the prior year. The increase is largely due to the costs of revenue of the business units of the former Analex Corporation, coupled with increased ABS costs and ELVIS. Costs of revenue as a percentage of revenues were approximately 85% and 81% for the nine month period ended September 30, 2002 and 2001, respectively. The decrease is primarily due to the increased volume of NASA contracts which generate smaller profit margins.
 
Selling, general and administrative expenses, including amortization of goodwill and other intangibles, totaled $3,591,400 for the nine months ended September 30, 2002, compared with $1,847,500 for the same period of the prior year. The $1,743,900 increase is primarily due to the addition of the business units of the former Analex Corporation costs and costs related to key finance, business development and marketing positions filled, offset by reduced amortization of goodwill due to implementation of the non-amortization provision of SFAS142 in 2002.
 
Operating income for the nine months ended September 30, 2002 was $2,398,600, compared to operating income of $287,000 for the period ended September 30, 2001. This $2,111,600 increase is primarily attributable to the profitability of the business units of the former Analex Corporation, coupled with increased profitability of ABS and ELVIS. Operating income increased $1,313,800, or 121%, in the nine months ended September

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30, 2002 as compared to the pro-forma operating income of $1,084,800 for the same period in 2001.
 
Interest expense totaled $780,100 for the nine months ended September 30, 2002, compared with $97,200 for the same period of the prior year. The $682,900 increase is due to the Company’s increased debt obligations and financing commitments associated with the acquisition of Analex.
 
Net income was approximately $1,513,600 for the nine months ended September 30, 2002, compared to net income of approximately $147,800 for the same period of the prior year. The $1,365,800 increase resulted primarily from the net income produced by the business units of the former Analex Corporation, partially offset by the increased interest and finance costs associated with the Analex acquisition. Net income increased $1,541,700 in the nine month ended September 30, 2002 as compared to the pro-forma net income for the same period in 2001, due to the award of the ELVIS contract.
 
CAPITAL RESOURCES AND LIQUIDITY
 
The working capital at September 30, 2002 increased by approximately $814,500 from December 31, 2001, primarily due to an increase in cash and accounts receivable partially offset by an increase in accounts payable and other current liabilities.
 
In the three months ended September 30, 2002, the Company recorded net income of approximately $914,000 and EBITDA, as defined below, of $1,302,800, after add-backs for interest of $269,100, depreciation of $17,300, amortization of $92,200, and income taxes of $10,200.
 
In the nine months ended September 30, 2002, the Company recorded net income of approximately $1,513,600 and EBITDA, as defined below, of $2,622,300, after add-backs for interest of $778,900, depreciation of $73,700, amortization of $232,200,and income taxes of $23,900.
 
EBITDA consists of earnings before interest expense, interest and other income, income taxes, deferred compensation, and depreciation and amortization. EBITDA does not represent funds available for the Company’s discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing the Company’s results of operations and cash flows. In addition, EBITDA is considered relevant and useful information, which is often reported and widely used by analysts, investors and other

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interested parties. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of the Company’s operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to the Company’s ability to meet future debt service, capital expenditure and working capital requirements.
 
Net cash provided by operating activities during the nine months ended September 30, 2002 was approximately $1,597,000, as compared with net cash provided of approximately $489,600 during the same period in 2001. This increase was due to the Company’s increased profitability.
 
Net cash used in investing activities during the nine months ended September 30, 2002 and 2001 was approximately $186,200 and $72,100, respectively. Net cash used in investing activities in each of these periods was for fixed asset purchases.
 
On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit Agreement which provides the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.
 
ELVIS Contract
 
Under the ELVIS contract, Analex will provide a broad range of Expendable Launch Vehicle (ELV) support services for NASA requirements at John F. Kennedy Space Center, Florida; Cape Canaveral Air Force Station, Florida; Vandenberg Air Force Base, California; and other launch site locations. This includes management, operation and maintenance of facilities, systems and equipment, as well as specified technical and administrative capabilities.
 
The contract covers responsibility for furnishing engineering services; performing safety and mission assurance functions; and providing communications, data and telemetry support. In addition, at Vandenberg, Analex will also be responsible for maintenance of NASA’s administrative, launch support and spacecraft facilities, mission support planning, and customer support for payload processing activities.

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The contract had a one-month phase-in period in June 2002, which is followed by a three-year, three-month basic period of performance. There are two options of three years each for a potential nine-year, four-month contract term. The contract value for the basic performance period is $54.9 million. The potential contract value including all priced options over nine years, four months is $163.7 million. However, total 9-year contract value may be increased as a result of additional task orders which may be issued under the contract as required.
 
Except for the historical information contained herein, the matters discussed in this 10-Q include forward-looking statements that involve a number of risks and uncertainties. There are certain important factors and risks that could cause results to differ materially from those anticipated by the statements contained herein. Such factors and risks include business conditions and growth in the information services, engineering services, software development and government contracting arenas and in the economy in general. Competitive factors include the pressures toward consolidation of small government contracts into larger contracts awarded to major, multi-national corporations; the Company’s ability to continue to recruit and retain highly skilled technical, managerial and sales/marketing personnel; and the Company’s ability to successfully identify, complete and integrate acquisitions. Other risks may be detailed from time to time in the Company’s SEC reports.
 
Item 3.     Quantitative and Qualitative Disclosure about Market Risk
 
The Company is exposed to market risks related to fluctuations in interest rates on its debt. The Company limits these risks by following established risk management policies and procedures including the use of an interest rate swap on $2,366,700 of its $2,930,300 Term Loan to manage, or hedge, interest rate risk. The Company does not enter into derivative instruments for speculative purposes. The Company requires that the hedging derivative instruments are effective in reducing the interest rate risk exposure. The effectiveness is essential for qualifying for hedge accounting. Changes in the hedging instruments fair value related to the effective portion of the risk being hedged are included in accumulated other comprehensive income (loss).
 
In conjunction with the Company’s policy to reduce interest rate risk, the Company entered into an interest rate swap in conjunction with its Term Loan to hedge the variability of monthly cash outflows attributable to changes in LIBOR. The swap effectively locks LIBOR at 4.25% with interest on its Term Loan, thus, 4.25% plus the credit performance margin.
 

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Increases in prevailing interest rates on other debt could increase the Company’s interest payment obligations relating to variable debt such as its revolving credit facility and the unhedged portion of its Term Loan. For example, a 100 basis point increase in interest rates would increase annual interest expense by $23,000, using debt balances at September 30, 2002.
 
Item 4.     Controls and Procedures
 
Within 90 days prior to the date of this report, the Company’s disclosure controls and procedures were evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Such controls and procedures were deemed to be effective to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation.

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Part II.    Other Information
 
Item 1.     Legal Proceedings
 
No material legal proceedings are currently pending.
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a)    
 
Exhibits
 
99.1
   
Certification 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
 
The Registrant filed the following Current Reports on or after April 1, 2002 and prior to the date of this Form 10-Q:
 
1.
 
Current Report on Form 8-K, dated April 30, 2002, attaching a press release issued by the Registrant announcing its earnings for the quarter ended March 31, 2002.
 
2.
 
Current Report on Form 8-K, dated May 22, 2002, attaching a press release issued by the Registrant announcing the filing, by its Advanced Biosystems, Inc. subsidiary, of nine provisional patent applications with the U.S. Patent and Trademark Office.
 
3.
 
Current Report on Form 8-K, dated May 29, 2002, attaching a press release issued by the Registrant announcing its award of the Expendable Launch Vehicle Integrated Support (ELVIS) contract by The National Aeronautics and Space Administration (NASA).
 
4.
 
Current Report on Form 8-K, dated July 3, 2002, attaching press releases issued by the Registrant announcing that the Registrant had changed its name from Hadron, Inc. to Analex Corporation, changed its trading symbol from HDRN to ANLX, and reorganized in Delaware.
 
5.
 
Current Report on Form 8-K, dated August 12, 2002, attaching press releases issued by the Registrant announcing its earnings conference call and Webcast relating to the second quarter of 2002, the award of the DARPA contract and its earnings for the quarter ended March 31, 2002.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
 
Date: November 12, 2002
 
Analex Corporation
  (Registrant)
        
By:
  
/s/    STERLING E. PHILLIPS, JR.        
      
By:
  
/s/    RONALD B. ALEXANDER         
   
    Sterling E. Phillips, Jr.
    President and Chief Executive
    Officer
    (Principal Executive Officer)
          
Ronald B. Alexander
Chief Financial Officer
  (Principal Financial
  Officer and Principal
  Accounting Officer)

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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Analex Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Sterling E. Phillips, Jr., Chief Executive Officer of the Company, and Ronald B. Alexander, Chief Financial Officer, (the “Signing Officers”) hereby certify, pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)
 
The Signing Officers have reviewed this quarterly report on Form 10-Q for the period ending September 30, 2002 (the “Report”).
 
 
(2)
 
Based on the Signing Officers’ knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report.
 
 
(3)
 
Based on the Signing Officers’ knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in the Report.
 
 
(4)
 
The Signing Officers are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
 
 
a.
 
designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to such Signing Officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
 
 
b.
 
evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report (the “Evaluation Date”); and
 
 
c.
 
presented in the Report such Signing Officers’ conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date.
 
 
(5)
 
The Signing Officers have disclosed to the Company’s auditors and the Audit Committee of the Board of Directors:
 
 
a.
 
all significant deficiencies in the design or operation of internal controls which could adversely

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affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
 
 
b.
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls; and
 
 
(6)
 
The Signing Officers have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent of the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
/s/    Sterling E. Phillips, Jr.        
Sterling E. Phillips, Jr.
Chief Executive Officer
November 12, 2002

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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Analex Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Sterling E. Phillips, Jr., Chief Executive Officer of the Company, and Ronald B. Alexander, Chief Financial Officer, (the “Signing Officers”) hereby certify, pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)    
 
The Signing Officers have reviewed this quarterly report on Form 10-Q for the period ending September 30, 2002 (the “Report”).
 
 
(2)
 
Based on the Signing Officers’ knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report.
 
 
(3)
 
Based on the Signing Officers’ knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in the Report.
 
 
(4)
 
The Signing Officers are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
 
 
a.    
 
designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to such Signing Officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
 
 
b.
 
evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report (the “Evaluation Date”); and
 
 
c.
 
presented in the Report such Signing Officers’ conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date.
 
 
(5)
 
The Signing Officers have disclosed to the Company’s auditors and the Audit Committee of the Board of Directors:
 
 
a.    
 
all significant deficiencies in the design or operation of internal controls which could adversely

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affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’ auditors any material weaknesses in internal controls; and
 
 
b.
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls; and
 
 
(6)
 
The Signing Officers have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent of the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
/s/    Ronald B. Alexander        
Ronald B. Alexander
Chief Financial Officer
November 12, 2002

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