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DIGITALNET HOLDINGS, INC. TABLE OF CONTENTS

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 000-50420

DIGITALNET HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

2525 Network Place, Herndon, VA 20171
(Address of principal executive offices)

(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 o    No ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes o    No ý

        As of October 31, 2003, there were 16,290,158 shares outstanding of the registrant's common stock, par value $0.001 per share.

DIGITALNET HOLDINGS, INC.
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

DIGITALNET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

See Accompanying Notes

3

DIGITALNET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)

See Accompanying Notes

4

DIGITALNET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)

See Accompanying Notes

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Business and Basis of Presentation

        DigitalNet Holdings, Inc. (DigitalNet or the Company) was incorporated in September 2001, under the laws of the state of Delaware. On November 26, 2002, the Company completed its acquisition of Getronics Government Solutions, L.L.C. (now DigitalNet Government Solutions, LLC or DGS). DGS's results of operations have been included in the Company's consolidated statements of operations from the date of acquisition. Prior to this acquisition, the Company was involved primarily in developing its business plan, recruiting personnel, raising capital, and identifying and evaluating operating assets for acquisition.

        DigitalNet, through its ownership of DGS, is a provider of managed network services, information security solutions, and application development and integration services to U.S. defense, intelligence and civilian federal government agencies. The Company's comprehensive information technology services and solutions allow federal government clients to outsource the design, implementation, integration, management and security of their computer networks and systems.

        The Company's operations are subject to certain risks and uncertainties including, among others, the susceptibility of the Company's services to rapid technological change, dependence on contracts with federal government agencies, dependence on significant customers, dependence on revenues derived from contracts awarded through competitive bidding, existence of contracts with fixed pricing, dependence on subcontractors to fulfill contractual obligations, current and potential competitors with greater resources, dependence on key management personnel, ability to recruit and retain employees, dependence on intellectual property, lack of operating history, and uncertainty of future profitability and possible fluctuations in financial results.

        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 three months and nine months ended September 30, 2003 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 Company's final initial public offering (IPO) prospectus filed with the SEC on October 10, 2003 (File No. 333-107764), which includes consolidated financial statements and the notes thereto for the year ended December 31, 2002.

        In March 2003, the Company effected a one-for-eight reverse stock split. Accordingly, all share and per share amounts have been retroactively adjusted to give effect to this event.

2. Initial Public Offering

        In October 2003, the Company completed its initial public offering (IPO) of common stock issuing 5,750,000 shares of common stock at $17.00 per share, which generated estimated proceeds, net of estimated 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 $43.8 million in aggregate principal amount of outstanding 9% senior notes due 2010 for approximately $47.7 million, or 109% of the aggregate principal amount of the notes being redeemed, and

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$27.0 million was used to purchase all of the outstanding Class B Preferred Stock. In connection with the redemption of the 9% senior notes due 2010, the Company will recognize a charge of approximately $3.9 million in the fourth quarter of 2003, attributable to the premium paid to redeem the 9% senior notes due 2010 and a charge of approximately $1.9 million related to the write-off of deferred financing costs related to the notes redeemed. The Company will also recognize a benefit to income attributable to common stockholders in the fourth quarter of 2003 of approximately $7.7 million related to the excess of the carrying amount of the Class B Preferred Stock over the purchase price paid for the 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. Upon conversion in the fourth quarter of 2003, the Company will recognize a beneficial conversion feature related to the Class A Preferred Stock and record a dividend of approximately $11.2 million. In the fourth quarter of 2003, the Company will also recognize approximately $10.6 million of stock-based compensation in connection with the IPO.

3. Significant Customers

        The Company had no revenues prior to its acquisition of DGS. Revenues generated from contracts with the federal government or prime contractors doing business with the federal government have accounted for substantially all of the Company's revenues. Revenues from contracts representing greater than 10% of total revenues were as follows (dollars in thousands):

4. Accounts Receivable

        Accounts receivable consists of the following (dollars in thousands):

        The amounts included in currently billable accounts receivable represent amounts that were billed in the subsequent reporting period. They are billings for services rendered prior to period-end that were billed once necessary billing data had been collected and an invoice produced. Unbilled accounts receivable represent amounts that are not yet billable based upon contract terms. At December 31, 2002, the unbilled accounts receivable related primarily to accounts due under contracts that had not yet received formal government funding at year-end due to delayed appropriations bills. The Company is precluded from billing for its services until the government has formally funded the contract. Substantially all of the unbilled accounts receivable are expected to be billed and collected within 90 days of the balance sheet date.

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5. Acquisitions

        On November 26, 2002, the Company acquired all of the membership interests of DGS from Getronics Wang Co. LLC (Getronics Parent) in a transaction accounted for using the purchase method of accounting. DGS' results of operations have been included in the Company's consolidated statements of operations from the date of its acquisition. At closing, consideration for the acquisition consisted of 33,500 shares of Class B Preferred Stock and $183.4 million in cash. This consideration was subject to adjustment based upon a final determination of the amount of net working capital, depreciable assets and accrued contract losses, as defined, as of the date of acquisition. During 2003, the Company paid approximately $8.3 million in cash as additional consideration as a result of these adjustments. Accordingly, the Company has 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):

        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. During the nine months ended September 30, 2003, the Company revised certain of its estimates related primarily to certain accounts receivable contingently due to the Company, the NASA CSOC contract obligation and the lease costs and severance related to abandoned DGS facilities and terminated DGS employees. The purchase price allocation has been adjusted as of September 30, 2003 to reflect the revisions to these estimates. The Company plans to complete its assessment of the assets and liabilities acquired during November 2003 and will reflect any adjustments to the purchase price allocation in its financial statements as of December 31, 2003. Items subject to adjustment include deferred income taxes and certain lease obligations and other liabilities.

        The purchase consideration has been allocated on a preliminary basis as follows (dollars in thousands) (unaudited):

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        The goodwill recorded is expected to be fully deductible for income tax purposes. The change in the carrying value of goodwill for the nine months ended September 30, 2003 is as follows (dollars in thousands):

        In connection with the DGS acquisition in November 2002, the Company recognized approximately $8.9 million in liabilities as the cost of abandoning certain leased DGS facilities and terminating certain DGS employees. The accrual consisted primarily of lease costs and severance and other employee termination costs related to the termination of approximately 70 employees in connection with the expiration of the INS contract and the consolidation of certain other operations. During the nine months ended September 30, 2003, the Company increased its estimate of the lease costs related to the abandoned DGS facilities and increased its estimate of the severance costs by approximately $1.2 million and $262,000, respectively, resulting in total liabilities recognized of approximately $10.3 million. For the nine months ended September 30, 2003, the Company charged approximately $2.0 million against the accrual for amounts paid.

        The DGS pre-acquisition November 25, 2002 balance sheet included $14.6 million of accounts receivable that are collected by the Company but remitted to Getronics Parent. Because the Company is only collecting these accounts receivable on behalf of Getronics Parent, they were not included as acquired assets in the DGS purchase price allocation and accordingly do not appear on the December 31, 2002 balance sheet. In addition, the Company did not record a liability related to these amounts in the DGS purchase price allocation as the Company does not have an obligation to pay the Getronics Parent in the event that the accounts receivable are not collected. During the nine months ended September 30, 2003 the Company collected approximately $14.6 million of such accounts receivable. As of September 30, 2003, the Company had not yet remitted approximately $2.0 million of the collections to Getronics Parent, which has been included in accounts payable in the accompanying consolidated balance sheet as of September 30, 2003.

6. Accrued Expenses

        Accrued expenses consists of the following (dollars in thousands):

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7. Debt

        Debt consists of the following (dollars in thousands):

        On July 3, 2003, DigitalNet, Inc., a wholly owned subsidiary of the Company, issued $125.0 million in aggregate principal amount of 9% senior notes due 2010 (the Notes). The net proceeds were applied to repay the indebtedness under the subordinated bridge note and the term loan. 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. There were no borrowings outstanding as of September 30, 2003 under the 2003 Credit Facility. The Company was in compliance with the financial covenants of the 2003 Credit Facility as of September 30, 2003. In connection with the termination of the previous credit facility and the repayment of the outstanding indebtedness under the subordinated bridge note and the term loan, the Company wrote-off approximately $4.5 million in previously deferred financing costs. Such write-off has been included in interest expense in the accompanying statements of operations for the three and nine months ended September 30, 2003.

8. 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 antidilutive. For purposes of computing basic earnings per common share, 701,848 and 1,044,686 shares of unvested common stock outstanding at September 30, 2002 and September 30, 2003, respectively, purchased by executives and employees of the Company are not treated as outstanding until they vest. The effect 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 be anti-dilutive. In addition, options and warrants to purchase 293,893 shares of common stock that were outstanding as of September 30, 2003, were excluded from the computation of diluted loss per common share as their effect would be anti-dilutive. The treasury stock effect of 701,848 and 1,044,686 shares of unvested common stock held by executives and employees as of September 30, 2002 and September 30, 2003, respectively, has also not been included in the computation of diluted loss per common share as their effect would be anti-dilutive.

        At completion of the 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. In addition the 1,044,686 shares of

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unvested common stock outstanding at September 30, 2003, become fully vested upon completion of the IPO.

        The following details the computation of the net loss per common share (dollars in thousands, except per share data):

        The pro forma earnings (loss) per common share is computed using the pro forma net income (loss) attributable to common stockholders and the pro forma weighted average common shares outstanding during the period. The pro forma net income (loss) attributable to common stockholders assumes the conversion of the Class A Preferred Stock into common stock and the purchase of the Class B Preferred Stock as if each had occurred at the beginning of each period presented. The pro forma weighted average common shares outstanding assumes the conversion of the Class A Preferred Stock into common stock at the IPO price of $17.00 per share as of the date of issuance for such

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preferred stock. The following details the computation of the pro forma earnings (loss) per common share (dollars in thousands, except per share data):

9. Stock-Based Compensation

        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 Accounting Principles Board (APB) Opinion No. 25 to the fair value method of accounting of SFAS No. 123, "Accounting for Stock-Based Compensation," if a company so elects. In 2003, the Company adopted SFAS No. 148. The adoption of this standard did not have a material impact on the Company's results of operations or financial position.

        The Company continues to account for its stock-based compensation in accordance with APB No. 25 and its related interpretations. In August 2003, the Company issued 199,025 options to purchase common stock to certain employees under the Company's Amended and Restated 2003 Stock Incentive Plan. Stock-based compensation cost related to stock option grants has been reflected in net income (loss) for the three and nine months ended September 30, 2003, as certain options granted had an exercise price less than the market value of the underlying common stock on the date of grant. The Company recorded approximately $794,000 of deferred compensation relating to the issuance of these options. The deferred compensation is being amortized over the four-year vesting period of the options. For the three and nine months ended September 30, 2003, the Company recorded compensation expense of approximately $54,000 related to these options. The remaining stock-based compensation expense recorded in the three and nine months ended September 30, 2003 related to shares of restricted stock held by certain employees.

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        The following table illustrates the effect on the net loss and the net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123.

        In accordance with SFAS No. 123, the fair value was 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 of approximately 50%.

10. Commitments and Contingencies

Audit Review

        Substantially all payments to DGS and the Company on government cost reimbursable contracts are provisional payments that are subject to adjustment upon audit by certain government audit agencies. DGS's incurred cost submissions have been completed through December 31, 2002 and have been audited through December 31, 2001. There are no outstanding incurred cost submissions or audits for any of DGS's previously acquired entities. The 2002 incurred cost audit for DGS 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 potential losses has been made in the accompanying consolidated financial statements.

11. Related Party Transactions

        At December 31, 2002 and September 30, 2003, the Company held notes receivable totaling approximately $1.0 million and $848,000, respectively, from certain executives and employees. These notes bear interest at 5 percent per annum. The notes were due and paid upon completion of the IPO in October 2003.

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        During 2001, the Company entered into a management services agreement with GTCR for $200,000 per year. In March 2002, this amount increased to $300,000 per year. The Company incurred approximately $225,000 related to this agreement for nine months ended September 30, 2003 and as of September 30, 2003, $575,000 was accrued but unpaid related to this agreement. This agreement terminated upon completion of the IPO in October 2003.

        In connection with the acquisition of DGS, the Company entered into certain transitional services agreements with Getronics Parent. Pursuant to these agreements, the Company agreed to provide maintenance services and office space to Getronics Parent. In addition Getronics Parent among other services, agreed to provide the Company with information technology and systems support. These agreements terminate at various dates from March 2003 to November 2004. For the nine months ended September 30, 2003, the Company paid approximately $3.5 million to Getronics Parent for services rendered under these agreements.

        From March 2003 through September 2003, the Company issued three purchase orders totaling approximately $310,000, on a subcontract basis, to a company owned by the son of the Company's Chairman and Chief Executive Officer. As of September 30, 2003, the Company has paid approximately $138,000 to the company pursuant to these purchase orders, and management anticipates that any remaining work under these orders will be invoiced and paid in the fourth quarter of 2003. 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.

12. Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on January 1, 2003 and adoption of this standard did not have a material impact on the Company's results of operations or financial position.

        In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. Among other things, SFAS No. 145 rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the amendment to SFAS No. 4, and 64, Extinguishment of Debt Made to Satisfy Sinking Fund Requirements. Through this rescission, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS No. 145 is effective for transactions occurring after May 15, 2002. Adoption of SFAS No. 145 required that the losses incurred by the Company as a result of the early retirement of debt in 2003 be reflected as a component of other income and expense and not treated as an extraordinary item.

        In June 2002, the FASB issued SFAS No. 146, Accounting for Costs of Exit or Disposal Activities. SFAS No. 146 nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that an exit or disposal activity related cost be recognized when the liability is incurred instead of when an entity commits to an exit plan. The provisions of SFAS No. 146 are effective for financial transactions initiated after December 31, 2002. The Company adopted SFAS

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No. 146 on January 1, 2003 and such adoption did not have a material impact on our results of operations or financial position.

        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for classifying and measuring as liabilities certain financial instruments that have characteristics of both liabilities and equity. The provisions of this statement require that any financial instruments that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur be classified as liabilities. This statement was effective immediately for instruments entered into or modified after May 31, 2003 and for all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The Company adopted SFAS No. 150 in the three months ended September 30, 2003, and such adoption did not have a material impact on the Company's results of operation or financial position.

        In December 2002, the Emerging Issues Task Force, or EITF, issued EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF 00-21 provides guidance on determining whether a revenue arrangement contains multiple deliverable items and if so, requires that revenue be allocated amongst the different items based on fair value. EITF 00-21 also requires that revenue on any item in a revenue arrangement with multiple deliverables not delivered completely must be deferred until delivery of the item is completed. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that implementation of EITF 00-21 will have a material impact on the Company's results of operations or financial position.

13. Guarantor Financial Statements

        The Notes issued by DigitalNet, Inc. are guaranteed on a full, unconditional, joint and several basis by DigitalNet Holdings, Inc. and DigitalNet, Inc.'s wholly-owned domestic subsidiaries, including DigitalNet Government Solutions, LLC.

        The following condensed consolidating financial information includes:

(1)

Condensed consolidating balance sheets as of December 31, 2002 and September 30, 2003, condensed consolidating statements of operations for the three and nine months ended September 30, 2003, and condensed consolidating statements of cash flows for the nine months ended September 30, 2003 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 subsidiaries, HFS GmbH and Getronics Government Solutions Puerto Rico, Inc., because these subsidiaries had no material operations, assets, or liabilities for the periods presented. Getronics Government Solutions Puerto Rico, Inc. was dissolved in the first quarter of 2003.

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        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.

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