** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** |
|---------------------|
|                |   |   |
| **ý**          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **          | ** ** | ** ** |
| ** **          | ** ** | **FOR THE QUARTER ENDED SEPTEMBER 25, 2004** |
|                |   |   |
| **o**               | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number**

**000-50080**

 

**SI International, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                                | ** ** | **52-2127278**                        |
|-----------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)             |       | (I.R.S. Employer  Identification No.) |
|                                                                        |       |                                  |
| **12012 Sunset Hills Road  Reston. Virginia**                               | ** ** | **20190-5869**                        |
| (Address of principal executive offices)                                    |       | (Zip Code)                            |
|                                                                        |       |                                  |
| Registrant’s telephone number, including area code: **(703) 234-7000** |

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    ý  Yes    o  No

 

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

 

As of November 1, 2004, there were 11,008,547 sharesoutstanding of the registrant’s common stock.

 

 

----

 

**SI INTERNATIONAL, INC.**

**FORM 10-Q**

# **INDEX**

# ** **

| **PART I.**       | **FINANCIAL INFORMATION**                                                                                                         | ** ** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| ITEM 1            | Financial Statements                                                                                                              |       |
|              | Consolidated Balance Sheets at September 25, 2004 (unaudited) and December  27, 2003                                              |       |
|              | Consolidated Statements of Operations for  the three and nine months ended September 25, 2004 and September 27, 2003  (unaudited) |       |
|              | Consolidated Statements of Cash Flows for  the nine months ended September 25, 2004 and September 27, 2003 (unaudited)            |       |
|              | Notes to Consolidated Financial Statements                                                                                        |       |
| ITEM 2            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       |       |
| ITEM 3            | Quantitative and Qualitative Disclosures  About Market Risk                                                                       |       |
| ITEM 4            | Controls and Procedures                                                                                                           |       |
|              |                                                                                                                              |       |
| **PART II.**      | **OTHER INFORMATION**                                                                                                             | ** ** |
| ITEM 1            | Legal Proceedings                                                                                                                 |       |
| ITEM 2            | Unregistered Sale of Equity Securities and  Use of Proceeds.                                                                      |       |
| ITEM 3            | Defaults Upon Senior Securities                                                                                                   |       |
| ITEM 4            | Submission of Matters to a Vote of Security  Holders                                                                              |       |
| ITEM 5            | Other Information                                                                                                                 |       |
| ITEM 6            | Exhibits and Reports on Form 8-K                                                                                                  |       |
| Signatures        |                                                                                                                              |       |
| Index to Exhibits |                                                                                                                              |       |

 

2

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## **PART I: FINANCIAL INFORMATION**

### **Item 1.  Financial Statements**

**SIInternational, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(Amountsin thousands, except share and per share data)**

 
| ** **                                                                                                                                                                                                | ** ** | **September 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| **Assets**                                                                                                                                                                                                | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Current assets:**                                                                                                                                                                                       |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                 |       | $                       | 4,864      |                   | $          | 23,252 |   |
| Accounts receivable, net                                                                                                                                                                                  |       | 52,228                  |       | 34,007                 |       |
| Other current assets                                                                                                                                                                                      |       | 6,281                   |       | 4,597                  |       |
| Total current assets                                                                                                                                                                                      |       | 63,373                  |       | 61,856                 |       |
| **Property and equipment, net**                                                                                                                                                                           |       | 4,136                   |       | 3,768                  |       |
| **Goodwill**                                                                                                                                                                                              |       | 94,041                  |       | 39,829                 |       |
| **Intangible assets, net**                                                                                                                                                                                |       | 4,546                   |       | —                 |       |
| **Other assets**                                                                                                                                                                                          |       | 2,577                   |       | 1,174                  |       |
| Total assets                                                                                                                                                                                              |       | $                       | 168,673    |                   | $          | 106,627 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                             | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Current liabilities:**                                                                                                                                                                                  |       |                    |       |                   |       |
| Accounts payable and accrued expenses                                                                                                                                                                     |       | $                       | 25,984     |                   | $          | 17,708 |   |
| Line of credit                                                                                                                                                                                            |       | 16,000                  |       | —                 |       |
| Current portion of long-term debt                                                                                                                                                                         |       | 5,250                   |       | —                 |       |
| Current portion of operating lease  obligations                                                                                                                                                           |       | 864                     |       | —                 |       |
| Escrow payable.                                                                                                                                                                                           |       | 1,034                   |       | —                 |       |
| Deferred revenue                                                                                                                                                                                          |       | 917                     |       | 3,975                  |       |
| Other current liabilities                                                                                                                                                                                 |       | 388                     |       | 465                    |       |
| Total current liabilities                                                                                                                                                                                 |       | 50,437                  |       | 22,148                 |       |
| **Long-term debt, net of current portion**                                                                                                                                                                |       | 21,750                  |       | —                 |       |
| **Long-term operating lease obligations**                                                                                                                                                                 |       | 1,124                   |       | —                 |       |
| **Other long-term liabilities**                                                                                                                                                                           |       | 5,406                   |       | 2,932                  |       |
| **Commitments and contingencies**                                                                                                                                                                         | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Stockholders’ equity:**                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Common stock—**$0.01  par value per share; 50,000,000 shares authorized; 8,486,864 and 8,451,507  shares issued and outstanding as of September 25, 2004 and December 27,  2003, respectively |       | 85                      |       | 85                     |       |
| Additional paid-in capital                                                                                                                                                                                |       | 76,094                  |       | 75,704                 |       |
| Deferred compensation                                                                                                                                                                                     |       | (243                    | )          | (340                   | )          |
| Retained earnings                                                                                                                                                                                         |       | 14,020                  |       | 6,098                  |       |
| Total stockholders’ equity                                                                                                                                                                           |       | 89,956                  |       | 81,547                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                           |       | $                       | 168,673    |                   | $          | 106,627 |   |

 

***See accompanying notes***

 

3

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** **

**SIInternational, Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**

**(Amountsin thousands, except per share data)**

**Unaudited**

 
| ** **                                      | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** |
|                                            |       |                    |       |                    |       |   |   |   |   |
| **Revenue**                                     |       | $                       | 72,926     |                    | $          | 42,082 |   | $ | 192,710 |   | $ | 124,130 |   |
| **Costs and expenses:**                         |       |                    |       |                    |       |   |   |   |   |
| Direct costs                                    |       | 49,106                  |       | 25,837                  |       | 121,435 |   | 75,127 |   |
| Indirect costs                                  |       | 17,615                  |       | 12,318                  |       | 53,974 |   | 38,648 |   |
| Depreciation and amortization                   |       | 516                     |       | 497                     |       | 1,704 |   | 1,495 |   |
| Amortization of intangible assets               |       | 171                     |       | —                  |       | 477 |   | — |   |
|                                            |       |                    |       |                    |       |   |   |   |   |
| Total operating expenses                        |       | 67,408                  |       | 38,652                  |       | 177,590 |   | 115,270 |   |
| **Income from operations**                      |       | 5,518                   |       | 3,430                   |       | 15,120 |   | 8,860 |   |
| **Other income (expense)**                      |       | (62                     | )          | —                  |       | (62 | ) | — |   |
| **Interest expense**                            |       | 693                     |       | 161                     |       | 1,964 |   | 469 |   |
| **Income before provision for income taxes**    |       | 4,763                   |       | 3,269                   |       | 13,094 |   | 8,391 |   |
| **Provision for income taxes**                  |       | 1,881                   |       | 1,290                   |       | 5,172 |   | 3,314 |   |
|                                            |       |                    |       |                    |       |   |   |   |   |
| **Net income**                                  |       | $                       | 2,882      |                    | $          | 1,979 |   | $ | 7,922 |   | $ | 5,077 |   |
|                                            |       |                    |       |                    |       |   |   |   |   |
| **Earnings per common share:**                  |       |                    |       |                    |       |   |   |   |   |
| ** **                                      |       |                    |       |                    |       |   |   |   |   |
| Basic net income per common share               |       | $                       | 0.34       |                    | $          | 0.23 |   | $ | 0.94 |   | $ | 0.60 |   |
|                                            |       |                    |       |                    |       |   |   |   |   |
| Diluted net income per common share             |       | $                       | 0.33       |                    | $          | 0.23 |   | $ | 0.89 |   | $ | 0.60 |   |
|                                            |       |                    |       |                    |       |   |   |   |   |
| **Basic weighted-average shares outstanding**   |       | 8,483                   |       | 8,447                   |       | 8,471 |   | 8,446 |   |
| **Diluted weighted-average shares outstanding** |       | 8,840                   |       | 8,612                   |       | 8,897 |   | 8,457 |   |

 

***See accompanying notes***

 

4

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**SIInternational, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(Amountsin thousands)**

**Unaudited**

** **
| ** **                                                                           | ** ** | **Nine Months Ended**    | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                           | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
| **Cash flows from operating activities:**                                            |       |                     |       |   |   |
| Net income                                                                           |       | $                        | 7,922      |   | $ | 5,077 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |       |                     |       |   |   |
| Depreciation and amortization                                                        |       | 1,704                    |       | 1,495 |   |
| Amortization of intangible assets                                                    |       | 477                      |       | — |   |
| Loss on disposal of fixed assets                                                     |       | —                   |       | 178 |   |
| Deferred income tax provision                                                        |       | 1,355                    |       | — |   |
| Stock-based compensation                                                             |       | 98                       |       | 100 |   |
| Amortization of deferred financing costs                                             |       | 343                      |       | 286 |   |
| Changes in operating assets and  liabilities, net of effect of business combination: |       |                     |       |   |   |
| Accounts receivable, net                                                             |       | (4,025                   | )          | 922 |   |
| Other current assets                                                                 |       | (297                     | )          | 770 |   |
| Other assets                                                                         |       | (543                     | )          | (25 | ) |
| Accounts payable and accrued expenses                                                |       | 1,847                    |       | 4,712 |   |
| Other current liabilities                                                            |       | —                   |       | 986 |   |
| Deferred revenue                                                                     |       | (3,058                   | )          | 75 |   |
| Operating lease obligation                                                           |       | (522                     | )          | — |   |
| Other long term liabilities                                                          |       | 1,368                    |       | 545 |   |
| Net cash provided by operating activities                                            |       | 6,669                    |       | 15,121 |   |
| **Cash flows from investing activities:**                                            |       |                     |       |   |   |
| Purchase of property and equipment                                                   |       | (1,050                   | )          | (1,025 | ) |
| Cash paid for acquisition of MATCOM                                                  |       | (66,086                  | )          | — |   |
| Net cash used in investing activities                                                |       | (67,136                  | )          | (1,025 | ) |
| **Cash flows from financing activities:**                                            |       |                     |       |   |   |
| Proceeds from exercise of stock options                                              |       | 390                      |       | 8 |   |
| Repayments from bank overdrafts                                                      |       | —                   |       | (2,201 | ) |
| Net borrowings under line of credit                                                  |       | 16,000                   |       | — |   |
| Proceeds from long-term debt                                                         |       | 30,000                   |       | — |   |
| Repayments of long-term debt                                                         |       | (3,000                   | )          | — |   |
| Payments of debt issuance fees                                                       |       | (1,202                   | )          | — |   |
| Repayments of notes payable                                                          |       | —                   |       | (137 | ) |
| Repayments of capital lease obligations                                              |       | (109                     | )          | (76 | ) |
| Net cash provided by (used in) financing  activities                                 |       | 42,079                   |       | (2,406 | ) |
| **Net change in cash and cash equivalents**                                          |       | (18,388                  | )          | 11,690 |   |
| **Cash and cash equivalents, beginning of  period**                                  |       | 23,252                   |       | 10,856 |   |
| **Cash and cash equivalents, end of period**                                         |       | $                        | 4,864      |   | $ | 22,546 |   |
| **Supplemental disclosures of cash flow  information:**                              |       |                     |       |   |   |
| Cash payments for interest                                                           |       | $                        | 1,368      |   | $ | 242 |   |
| Cash payments for income taxes                                                       |       | $                        | 4,817      |   | $ | 2,338 |   |
| Purchases of assets under capital lease                                              |       | $                        | —     |   | $ | 122 |   |

 

***See accompanying note****s*

 

5

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**SIInternational, Inc. and Subsidiaries**

** **

**Notesto consolidated financial statements**

**(Unaudited)**

 

**1.             Basisof Presentation**

 

The accompanying unaudited consolidated financialstatements of SI International, Inc. and its subsidiaries have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the quarter and nine months ended September 25, 2004 arenot necessarily indicative of the results that may be expected for the yearending December 25, 2004. For further information, refer to the financialstatements and footnotes included in SI International’s Annual Report onForm 10-K/A for the year ended December 27, 2003.  References to the “Company,” “we,” “us” and “our”refer to SI International, Inc. and its subsidiaries.

 

**2.             Summaryof significant accounting policies:**

 

**Principles of consolidation**

 

The accompanying consolidated financialstatements include the accounts of the Company and its wholly and majority-ownedsubsidiaries.   All significantintercompany transactions and accounts have been eliminated in consolidation.

 

**Use of estimates**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

**Reporting periods**

 

The Company’s fiscal year is based on thecalendar year and ends each year on the Saturday nearest but prior to December31 of that year, and our fiscal quarters end on the Saturday nearest but priorto the applicable quarterly month end. As a result, our fiscal year may be comprised of 52 or 53 weeks.  The fiscal quarters presented in this Form10-Q include 13 weeks.

 

**Cash and cash equivalents**

 

The Company considers all investments withmaturities of three months or less at the date of purchase to be cashequivalents.

 

**Revenue Recognition**

 

Ouraccounting policy regarding revenue recognition is written to comply with thefollowing criteria:  (1) a contract hasbeen executed; (2) the contract price is fixed and determinable; (3) deliveryof services or products has occurred; and (4) collectibility of the contractprice is considered probable and can be reasonably estimated.  Compliance with these criteria may require usto make significant judgments and estimates.

 

6

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**Significant customers**

 

Revenue generated from contracts with theFederal government or prime contractors doing business with the Federalgovernment accounted for a significant percent of revenues in the fiscalquarter and nine months ending September 25, 2004 and September 27, 2003.

 
| ** **                | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|---------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
|                      |       |                     |       |                     |       |   |   |   |   |
| Department of Defense     |       | 53.2                     | %          | 55.7                     | %          | 52.0 | % | 53.7 | % |
| Federal civilian agencies |       | 42.9                     |       | 37.9                     |       | 44.3 |   | 39.8 |   |
| Commercial entities       |       | 3.9                      |       | 6.4                      |       | 3.7 |   | 6.5 |   |
|                      |       |                     |       |                     |       |   |   |   |   |
| Total revenue             |       | 100.0                    | %          | 100.0                    | %          | 100.0 | % | 100.0 | % |

 

For the three and nine months endedSeptember 25, 2004, as well as the three and nine months of 2003, we had onecontract that generated more than 10% of our revenue.  Our Command, Control, Communications,Computer, Intelligence, Information, Surveillance and Reconnaissance (C4I2SR)contract with the U.S. Air Force Space Command represented approximately 21.0%and 24.6% of total revenue for the three months ended September 25, 2004 andSeptember 27, 2003, respectively, and 15.5% and 22.4% of total revenuefor the nine months ended September 25, 2004 and September 27, 2003,respectively.

 

**Deferred financing costs**

 

Costs incurred in establishing our creditfacility are deferred and amortized as interest expense over the term of therelated debt using the effective interest method. These deferred costs arereflected as a component of other assets in the accompanying consolidatedbalance sheets. The deferred financing costs consist of the following (inthousands):

 
| ** **               | ** ** | **September 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|--------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **               | ** ** | ** **              | ** ** | ** **             | ** ** |
| Deferred loan costs      |       | $                       | 2,321      |                   | $          | 1,120 |   |
| Accumulated amortization |       | (764                    | )          | (421                   | )          |
|                     |       | $                       | 1,557      |                   | $          | 699 |   |

 

**Deferred revenue**

 

At the end of the quarter ended September 25,2004 and the fiscal year ended December 27, 2003, we received advance paymentsof approximately $900,000 and $3,900,000, respectively, from a customer topurchase equipment to be used in a contract. The advances were reflected asdeferred revenue as of September 25, 2004 and December 27, 2003 in theaccompanying consolidated balance sheets.

 

**Fair value of financial instruments**

 

The Company’s financial instruments consistprimarily of cash and cash equivalents, accounts receivable, accounts payable,credit facilities, and notes payable. In management’s opinion, the carryingamounts of these financial instruments approximate their fair values atSeptember 25, 2004 and December 27, 2003.

 

**Stock-based compensation**

 

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation—Transition and Disclosure—anamendment of SFAS 123.”  This statementamends SFAS No. 123, “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, this statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The Company has chosen tocontinue to account for stock-based compensation using the intrinsic valuemethod prescribed in APB Opinion No. 25 and

 

7

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related interpretations. Accordingly, compensation expense for stock options is measured as theexcess, if any, of the fair market value of the Company’s stock at the date ofthe grant over the exercise price of the related option.  The Company has adopted the annual disclosureprovisions of SFAS No. 148 in its financial reports for the year ended December27, 2003 and has adopted the interim disclosure provisions for its financialreports for the quarters and nine months ended September 25, 2004 and September27, 2003.

 
| ** **                                                                                                                              | ** ** | **Three  Months Ended**  | ** ** | **Nine  Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                                              | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
| ** **                                                                                                                              | ** ** | ** **               | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income - as reported                                                                                                                |       | $                        | 2,882      |                     | $          | 1,979 |   | $ | 7,922 |   | $ | 5,077 |   |
|                                                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Add: total stock-based employee  compensation expense as reported under intrinsic value method (APB No. 25)  for all awards, net of tax |       |                     |       |                     |       |   |   |   |   |
|                                                                                                                                    |       | 19                       |       | 20                       |       | 59 |   | 61 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method (SFAS No. 123) for all  awards, net of tax     |       |                     |       |                     |       |   |   |   |   |
|                                                                                                                                    |       | (528                     | )          | (114                     | )          | (1,567 | ) | (534 | ) |
| Net income - pro forma                                                                                                                  |       | 2,373                    |       | 1,885                    |       | 6,414 |   | 4,604 |   |
|                                                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Basic earnings per share - as reported                                                                                                  |       | 0.34                     |       | 0.23                     |       | 0.94 |   | 0.60 |   |
|                                                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Diluted earnings per share - as reported                                                                                                |       | 0.33                     |       | 0.23                     |       | 0.89 |   | 0.60 |   |
|                                                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Basic earnings per share - pro forma                                                                                                    |       | 0.28                     |       | 0.22                     |       | 0.76 |   | 0.55 |   |
|                                                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Diluted earnings per share - pro forma                                                                                                  |       | 0.27                     |       | 0.22                     |       | 0.72 |   | 0.54 |   |
|                                                                                                                                         |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

**Earningsper share**

 

Basic EPS is computed by dividing reportednet income by the weighted average number of shares outstanding withoutconsideration of common stock equivalents or other potentially dilutivesecurities. Diluted EPS gives effect to common stock equivalents and otherpotentially dilutive securities outstanding during the period.

 

The following details the computation of net income per common share(in thousands):

 
| ** **                                  | ** ** | **Three  Months Ended**  | ** ** | **Nine  Months Ended**   | ** ** |
|---------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
|                                        |       |                     |       |                     |       |   |   |   |   |
| Net Income - Basic and Diluted              |       | $                        | 2,882      |                     | $          | 1,979 |   | $ | 7,922 |   | $ | 5,077 |   |
|                                        |       |                     |       |                     |       |   |   |   |   |
| **Weighted average share calculation:**     |       |                     |       |                     |       |   |   |   |   |
|                                        |       |                     |       |                     |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 8,483                    |       | 8,447                    |       | 8,471 |   | 8,446 |   |
| Treasury stock effect of stock options      |       | 357                      |       | 165                      |       | 426 |   | 11 |   |
|                                        |       |                     |       |                     |       |   |   |   |   |
| Diluted weighted average shares outstanding |       | 8,840                    |       | 8,612                    |       | 8,897 |   | 8,457 |   |
|                                             |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

**Reclassifications**

 

Certain prior year balances have beenreclassified to conform to the presentation of the current year.

 

8

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**3.             Acquisitions:**

 

On January 21, 2004, the Company completed thepurchase of MATCOM International Corp., or MATCOM, a provider of informationtechnology, systems engineering, logistics, and training.  Under the terms of the merger agreement, theCompany acquired MATCOM for $65.8 million, of which $63.7 million was paidin cash to the seller. The transaction was funded through cash on hand andborrowings under the credit facility. Contemporaneously with the closing of the acquisition of MATCOM, weamended our credit facility to increase the maximum amount of availableborrowings from $35.0 million to $80.0 million, of which $30.0 million iscomprised of a term loan and the remainder of a revolving credit facility, andto extend the maturity of the credit facility to January 21, 2008.  Approximately $54.2 million of the purchaseconsideration has been allocated to goodwill based primarily on the excess ofthe purchase price over the estimated fair value of net assets acquired, andapproximately $5.0 million of the purchase price has been assigned toidentifiable intangible assets of contractual customer relationships. Thecontractual customer relationships are being amortized accelerated over itsestimated remaining life of 11 years.

 

The total purchase price paid, including transactioncosts of $1.4 million, was allocated as follows (in thousands):

 
| Accounts receivable                      |   | 14,425 | ** ** |
|------------------------------------------|--------|--------|------------|
| Prepaid expense and other current assets |   | 1,631  |       |
| Income tax receivable                    |   | 1,216  |       |
| Property and equipment                   |   | 1,023  |       |
| Accounts payable & accrued expenses  |   | (9,304 | )          |
| Deferred rent                            |   | (31    | )          |
| Deferred income tax                      |   | (1,768 | )          |
| Contractual customer relationships       |   | 5,023  |       |
| Goodwill                                 |   | 54,212 |       |
| Total consideration                      |   | $      | 66,427     |   |
|                                          |        |        |            |  |

 

 

The following unaudited proforma combined condensedstatements of operations (in thousands, except per share) set forth theconsolidated results of operations of the Company for the nine months endedSeptember 25, 2004 and September 27, 2003 as if the above described acquisitionhad occurred at the beginning of each period presented. This unaudited proformainformation does not purport to be indicative of the actual financial positionor the results that would actually have occurred if the combination had been ineffect for the nine months ended September 25, 2004 and September 27, 2003.

 
| ** **                 | ** ** | **Nine Months Ended**   | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** |
|                       |       |                    |       |   |   |
| Revenue                    |       | $                       | 196,226    |   | $ | 177,184 |   |
| Net income                 |       | $                       | 8,106      |   | $ | 6,755 |   |
| Diluted earnings per share |       | $                       | 0.91       |   | $ | 0.80 |   |

 

 

**4.  Accountsreceivable:**

 

Accounts receivable consists of the following(in thousands):

 
| ** **                                                                                         | ** ** | **September 25, 2004** | ** ** | **December 27, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                                                                               |       |                   |       |                  |       |
| Billed accounts receivable                                                                         |       | $                      | 26,134     |                  | $          | 18,215 |   |
| Unbilled accounts receivable:                                                                      |       |                   |       |                  |       |
| Currently billable                                                                                 |       | 19,406                 |       | 13,137                |       |
| Unbilled retainages and milestones payments  expected to be billed within the next 12 months       |       | 7,104                  |       | 3,127                 |       |
| Indirect costs incurred and charged to  cost-plus contracts in excess of provisional billing rates |       | 1,075                  |       | 768                   |       |
| Total unbilled accounts receivable                                                                 |       | 27,585                 |       | 17,032                |       |
| Allowance for doubtful accounts                                                                    |       | (1,491                 | )          | (1,240                | )          |
| Accounts receivable, net                                                                           |       | $                      | 52,228     |                  | $          | 34,007 |   |

 

9

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The currently billable amounts included asunbilled accounts receivable as of September 25, 2004 represent amounts thatare billed during the following quarter of the current year. They are billingsfor services rendered prior to quarter-end, which are billed once necessarybilling data has been collected and an invoice is produced.

 

**5.             Propertyand equipment:**

 

Property and equipment consist of thefollowing (in thousands):

 
| ** **                                           | ** ** | **September 25, 2004** | ** ** | **December 27, 2003** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Computers and equipment                              |       | $                      | 7,488      |                  | $          | 6,389 |   |
| Software                                             |       | 2,094                  |       | 1,914                 |       |
| Furniture and fixtures                               |       | 1,664                  |       | 1,339                 |       |
| Leasehold improvements                               |       | 830                    |       | 676                   |       |
|                                                 |       | 12,076                 |       | 10,318                |       |
| Less—Accumulated depreciation and  amortization |       | (7,940                 | )          | (6,550                | )          |
| Property and equipment, net                          |       | $                      | 4,136      |                  | $          | 3,768 |   |

 

Property and equipment includes assetsfinanced under capital lease obligations of approximately $93,000 and $178,000,net of accumulated amortization, as of September 25, 2004 and December 27,2003, respectively.

 

Depreciation and amortization expense ofapproximately $516,000 and $497,000 was recorded in the quarter ended September25, 2004 and the quarter ended September 27, 2003, respectively

 

**6.             Accountspayable and accrued expenses:**

 

Accounts payable and accrued expenses consistof the following (in thousands):

 
| ** **                            | ** ** | **September  25, 2004** | ** ** | **December  27, 2003** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                  |       |                    |       |                   |       |
| Accounts payable                      |       | $                       | 8,480      |                   | $          | 6,965 |   |
| Accrued compensation and benefits     |       | 11,068                  |       | 5,675                  |       |
| Other accrued liabilities             |       | 6,436                   |       | 5,068                  |       |
|                                  |       |                    |       |                   |       |
| Accounts payable and accrued expenses |       | $                       | 25,984     |                   | $          | 17,708 |   |

 

**7.             Debt:**

 

Debt, which is included in current and longterm liabilities in the accompanying balance sheets, consists of the following(in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **September  25, 2004** | ** ** | **December  27, 2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Credit facilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                    |       |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Line of credit at September 25, 2004, bears  interest at LIBOR plus 275 to 350 basis points or a specified base rate plus  175 to 250 basis points, interest due monthly, principal due January 21, 2008                                                                                                                                                                                                                                                                  |       | $                       | 16,000     |                   | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Term loan at September 24, bears interest  at LIBOR plus 275 to 350 basis points or a specified base rate plus 175 to  250 basis points, interest due monthly, three $1.5 million quarterly  principal payments starting on June 30, 2004, eight $1.875 million quarterly  principal payments starting on March 31, 2005, three $2.25 million quarterly  principal payments starting on March 31, 2007, and a final $3.75 million  principal payment on December 31, 2007 |       | 27,000                  |       | —                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Notes payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                    |       |                   |       |
| Indemnification note payable                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 340                     |       | 340                    |       |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                       | 43,340     |                   | $          | 340 |   |

 

10

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The original credit facility (the 2002 creditfacility) consisted of a $35.0 million secured revolving credit arrangementwith Wachovia Bank, N.A. acting as Administration Agent for a consortium oflenders.  With the closing of theacquisition of MATCOM, the Company amended the 2002 credit facility in January2004. The amended credit facility (the 2004 credit facility) consists of a $30million term loan and a $50.0 million secured revolving creditarrangement.  The 2004 credit facility issecured by a pledge of substantially all of our current and future tangible andintangible assets, as well as those of our current and future subsidiaries,including accounts receivable, inventory and capital stock of our existing andfuture subsidiaries.  In addition, theCompany is required to maintain compliance with financial and nonfinancial covenants.

 

**8.             Commitmentsand contingencies:**

 

**Leases**

 

As of September 25, 2004, the Company hadnoncancelable operating leases, primarily for real estate, that expire over thenext ten years. Rental expense during the quarter ended September 25, 2004 wasapproximately $1.6 million, compared to rental expense of approximately $1.3million during the quarter ended September 27, 2003.

 

**Contract cost audits**

 

Payments to the Company on government costreimbursable contracts are based on provisional or estimated indirect rates,which are subject to audit on an annual basis by the Defense Contract AuditAgency (DCAA). The cost audits result in the negotiation and determination ofthe final indirect cost rates that the Company may use for the period(s)audited. The final rates, if different from the provisional rates, may createan additional receivable or liability for the Company. The Company’s revenuerecognition policy calls for revenue recognized on all cost reimbursablegovernment contracts to be recorded at provisional rates unless collectibilityis reasonably assured for costs incurred at higher rates. To the extent theindirect rate differential creates a liability for the Company, thedifferential is recognized as a reduction to revenue when identified.

 

**Litigation and claims**

 

From time to time, the Company is involved inlitigation, claims and disputes that arise in the ordinary course of itsbusiness.  In addition, the Company issubject to audit, review, and investigation by various agencies of the Federalgovernment to determine compliance with applicable federal statutes andregulations.  As a Federal governmentcontractor, the Company is subject to audit by certain federal agencies todetermine if the Company’s performance and administration of its governmentcontracts are compliant with contractual requirements and applicable federalstatutes and regulations.

 

11

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While the Company cannot predict the ultimate outcome of legalproceedings, government audits, investigations, claims and disputes to which itis or may be subject, the Company currently believes, based uponinformation available to us as of the date of this filing, that any ultimateliability arising out of these matters will not have a material adverse effecton our financial position, results of operations, or cash flows.

 

**9.             Stockholders’equity:**

 

**Stock option plan**

 

In 2002, the Company adopted the 2002 StockIncentive Plan to grant stock options to purchase up to 1,600,000 shares of itscommon stock to its employees and employees of its affiliates.  In March 2004, the Board of Directorsincreased the number of reserved shares by 160,000 so that the total number ofreserved shares totals 1,760,000.  Theterms of the 2002 Stock Incentive Plan state that this ceiling of 1,600,000shares of common stock shall automatically increase at the beginning of eachfiscal year by a number of shares equal to the lesser of 160,000 shares ofcommon stock and an amount determined by the Company’s Board of Directors.  As of September 25, 2004, the Company hadissued 1,405,929 stock options under the 2002 Stock Incentive Plan against aceiling of 1,760,000 shares of common stock authorized under this plan.

 

**Common stock offering**

 

On October 6, 2004, the Company andaffiliates of Frontenac sold an aggregate of 3,520,000 shares of the Company’scommon stock in an underwritten public offering priced at $21.85 pershare.  Of the 3,520,000 shares offered,2,520,000 shares were sold by the Company, including an option to purchase320,000 shares to cover over-allotments that was granted to, and exercised by,the underwriters, and 1,000,000 shares were sold by the sellingstockholders.  In connection with thesecondary offering, the Company received approximately $51.3 million in netproceeds, which was primarily used to payoff the $27.0 million of term loanborrowings and the $16.0 million of borrowings under the revolving line ofcredit on October 8, 2004.  The Company will write-off a portion ofdeferred financing costs associated with the pay-off of the borrowings, whichwill be reflected in the Company’s fourth quarter of fiscal 2004.  The Company has incurred approximately$775,000 in costs in connection with this offering of common stock.  Such costs will be netted against theproceeds and recorded in stockholder's equity. 

 

**Item 2****.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*The followingdiscussion and analysis should be read in conjunction with the consolidatedfinancial statements and related notes included elsewhere in this Form 10-Q.This discussion and analysis contains forward-looking statements that**involve**known and unknown**risks**,**uncertainties,**and other factors that maycause**our**actual results, level ofactivity, performance or achievements**to**be materially different from any future results, levels of activity,performance or achievements expressed or implied by such**forward**-**looking statements. In**some cases, you canidentify these statements by forward-looking words such as “anticipate,” “believe,”“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,”**and**“would” or similar words.You should read statements that contain these words carefully because theydiscuss our future expectations, contain projections of our future results ofoperations or of our financial position, or state other forward-lookinginformation. We believe that it is important to communicate our futureexpectations to our investors. However, there may be events**in the**future that we are not ableto predict accurately or control. In particular, statements that we makein this section relating to the sufficiency of anticipated sources of capitalto meet our cash requirements are forward- looking statements. Our actual resultscould differ materially from those anticipated in these forward-lookingstatements for many reasons, including as a result of some of the factorsdescribed below, elsewhere in this Form 10-Q and in the section entitled “RiskFactors” in our Form 10-K/A for the fiscal year ended December 27, 2003.   You should not place undue reliance on theseforward-looking statements, which apply only as of the date of the filing ofthis Form 10-Q.*

 

*Our fiscal year isbased on the calendar year and ends each year on the Saturday closest to butprior to December 31 of that year, and our fiscal quarter ends 13 weeksafter the conclusion of the previous fiscal quarter.*

 

*References to the “Company,”“we,” “us” and “our” refer to SI International, Inc. and its subsidiaries.*

 

12

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**Overview**

 

We are a provider of information technology andnetwork solutions to the Federal government. Our clients include U.S. Air Force Space Command, the Department ofState, the U.S. Army, the Department of Homeland Security, Federal RetirementThrift Investment Board, the National Institutes of Health, the Department ofAgriculture, U.S. Air Force Electronic Systems Center, the U.S. Navy and theintelligence community.  We combine ourtechnology and industry expertise to provide a full spectrum ofstate-of-the-practice solutions and services, from design and development toimplementation and operations, which assist our clients in achieving missionsuccess.

 

In the three and nine months ended September25, 2004, we received 96.1% and 96.3%, respectively, of our revenues fromservices we provided to various departments and agencies of the Federalgovernment and 3.9% and 3.7%, respectively, of our total revenues from workperformed for commercial entities. In comparison, for the three and nine monthsended September 27, 2003, we received 93.6% and 93.5%, respectively, of ourrevenues from services we provided to Federal government agencies and 6.4% and6.5%, respectively, of total revenues from work performed for commercialentities.  The following table shows ourrevenues from the client groups listed as a percentage of total revenue.Revenue data for the Department of Defense includes revenue generated from workperformed under engagements for both the Department of Defense and theintelligence community.

 
| ** **                | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|---------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
|                      |       |                     |       |                     |       |   |   |   |   |
| Department of Defense     |       | 53.2                     | %          | 55.7                     | %          | 52.0 | % | 53.7 | % |
| Federal civilian agencies |       | 42.9                     | %          | 37.9                     | %          | 44.3 | % | 39.8 | % |
| Commercial entities       |       | 3.9                      | %          | 6.4                      | %          | 3.7 | % | 6.5 | % |
| Total revenue             |       | 100.0                    | %          | 100.0                    | %          | 100.0 | % | 100.0 | % |

 

We have derived a substantial majority of ourrevenues from governmental contracts under which we act as a prime contractor.We also provide services indirectly as a subcontractor. We intend to focus onretaining and increasing the percentage of our business as prime contractorbecause it provides us with client relationships that generate higher levels ofrevenue. The following table shows our revenues as prime contractor and assubcontractor as a percentage of our total revenue for the following periods:

 
| ** **             | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
|                   |       |                     |       |                     |       |   |   |   |   |
| Prime contract revenue |       | 81.2                     | %          | 85.0                     | %          | 79.9 | % | 83.7 | % |
| Subcontract revenue    |       | 18.8                     | %          | 15.0                     | %          | 20.1 | % | 16.3 | % |
| Total revenue          |       | 100.0                    | %          | 100.0                    | %          | 100.0 | % | 100.0 | % |

 

Our services are provided under three typesof contracts: cost reimbursable, time and materials and fixed price contracts.The following table shows our revenues from each of these types of contracts asa percentage of our total revenue for the following periods:

 
| ** **         | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|--------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **         | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
|               |       |                     |       |                     |       |   |   |   |   |
| Cost reimbursable  |       | 33.3                     | %          | 40.4                     | %          | 28.5 | % | 38.4 | % |
| Time and materials |       | 46.6                     | %          | 32.4                     | %          | 48.1 | % | 35.6 | % |
| Fixed price        |       | 20.1                     | %          | 27.2                     | %          | 23.4 | % | 26.0 | % |
| Total              |       | 100.0                    | %          | 100.0                    | %          | 100.0 | % | 100.0 | % |

 

13

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Under cost reimbursable contracts, we arereimbursed for costs that are determined to be reasonable, allowable andallocable to the contract, and paid a fee representing the profit marginnegotiated between us and the contracting agency, which may be fixed orperformance based. Under cost reimbursable contracts we recognize revenues andan estimate of applicable fees earned as costs are incurred. We consider fixedfees under cost reimbursable contracts to be earned in proportion to theallowable costs incurred in performance of the contract. For performance-basedfees under cost reimbursable contracts, we recognize the relevant portion ofthe expected fee to be awarded by the client at the time such fee can bereasonably estimated, based on factors such as our prior award experience andcommunications with the client regarding performance. In general, costreimbursable contracts are the least profitable of our government contracts. Inthe three and nine months ended September 25, 2004, 33.3% and 28.5%,respectively, of our revenues were derived from cost reimbursablecontracts.  In the three and nine monthsended September 27, 2003, 40.4% and 38.4%, respectively, of our revenues werederived from cost reimbursable contracts.

 

Under time and materials contracts, we arereimbursed for labor at fixed hourly rates and generally reimbursed separatelyfor allowable materials, costs and expenses. To the extent that our actuallabor costs under a time and materials contract are higher or lower than thebilling rates under the contract, our profit under the contract may either begreater or less than we anticipated or we may suffer a loss under the contract.We recognize revenues under time and materials contracts by multiplying thenumber of direct labor hours expended by the contract billing rates and addingthe effect of other billable direct costs. In general, we realize a higherprofit margin on work performed under time and materials contracts than costreimbursable contracts. In the three and nine months ended September 25, 2004,46.6% and 48.1%, respectively, of our revenues were derived from time andmaterials contracts.  In the three andnine months ended September 27, 2003, 32.4% and 35.6%, respectively, of our revenueswere derived from time and material contracts.

 

Under fixed price contracts, we perform specific tasks for a fixedprice. Compared to cost reimbursable and time and materials contracts, fixedprice contracts generally offer higher profit margin opportunities but involvegreater financial risk because we bear the impact of cost overruns in returnfor the full benefit of any cost savings. We generally do not undertakecomplex, high-risk work, such as long-term software development, under fixedprice terms. Fixed price contracts may include either a product delivery orspecific service performance over a defined period.  Revenue on fixed price contracts that providefor the Company to render services throughout a period is recognized as earnedaccording to contract terms as the service is provided on a proportionateperformance basis.  These contracts aregenerally less than six months in duration. For fixed price contracts that provide for the delivery of a specificproduct with related customer acceptance provisions, revenues are recognized asthose products are delivered and accepted. In the three and nine months ended September 25, 2004, 20.1% and 23.4%,respectively, of our revenues were derived from fixed price contracts.   In the three and nine months ended September27, 2003, 27.2% and 26.0%, respectively, of our revenues were derived fromfixed price contracts.

 

If we anticipate a loss on a contract, weprovide for the full amount of anticipated loss at the time of thatdetermination.

 

Our most significant expense is direct cost,which consists primarily of direct labor costs for program personnel and directexpenses incurred to complete contracts, including cost of materials andsubcontractor costs. Our ability to predict accurately the number and types ofpersonnel, their salaries, and other costs, can have a significant impact onour direct cost.

 

The allowability of certain direct andindirect costs in federal contracts is subject to audit by the client, usuallythrough the DCAA. Certain indirect costs are charged to contracts and paid bythe client using provisional, or estimated, indirect rates, which are subjectto later revision, based on the government audits of those costs.

 

We actively monitor our relationships withour clients during our engagements, as well as the quality of the service weprovide, to assist in our efforts to win recompetition bids. In addition, westrive to maintain good relationships with a wide variety of governmentcontractors.

 

**Subsequent Events**

 

On October 6, 2004, the Company and affiliates ofFrontenac sold an aggregate of 3,520,000 shares of the Company’s common stockin an underwritten public offering priced at $21.85 per share.  Of the 3,520,000 shares offered, 2,520,000shares were sold by the Company, including an option to purchase 320,000 sharesto cover over-allotments that was granted to, and exercised by, theunderwriters, and 1,000,000 shares were sold by the selling stockholders.   In connection with the secondary offering,the Company received approximately $51.3 million in net proceeds, which was

 

14

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primarilyused to payoff the $27.0 million of term loan borrowings and the $16.0 millionof borrowings under the revolving line of credit on October 8, 2004.  The Company will write-off a portion ofdeferred financing costs associated with the pay-off of the borrowings, whichwill be reflected in the Company’s fourth quarter of fiscal 2004.  The Company has incurred approximately$775,000 in costs in connection with this offering of common stock.  Such costs will be netted against theproceeds and recorded in stockholder's equity. Additional information relating to this event is included below in theSection entitled “Liquidity and Capital Resources.”

 

**Results of Operations**

 

The following table sets forth certain itemsfrom our consolidated statements of operations as a percent of revenues for theperiods indicated.

 
| ** **                               | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**   | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** |
|                                     |       |                    |       |                    |       |   |   |   |   |
| Revenue                                  |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Costs and expenses:                      |       |                    |       |                    |       |   |   |   |   |
| Direct costs                             |       | 67.2                    |       | 61.3                    |       | 63.0 |   | 60.5 |   |
| Indirect costs                           |       | 24.2                    |       | 29.3                    |       | 28.0 |   | 31.1 |   |
| Depreciation                             |       | 0.7                     |       | 1.2                     |       | 0.9 |   | 1.2 |   |
| Amortization                             |       | 0.2                     |       | —                  |       | 0.2 |   | — |   |
| Total operating expenses                 |       | 92.3                    |       | 91.8                    |       | 92.1 |   | 92.8 |   |
| Income from operations                   |       | 7.7                     |       | 8.2                     |       | 7.9 |   | 7.2 |   |
| Other income (expense)                   |       | (0.1                    | )          | —                  |       | (0.0 | ) | — |   |
| Interest expense                         |       | 1.0                     |       | 0.4                     |       | 1.1 |   | 0.4 |   |
| Income before provision for income taxes |       | 6.6                     |       | 7.8                     |       | 6.8 |   | 6.8 |   |
| Provision for income taxes               |       | 2.6                     |       | 3.1                     |       | 2.7 |   | 2.7 |   |
| Net income                               |       | 4.0                     | %          | 4.7                     | %          | 4.1 | % | 4.1 | % |

 

**Three months ended September 25, 2004compared with three months ended September 27, 2003**

 

*Revenue.*  For the three months ended September 25,2004, our revenues increased 73.3% to $72.9 million from$42.1 million for the three months ended September 27, 2003. Revenues fromwork under Federal government contracts increased 77.7% to $70.0 millionfor the three months ended September 25, 2004 from $39.4 million for the threemonths ended September 27, 2003. This increase was primarily attributable toincreased activity in our applications development, engineering and networksolutions services and revenue from our most recent acquisition, MATCOM.  Commercial revenues increased 6.3% to $2.9million in the three months ended September 25, 2004 from $2.7 million in thethree months ended September 27, 2003.

 

*Direct costs.*  Direct costs include direct labor and otherdirect costs such as materials and subcontracts. Generally, changes in directcosts are correlated to changes in revenue as resources are consumed in theproduction of that revenue. For the three months ended September 25, 2004,direct costs increased 90.1% to $49.1 million from $25.8 million forthe three months ended September 27, 2003. This increase was attributableprimarily to the increase in revenue. As a percentage of revenue, direct costswere 67.2% for the three months ended September 25, 2004 as compared to 61.3%for the three months ended September 27, 2003.

 

*Indirect costs.*  Indirect costs include facilities, selling,bid and proposal, indirect labor, fringe benefits and other discretionarycosts. For the three months ended September 25, 2004, indirect costs increased43.0% to $17.6 million from $12.3 million for the three months endedSeptember 27, 2003.  This $5.3 million increase was primarilyattributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs as well as the acquisitionof MATCOM and the growth in our sales and marketing efforts.  As a percentage of revenue, indirectcosts were 24.2% for the three months ended September 25, 2004 as compared to29.3% for the three months ended September 27, 2003.

 

*Depreciation.*Forthe three months ended September 25, 2004, depreciation expense increased 3.8%to $0.52 million from $0.50 million for the three months ended September 27,2003.  This increase was attributableprimarily to increased levels of capital expenditures. As a percentage ofrevenue, depreciation expense was 0.7% for the three months ended September 25,2004 compared to 1.2% for the three months ended September 27, 2003.

 

15

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*Amortization of intangible assets.*Forthe three months ended September 25, 2004, amortization of intangible assetswas $0.17 million, compared to $0 for the three months ended September 27,2003.  This increase was attributed to the acquisition of MATCOM.  The Company uses an accelerated method ofamortization.

 

*Income fromoperations.*  Forthe three months ended September 25, 2004, income from operations increased60.8% to $5.5 million from $3.4 million for the three months endedSeptember 27, 2003. This increase was attributable primarily to increasedrevenues.  As a percentage of revenue,income from operations was 7.7% for the three months ended September 25, 2004compared to 8.2% for the three months ended September 27, 2003.

 

*Interest expense.*  Interest expense increased 330.4% to$0.69 million for the three months ended September 25, 2004 from$0.16 million for the three months ended September 27, 2003. This increase was attributable primarily toincreased borrowings under our credit facility made in connection with theacquisition of MATCOM.  As apercentage of revenue, interest expense was 1.0% for the three months endedSeptember 25, 2004 as compared to 0.4% for the three months ended September 27,2003.  We anticipate interest expense to remain at higher levels throughoutfiscal year 2004 as compared to the same periods in 2003.

 

*Provisionfor/benefit from income taxes.*  The provision for income tax was$1.9 million in the three months ended September 25, 2004, compared to$1.3 million for the three months ended September 27, 2003.   For the third quarters of both 2004 and 2003, our tax provision represents aneffective tax rate of 39.5%.  Oureffective tax rate is greater than the federal statutory rate of 34% dueprimarily to state income tax rates.

 

**Nine months ended September 25, 2004 comparedwith nine months ended September 27, 2003**

 

*Revenue.*  For the nine months ended September 25, 2004,our revenues increased 55.2% to $192.7 million from $124.1 millionfor the nine months ended September 27, 2003. Revenues from work under Federalgovernment contracts increased 59.4% to $185.5 million for the nine monthsended September 25, 2004 from $116.0 million for the nine months endedSeptember 27, 2003. This increase was attributable primarily to increasedactivities in our outsourcing, applications development, engineering andnetwork solutions services and revenue from our most recent acquisition,MATCOM.  Commercial revenues decreased11.1% to $7.2 million in the nine months ended September 25, 2004 from $8.1million in the nine months ended September 27, 2003.  The decrease was attributable primarily toincrease in our focus on Federal government support.

 

*Direct costs.*  Direct costs include direct labor and otherdirect costs such as materials and subcontracts. Generally, changes in directcosts are correlated to changes in revenue as resources are consumed in theproduction of that revenue. For the nine months ended September 25, 2004,direct costs increased 61.6% to $121.4 million from $75.1 million forthe nine months ended September 27, 2003. This increase was attributableprimarily to the increase in revenue. As a percentage of revenue, direct costswere 63.0% for the nine months ended September 25, 2004 as compared to 60.5%for the nine months ended September 27, 2003.

 

*Indirect costs.*  Indirect costs include facilities, selling,bid and proposal, indirect labor, fringe benefits and other discretionarycosts. For the nine months ended September 25, 2004, indirect costs increased39.7% to $54.0 million from $38.6 million for the nine months endedSeptember 27, 2003.  This increase was primarily attributable tothe expected growth of support functions necessary to facilitate and administerthe growth in direct costs, as well as the acquisition of MATCOM and the growthin our sales and marketing efforts.    As a percentage of revenue, indirect costswere 28.0% for the nine months ended September 25, 2004 as compared to 31.1%for the nine months ended September 27, 2003.

 

*Depreciation.*Forthe nine months ended September 25, 2004, depreciation expense was $1.7 millionas compared to $1.5 million for the nine months ended September 27, 2003.  As a percentage of revenue, depreciationexpense was 0.9% for the nine months ended September 25, 2004 compared to 1.2%for the nine months ended September 27, 2003.

 

*Amortization of intangible assets.*Forthe nine months ended September 25, 2004, amortization of intangible assets was$0.5 million, compared to $0 for the nine months ended September 27, 2003.  Thisincrease was attributed to the acquisition of MATCOM.  The Company uses an accelerated method ofamortization.

 

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*Income fromoperations.*  Forthe nine months ended September 25, 2004, income from operations increased70.7% to $15.1 million from $8.9 million for the nine months endedSeptember 27, 2003. This increase was attributable primarily to the higherrevenue.  As a percentage of revenue,income from operations was 7.9% for the nine months ended September 25, 2004compared to 7.2% for the nine months ended September 27, 2003.

 

*Interest expense.*  Interest expense increased 318.8% to$2.0 million for the nine months ended September 25, 2004 from$0.47 million for the nine months ended September 27, 2003. This increase was attributable primarily toincreased borrowings under our credit facility made in connection with theacquisition of MATCOM.  As apercentage of revenue, interest expense was 1.1% for the nine months endedSeptember 25, 2004 as compared to 0.4% for the nine months ended September 27,2003.  We anticipate interest expense to remain at higher levels throughoutfiscal year 2004 as compared to the same periods in 2003.

 

*Provisionfor/benefit from income taxes.*  The provision for income tax was$5.2 million in the nine months ended September 25, 2004, compared to$3.3 million for the nine months ended September 27, 2003.   For both the nine months ended September 25,2004 and the nine months ended September 27, 2003, we have recorded an expensefor income tax, which reflects an effective rate of 39.5%.

 

### **Liquidity andCapital Resources**

### ** **

Our primary liquidity needs are the financing ofworking capital, capital expenditures and acquisitions. We have historicallyrelied primarily on cash flow from operations, borrowings under our creditfacility and from some of our stockholders and the sale of common and preferredstock to provide for our cash needs.

 

Net cash provided by operations was $6.7million for the nine months ended September 25, 2004 compared with$15.1 million net cash provided by operations for the nine months endedSeptember 27, 2003.  Cash provided byoperations in the nine months ended September 25, 2004 was attributable to netincome of $8.0 million, depreciation, amortization and other non-cashitems of $4.0 million, offset by an increase in net operating assets by $5.3million. Cash provided by operations in the nine months ended September 27,2003 was attributable to net income of $5.1 million, depreciation,amortization and other non-cash items of $2.1 million, and decrease in workingcapital and other operating assets and liabilities of $7.9 million.

 

Cash used in investing activities was $67.1million for the nine months ended September 25, 2004 and $1.0 million for thenine months ended September 27, 2003. For the nine months ended September 25, 2004, we acquired MATCOM for$66.1 million and invested $1.0 million in capital assets.  For the nine months ended September 27, 2003,we invested $1.0 million in capital assets.

 

Cash provided by (used in) financing activitieswas $42.1 million for the nine months ended September 25, 2004, compared withcash used in financing activities of $2.4 million for the nine months endedSeptember 27, 2003.  Cash provided byfinancing activities for the nine months ended September 25, 2004 wasattributable to $16.0 million net borrowings under our revolving line ofcredit, $30.0 million of long-term debt provided by our credit facility and$0.4 million provided by proceeds from the exercise of stock options, partiallyoffset by $1.2 million repayments of debt issuance fees, $3.0 million forrepayment of long-term debt, and $0.1 million of capital lease payments.   Cash used in financing activities for thenine months ended September 27, 2003 was attributable to repayments for notesand leases of $0.2 million and repayment of bank overdrafts of $2.2 million.

 

Cash and cash equivalents as of September 25,2004 and September 27, 2003 were $4.9 million and $22.5 million,respectively.

 

In connection with the acquisition of MATCOM, weamended our credit facility to increase the borrowing capacity from$35 million to $80 million and extended the term to January 21,2008.

 

The amended credit facility includes a$30 million term loan and a $50 million revolving credit facility.Under the term loan, we are required to make three $1.5 million quarterlyprincipal payments starting on June 30, 2004, eight $1.875 millionquarterly principal payments starting on March 31, 2005, three$2.25 million quarterly principal payments starting on March 31, 2007,and a final $3.75 million principal payment on December 31,2007.  In connection with the secondaryoffering that closed on October 6, 2004, the Company paid off the $27.0 millionof term loan borrowings and the $16.0 million of borrowings under the revolvingline of credit on October 8, 2004. In connection with the early repayment of

 

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debt, the Company will write-off of a portion of deferred financingcosts in the fourth quarter of fiscal 2004.

 

The amended credit facility permits us, subject toour compliance with financial and nonfinancial covenants and customaryconditions, to make up to $50.0 million of revolving credit borrowings andalso provides for the issuance of letters of credit, although the amount ofavailable revolving credit borrowings is reduced by the amount of anyoutstanding letters of credit issued under the facility.

 

Any borrowings outstanding under the facility will,at our option, bear interest either at floating rates equal to LIBOR plus aspread ranging from 275 to 350 basis points or a specified base rate plus aspread ranging from 175 to 250 basis points, with the exact spread determinedupon the basis of our ratio of outstanding indebtedness to our earnings beforeinterest, taxes, and depreciation and amortization expense, as defined in thenew credit facility.

 

We and each of our existing and future subsidiariesare jointly and severally liable with respect to the payment of all borrowingsand other amounts due and performance of all obligations under the new creditfacility. The new credit facility is secured by a pledge of substantially allof our current and future tangible and intangible assets, as well as those ofour current and future subsidiaries, including accounts receivable, inventoryand capital stock of our existing and future subsidiaries. The new creditfacility requires us to make mandatory prepayments of outstanding borrowings,with a corresponding reduction in the maximum amount of borrowings availableunder the facility; net proceeds from certain insurance recoveries and assetsales, 100% of the net proceeds from debt issuances, and 50% of the netproceeds from certain equity issuances are subject to specified exceptions.Also, the new credit facility includes a number of restrictive covenantsincluding, among other things, limitations on our leverage and capitalexpenditures, limitations on our ability to incur additional indebtedness orliens, requirements that we maintain minimum ratios of cash flow to fixedcharges and prohibitions on payment of dividends on our capital stock,limitations on our ability to enter into mergers, acquisitions or sales of ourassets, and prohibitions on certain transactions among our subsidiaries andaffiliated companies. The new credit facility also contains events of default,including, among other events, any transaction resulting in a new stockholderor group of stockholders acquiring control of our board of directors orownership of greater than 40% of our outstanding capital stock, any default byus under any material government contract or other material contract to whichwe are a party, and the suspension of our ability to enter into contracts withthe federal, state or local governments generally.

 

We currently anticipate that cash flow fromoperations and borrowings available under our new credit facility will besufficient to meet our presently anticipated capital needs for at least thenext twelve months, but may be insufficient to provide funds necessary for anyfuture acquisitions we may make, whether during the next twelve months orthereafter. To the extent that we require additional funds, whether foracquisitions or otherwise, we may seek additional equity or debt financing.

 

On March 22, 2004, we filed a shelf registrationstatement with the Securities and Exchange Commission relating to the futureoffering of up to an aggregate of $100 million of our common stock, preferredstock, depositary shares, debt securities and warrants exercisable for commonor preferred stock.  The shelfregistration statement also registers the offering of up to 1,500,000 shares ofcommon stock held by affiliates of Frontenac Company, our largeststockholder.  On May 21, 2004, the shelfregistration statement was declared effective by the Securities and ExchangeCommission.  On October 6, 2004, theCompany and affiliates of Frontenac sold an aggregate of 3,200,000 shares ofthe Company’s common stock in an underwritten public offering priced at $21.85per share.  Of the 3,200,000 shares offered,2,200,000 shares were sold by the Company and 1,000,000 shares were sold by theselling stockholders.  In connection withthis offering, the Company received approximately $51.3 million in netproceeds.  The Company will not receiveany of the proceeds from the sale of common stock by the sellingstockholders.  The Company also grantedthe underwriters an option to purchase up to 320,000 shares solely to coverover-allotments, which the underwriters exercised.

 

The Company incurred approximately $775,000 in costsin connection with the filing of the shelf registration statement in March2004, a proposed public offering of common stock that was contemplated duringMay 2004, and the secondary offering that closed in October 2004.  Such costs will be netted against theproceeds and recorded in stockholder’s equity upon closing of the offering.

 

Financial data for all of our subsidiaries areincluded in our consolidated financial statements.

 

**Critical Accounting Policies and Estimates**

 

Our significant accounting policies are described inNote 2 to our accompanying consolidated financial statements. We considerthe accounting policies related to revenue recognition to be critical to theunderstanding of our results of

 

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operations.  Our critical accounting policies also includethe areas where we have made what we consider to be particularly difficult,subjective or complex judgments in making estimates, and where these estimatescan significantly impact our financial results under different assumptions andconditions. We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States. As such, we are required tomake certain estimates, judgments and assumptions that we believe arereasonable based upon the information available. These estimates, judgments andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the periods presented. Actual results could be different from theseestimates.

 

*Revenue Recognition*

 

Our accounting policy regarding revenuerecognition is written to comply with the following criteria: (1) acontract has been executed; (2) the contract price is fixed anddeterminable; (3) delivery of services or products has occurred; and(4) collectibility of the contract price is considered probable and can bereasonably estimated. Compliance with these criteria may require us to makesignificant judgments and estimates.

 

For cost reimbursable contracts with fixedfees and fixed price contracts, we estimate the applicable fees earned as costsare incurred or services are provided. This process requires estimation of thecontemplated level of effort to accomplish the tasks under contract and thecost of such effort, as well as ongoing assessment towards completing thecontract. We utilize a number of management processes to monitor contractperformance and revenue estimates, including monthly in-process reviews. Forcost reimbursable contracts with performance-based fees, we estimate theapplicable fees earned based on historical experience and performanceevaluations from our customers. For fixed price contracts that are based onunit pricing, we recognize revenue for the number of units delivered in anygiven fiscal period.  For fixed pricecontracts that are based on the proportionate performance method and involve aspecified number of similar acts, we recognize revenue based on the proportionof those acts completed compared to the number of total specified acts requiredby the contract.  For fixed pricecontracts that are based on the proportionate performance method and involve aspecified number of defined but not similar acts, we recognize revenue based onthe proportion of the project’s percentage total costs incurred compared to theestimated total costs associated with the entire transaction.  Occasionally, facts may develop that requirerevisions to estimated total costs or revenues expected. The cumulative effectof any such revisions is recorded in the period in which the facts requiringthe revision become known. The full amounts of anticipated losses on anycontract type are recognized in the period in which they become known.

 

In addition, certain indirect costs arecharged to contracts and paid by the client using provisional, or estimated,indirect rates that are subject to later revision based on government audits.Any costs found to be improperly allocated to a specific contract will not bereimbursed, and any such costs already reimbursed must be refunded.

 

*Stock Based Compensation*

 

We account for stock-based compensation using theintrinsic value method prescribed in APB Opinion No. 25 and relatedinterpretations. Accordingly, compensation expense for stock options ismeasured as the excess, if any, of the fair market value of the Company’s stockat the date of the grant over the exercise price of the related option.  We have adopted the annual disclosureprovisions of SFAS No. 148 in our financial reports for the year endedDecember 31, 2003.  The disclosures determine compensation cost forthe Company’s stock options based on SFAS No. 123, which reflects the fairvalue of each option estimated on the date of grant using the Black-Scholesoption-pricing model.

 

**Item3.    Quantitative and QualitativeDisclosures About Market Risk.**

 

Historically, our investmentpositions have been relatively small and short-term in nature. We havetypically made investments in a fund with an effective average maturity offewer than 40 days and a portfolio make-up consisting primarily of commercialpaper and notes, variable rate instruments, and, to a lesser degree, overnightsecurities and bank instruments.  Sinceour initial public offering, the Board of Directors approved an investmentpolicy that requires us to invest in relatively short-term, high quality, andhigh liquidity obligations.

 

**Item 4.     Controls andProcedures.**

 

*Disclosure Controls andProcedures. *The Company has established and maintainsdisclosure controls and procedures that are designed to ensure that materialinformation required to be disclosed by the Company in the reports that

 

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itfiles under the Securities Exchange Act of 1934, as amended, such as thisreport on Form 10-Q, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.These controls and procedures are based closely on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) promulgated under the ExchangeAct.  Rules adopted by the Securities andExchange Commission require that we present the conclusions of the ChiefExecutive Officer and Chief Financial Officer about the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisquarterly report

 

*Limitations on the Effectiveness of Controls*.* *Management,including our Chief Executive Officer and Chief Financial Officer, do notexpect that our disclosure controls and procedures will prevent all errors andall fraud.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurance ofachieving the desired control objectives. Further, the design of a control system must reflect the fact that thereare resource constraints, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management’s overrideof the control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

*Scope of the Evaluation.*The evaluation by our Chief Executive Officerand our Chief Financial Officer of our disclosure controls and proceduresincluded a review of procedures and discussions with our Audit Committee, ouraccounting management team, and others in our organization. In the course ofthe evaluation, we sought to identify data errors, control problems or acts offraud and to confirm that appropriate corrective action, including processimprovements, were being undertaken.

 

The overall goals of thesevarious evaluation activities are to monitor our disclosure controls andprocedures and to make modifications as necessary. Our intent in this regard isthat the disclosure controls and procedures will be maintained as systems thatchange (including with improvements and corrections) as conditions warrant.Among other matters, we sought in our evaluation to determine whether there wereany “significant deficiencies” or “material weaknesses” in our internal controlover financial reporting, or whether we had identified any acts of fraudinvolving personnel who have a significant role in our internal control overfinancial reporting. This information was important both for the evaluationgenerally and because the Section 302 certifications require that ourChief Executive Officer and our Chief Financial Officer disclose thatinformation to the Audit Committee of our Board of Directors and to ourindependent auditors and to report on related matters in this section of thereport on Form 10-Q. In the professional auditing literature, “significantdeficiencies” are referred to as “reportable conditions”; these are controlissues that could have a significant adverse effect on the ability to record,process, summarize and report financial data in the financial statements. A “materialweakness” is defined in the auditing literature as a particularly seriousreportable condition where the internal control does not reduce to a relativelylow level the risk that misstatements caused by error or fraud may occur inamounts that would be material in relation to the financial statements and notbe detected within a timely period by employees in the normal course ofperforming their assigned functions. We also sought to deal with other controlmatters in the evaluation, and in each case if a problem was identified, weconsidered what revision, improvement and/or correction was necessary to bemade in accordance with our on-going procedures.

 

*Periodic Evaluationand Conclusion*.  Under the supervision and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, the Company carried out an evaluation of the effectiveness of thedesign and operation of disclosure controls and procedures as of September 25,2004.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective at the reasonable assurancelevel as of September 25, 2004 in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic SEC filings.

 

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*Changes in InternalControl Over Financial Reporting. *Duringthe three months ended September 25, 2004, there were no changes to the Company’s internal control over financialreporting that materially affected, or are reasonable likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PARTII:  OTHER INFORMATION**

 

**Item1.   Legal Proceedings**

 

From time to time, the Company is involved inlitigation, claims and disputes that arise in the ordinary course of its business.  In addition, the Company is subject to audit,review, and investigation by various agencies of the Federal government todetermine compliance with applicable federal statutes and regulations.  As a Federal government contractor, theCompany is subject to audit by certain federal agencies to determine if theCompany’s performance and administration of its government contracts arecompliant with contractual requirements and applicable federal statutes andregulations.  While the Companycannot predict the ultimate outcome of legal proceedings, government audits,investigations, claims and disputes to which it is or may be subject, theCompany currently believes,based upon information available to us as of the date of this filing, that anyultimate liability arising out of these matters will not have a materialadverse effect on our financial position, results of operations, or cash flows.

 

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

**Item 3.  Defaults Upon SeniorSecurities**

 

None.

 

**Item4.   Submission of Matters To a Vote ofSecurity Holders**

 

None.

 

**Item5.  Other Information**

 

None.

 

**Item 6.  Exhibits and Reports onForm 8-K**

 

(a)   Exhibits

 

Theexhibits required by this item are set forth on the Index to Exhibits attachedhereto.

 

(b)   Reporton Form 8-K

 
|   | • | Current  Report on Form 8-K dated September 14, 2004 announcing a change in the  Company’s Transfer Agent and Registrar and disclosing the Company’s form  Stock Option Agreements.                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
|   | • | Current  Report on Form 8-K dated September 14, 2004 announcing an extension of period  of performance and increase in the contract ceiling value relating to the  Company’s National Visa Center contract with the U.S. Department of State. |

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | SI  INTERNATIONAL, INC.       |
|--------|-------------------------------|
|   |
|   |
|   | /s/ Thomas E. Dunn            |   |
|   | Thomas  E. Dunn               |
|   | Executive  Vice President and |
|   | Chief  Financial Officer      |
|   |
|   |
| Date:  | November  4, 2004             |   |
|        |                               |  |  |  |

 

 

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INDEX TO EXHIBITS

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                        |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Second  Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s  Registration Statement on Form S-1/A (File No. 333-87964) filed on October  25, 2002 (the “Third Amendment) and incorporated herein by reference).                                                                                                     |
| 3.2              |       | Amended  and Restated Bylaws, as amended (filed as Exhibit 3.2 to the Company’s  Registration Statement on Form S-1/A (File No. 333-87964) filed on November  8, 2002 (the “Fifth Amendment) and incorporated herein by reference).                                                                                                          |
| 4.1              |       | Registration  Rights Agreement, as amended (filed as Exhibit 4.1 to the Third Amendment and  incorporated herein by reference).                                                                                                                                                                                                                        |
| 4.2              |       | Specimen  Certificate of our common stock (filed as Exhibit 4.2 to the Company’s  Registration Statement on Form S-1/A (File No. 333-87964) filed on November  5, 2002 (the “Fourth Amendment) and incorporated herein by reference).                                                                                                        |
| 4.3              |       | Stock  Purchase Agreement, as amended (filed as Exhibit 4.3 to the Fifth Amendment  and incorporated herein by reference).                                                                                                                                                                                                                             |
| 4.4              |       | Amendment  to Stock Purchase Agreements (filed as Exhibit 4.4 to the Fourth Amendment  and incorporated herein by reference).                                                                                                                                                                                                                          |
| 10.1             |       | Form  of 2002 Stock Incentive Plan (filed as Exhibit 10.1 to the Third Amendment  and incorporated herein by reference).                                                                                                                                                                                                                               |
| 10.2             |       | January  2001 Nonqualified Stock Option Plan (filed as Exhibit 10.2 to the Company’s  Registration Statement on Form S-1/A (File No. 333-87964) filed on June 24,  2002 (the “First Amendment) and incorporated herein by reference).                                                                                                        |
| 10.3             |       | SI  International, Inc. 2001 Service Award Stock Option Plan (filed as Exhibit  10.3 to the First Amendment and incorporated herein by reference).                                                                                                                                                                                                     |
| 10.4             |       | 1998  Stock Option Plan (filed as Exhibit 10.5 to the First Amendment and  incorporated herein by reference).                                                                                                                                                                                                                                          |
| 10.5             |       | Credit  Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed November 12, 2002 and incorporated herein by reference) and amended and  restated by Amendment no.1 (filed as Exhibit 10.5 to the Company Annual  Report on Form 10-K/A (File No. 000-50080) filed on April 28, 2004 and  incorporated by reference). |
| 10.6             |       | Executive  Employment Agreement with S. Bradford Antle (filed as Exhibit 10.6 to the  Third Amendment and incorporated herein by reference).                                                                                                                                                                                                           |
| 10.7             |       | Executive  Employment Agreement with Walter J. Culver (filed as Exhibit 10.7 to the  Third Amendment and incorporated herein by reference).                                                                                                                                                                                                            |
| 10.8             |       | Executive  Employment Agreement with Thomas E. Dunn (filed as Exhibit 10.8 to the Third  Amendment and incorporated herein by reference).                                                                                                                                                                                                              |
| 10.9             |       | Executive  Employment Agreement with Thomas E. Lloyd (filed as Exhibit 10.9 to the Third  Amendment and incorporated herein by reference).                                                                                                                                                                                                             |
| 10.10            |       | Executive  Employment Agreement with Ray J. Oleson (filed as Exhibit 10.10 to the Third  Amendment and incorporated herein by reference).                                                                                                                                                                                                              |
| 10.11            |       | Form  of Indemnification Agreement (filed as Exhibit 10.11 to the Third Amendment  and incorporated herein by reference).                                                                                                                                                                                                                              |
| 31.1             |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to Rule  13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith)                                                                                                                                                              |
| 32.1             |       | Certifications  of Chief Financial Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (filed herewith)                                                                                                                                                      |

 

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