** **

**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 MARCH 29, 2003**                                                      |
|                |   |                                                                                          |
| **o**               |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number000-50080**

 

**SI International, Inc.**

(Exact name of registrant as specified 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**

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    ý  Yes    o  No

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  o  Yes    ý  No

 

Asof May 5, 2003, there were 8,447,162shares outstanding of the registrant’s common stock.

 

** **

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**SI INTERNATIONAL, INC.**

**FORM 10-Q**

# **INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                        | **3**  |
|----------------|--------------------------------------------------------------------------------------------------|--------|
| ITEM 1         | Financial Statements                                                                             | 3      |
|           | Consolidated Balance Sheets-March 29, 2003 and December 28,  2002                      | 3      |
|           | Consolidated Statements of Operations-Three  months ended March 29, 2003 and March 30, 2002 | 4      |
|           | Consolidated Statements of Cash Flows-Three  months ended March 29, 2003 and March 30, 2002 | 5      |
|           | Notes to Consolidated Financial Statements                                                       | 6      |
| ITEM 2         | Management’s Discussion and Analysis of  Financial Condition and Results of Operations      | 12     |
| ITEM 3         | Quantitative and Qualitative Disclosures  About Market Risk                                      | 17     |
| ITEM 4         | Controls and Procedures                                                                          | 17     |
|           |                                                                                             |   |
| **PART II.**   | **OTHER INFORMATION**                                                                            | **18** |
| ITEM 1         | Legal Proceedings                                                                                | 18     |
| ITEM 2         | Changes in Securities and Use of Proceeds                                                        | 18     |
| ITEM 3         | Defaults Upon Senior Securities                                                                  | 18     |
| ITEM 4         | Submission of Matters to a Vote of Security  Holders                                             | 18     |
| ITEM 5         | Other Information                                                                                | 18     |
| ITEM 6         | Exhibits and Reports on Form 8-K                                                                 | 18     |
| Signatures     | 20                                                                                               |
| Certifications | 21                                                                                               |

 

2

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**PART I: FINANCIAL INFORMATION**

 

**Item1.   Financial Statements**

 

**SI International, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**

**(Amounts in thousands, except share and pershare data)**

 

|                                                                                                                                                                                                      |   | **March 29,********2003** |       | **December 28,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|------------------------|------------|
|                                                                                                                                                                                                      |   | **(unaudited)**           |       |                   |       |
| **Assets**                                                                                                                                                                                                |   |                      | ** ** |                   | ** ** |
| **Current assets:**                                                                                                                                                                                       |   |                      |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                 |   | $                         | 13,250     |                   | $          | 10,856 |   |
| Accounts receivable, net                                                                                                                                                                                  |   | 31,181                    |       | 31,901                 |       |
| Other current assets                                                                                                                                                                                      |   | 3,531                     |       | 3,741                  |       |
| Total current assets                                                                                                                                                                                      |   | 47,962                    |       | 46,498                 |       |
| **Property and equipment, net**                                                                                                                                                                           |   | 4,380                     |       | 4,542                  |       |
| **Goodwill and assembled workforce, net**                                                                                                                                                                 |   | 39,829                    |       | 39,829                 |       |
| **Other assets**                                                                                                                                                                                          |   | 1,351                     |       | 1,446                  |       |
| Total assets                                                                                                                                                                                              |   | $                         | 93,522     |                   | $          | 92,315 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                             |   |                      | ** ** |                   | ** ** |
| **Current liabilities:**                                                                                                                                                                                  |   |                      |       |                   |       |
| Accounts payable and accrued expenses                                                                                                                                                                     |   | $                         | 13,220     |                   | $          | 12,712 |   |
| Deferred revenue                                                                                                                                                                                          |   | 58                        |       | 1,074                  |       |
| Other current liabilities                                                                                                                                                                                 |   | 2,749                     |       | 2,775                  |       |
| Total current liabilities                                                                                                                                                                                 |   | 16,027                    |       | 16,561                 |       |
| **Other long-term liabilities**                                                                                                                                                                           |   | 1,991                     |       | 1,777                  |       |
| **Commitments and contingencies**                                                                                                                                                                         |   |                      | ** ** |                   | ** ** |
| **Stockholders’ equity (deficit):**                                                                                                                                                                  |   |                      | ** ** |                   | ** ** |
| **Common stock**—$0.01 par value per share; 50,000,000 shares  authorized; 8,439,741 and 8,447,162 shares issued and outstanding as of  December 28, 2002 and March 29, 2003, respectively |   | 85                        |       | 85                     |       |
| Additional paid-in capital                                                                                                                                                                                |   | 75,685                    |       | 75,682                 |       |
| Deferred compensation                                                                                                                                                                                     |   | (474                      | )          | (509                   | )          |
| Accumulated deficit                                                                                                                                                                                       |   | 208                       |       | (1,281                 | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                                 |   | 75,504                    |       | 73,977                 |       |
| Total liabilities and stockholders’ equity (deficit)                                                                                                                                                 |   | $                         | 93,522     |                   | $          | 92,315 |   |

 

###### ***Seeaccompanying notes***

 

3

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**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

**(Amounts in thousands, except per share data)**

**Unaudited**

 

|                                                                                                                                                  |   | **Three Months  Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                  |   | **March 29,  2003**     |   | **March 30,********2002** |   |
|                                                                                                                                                  |   |                    |   |   |   |
| **Revenue**                                                                                                                                           |   | $                       | 41,324 |   | $ | 33,463 |   |
| **Costs and expenses:**                                                                                                                               |   |                    |   |   |   |
| Direct  costs                                                                                                                                         |   | 25,026                  |   | 19,145 |   |
| Indirect  costs, including $34 and $35 of non-cash stock-based compensation in fiscal  quarters ended March 30, 2002 and March 29, 2003, respectively |   | 13,163                  |   | 11,718 |   |
| Depreciation  and Amortization                                                                                                                        |   | 512                     |   | 481 |   |
| Total  operating expenses                                                                                                                             |   | 38,701                  |   | 31,344 |   |
| **Income from operations**                                                                                                                            |   | 2,623                   |   | 2,119 |   |
| **Interest expense**                                                                                                                                  |   | (162                    | )      | (697 | ) |
| **Minority interests**                                                                                                                                |   | —                  |   | (38 | ) |
| **Change in fair value of put warrants**                                                                                                              |   | —                  |   | (90 | ) |
| **Income before provision for income taxes**                                                                                                          |   | 2,461                   |   | 1,294 |   |
| **Provision for income taxes**                                                                                                                        |   | 973                     |   | 564 |   |
| **Net income**                                                                                                                                        |   | 1,488                   |   | 730 |   |
| **Dividends on redeemable cumulative preferred stock**                                                                                                |   | —                  |   | 533 |   |
| **Net income attributable to common stockholders**                                                                                                    |   | $                       | 1,488  |   | $ | 197 |   |
|                                                                                                                                                  |   |                    |   |   |   |
| **Earnings per common share:**                                                                                                                        |   |                    |   |   |   |
| Basic  net income  per common share                                                                                                              |   | $                       | 0.18   |   | $ | 0.07 |   |
|                                                                                                                                                  |   |                    |   |   |   |
| Diluted  net income per common share                                                                                                                  |   | $                       | 0.18   |   | $ | 0.07 |   |
|                                                                                                                                                  |   |                    |   |   |   |
| **Basic weighted-average shares outstanding**                                                                                                         |   | 8,442                   |   | 2,632 |   |
| **Diluted weighted-average shares outstanding**                                                                                                       |   | 8,442                   |   | 2,666 |   |

 

***See accompanying notes***

 

4

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**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Amounts in thousands)**

**Unaudited**

** **

|                                                                               |   | **Three Months Ended**    |   |
|------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                               |   | **March 29,********2003** |   | **March 30,********2002** |   |
| **Cash flows from operating activities:**                                          |   |                      |   |   |   |
| Net income                                                                         |   | $                         | 1,488  |   | $ | 730 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                      |   |   |   |
| Depreciation and amortization                                                      |   | 512                       |   | 481 |   |
| Loss on disposal of fixed assets                                                   |   | 168                       |   | — |   |
| Stock-based compensation                                                           |   | 35                        |   | 34 |   |
| Amortization of deferred financing costs and debt discount                         |   | 96                        |   | 74 |   |
| Change in fair value of put warrants                                               |   | —                    |   | 90 |   |
| Minority interests                                                                 |   | —                    |   | 38 |   |
| Changes in operating assets and liabilities, net of effect of  acquisitions:       |   |                      |   |   |   |
| Accounts receivable                                                                |   | 719                       |   | (687 | ) |
| Other current assets                                                               |   | 211                       |   | (909 | ) |
| Other assets                                                                       |   | (1                        | )      | 25 |   |
| Accounts payable and accrued expenses                                              |   | 509                       |   | 2,301 |   |
| Deferred revenue                                                                   |   | (1,017                    | )      | (50 | ) |
| Other long term liabilities                                                        |   | 236                       |   | (81 | ) |
| Net cash provided by operating activities                                          |   | 2,956                     |   | 2,046 |   |
| **Cash flows from investing activities:**                                          |   |                      |   |   |   |
| Purchase of property and equipment, net                                            |   | (518                      | )      | (358 | ) |
| Net cash used in investing activities                                              |   | (518                      | )      | (358 | ) |
| **Cash flows from financing activities:**                                          |   |                      |   |   |   |
| Proceeds from issuance of common stock                                             |   | 4                         |   | — |   |
| Proceeds from bank overdrafts                                                      |   | 111                       |   | 233 |   |
| Borrowings under line of credit                                                    |   | —                    |   | 17,473 |   |
| Repayments of line of credit                                                       |   | —                    |   | (17,690 | ) |
| Repayments of notes payable                                                        |   | (137                      | )      | (900 | ) |
| Repayments of long-term debt and borrowings from stockholders                      |   | —                    |   | (563 | ) |
| Payments of capital leases                                                         |   | (22                       | )      | (42 | ) |
| Net cash used in financing activities                                              |   | (44                       | )      | (1,489 | ) |
| **Net increase (decrease) in cash and cash  equivalents**                          |   | 2,394                     |   | 199 |   |
| **Cash and cash equivalents, beginning of  period**                                |   | 10,856                    |   | 470 |   |
| **Cash and cash equivalents, end of period**                                       |   | $                         | 13,250 |   | $ | 669 |   |
| **Supplemental disclosures of cash flow  information:**                            |   |                      |   |   |   |
| Cash payments for interest                                                         |   | $                         | 51     |   | $ | 486 |   |
| Cash payments for income taxes                                                     |   | $                         | 79     |   | $ | 337 |   |

 

***See accompanying notes***

 

5

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**SI International, Inc. and Subsidiaries**

 

**Notes to consolidated financial statements**

**(Unaudited)**

 

**1.****                                      Basis of Presentation**

 

The accompanying unaudited consolidated financialstatements of SI International, Inc. and its subsidiaries (the “Company”) havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all 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 ended March 29, 2003 are not necessarilyindicative of the results that may be expected for the year ending December 27,2003. For further information, refer to the financial statements and footnotesincluded in SI International’s Annual Report on Form 10-K/A for the yearended December 28, 2002.

 

**2.****                                      Summary of significant accounting policies:**

 

**Principles ofconsolidation**

 

The accompanying consolidated financialstatements include the accounts of the Company and its wholly andmajority-owned subsidiaries.   Allsignificant intercompany transactions and accounts have been eliminated inconsolidation.

 

**Use ofestimates**

 

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.

 

**Reportingperiods**

 

The Company’s fiscal year ends on theSaturday nearest to December 31 of that year.  All fiscal years presented include 52 weeks. The Company’squarters end on the Saturday nearest to the applicable quarterlymonth-end.  All quarters presentedinclude 13 weeks.

 

**Cash and cashequivalents**

 

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

 

The balance of checks the Company haswritten, but have not yet been presented to the bank for payment is$2.3 million and $1.6 million at March 29, 2003 and March 30, 2002,respectively.  These balances have beenclassified in other current liabilities in the accompanying consolidatedbalance sheets.

 

6

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**Significantcustomers**

 

Revenue generated from contracts with thefederal government or prime contractors doing business with the federalgovernment accounted for a significant percent of revenues in the fiscalquarters ending March 29, 2003 and March 30, 2002.

 

|                      |   | **Percent of revenues** |   |
|---------------------------|--------|-------------------------|--------|
|                      |   | **Three Months Ended**  |   |
|                      |   | **March 29,  2003**     |   | **March 30,  2002** |   |
|                      |   |                    |   |   |   |
| Department of Defense     |   | 51.6                    | %      | 43.5 | % |
| Federal civilian agencies |   | 42.1                    |   | 47.3 |   |
| Commercial entities       |   | 6.3                     |   | 9.2 |   |
| Total revenue             |   | 100.0                   | %      | 100.0 | % |

 

For the first quarter of 2003 as well as thefirst quarter of  2002, we had twocontracts that generated more than 10% of our revenue.  Our C4I2SR contract with the U.S. Air ForceSpace Command represented approximately 21.3% and 19.1% of total revenue forthe quarters ended March 29, 2003 and March 30, 2002, respectively.   Our National Visa Center contract with theDepartment of State represented approximately 14.5% and 11.3% of total revenuefor the quarters ended March 29, 2003 and March 30, 2002, respectively.

 

**Deferredfinancing 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):

 

|                     |   | **March 29,  2003** |   | **December 28,  2002** |   |
|--------------------------|--------|---------------------|--------|------------------------|--------|
|                     |   |                |   |                   |   |
| Deferred loan costs      |   | $                   | 1,093  |                   | $      | 1,093 |   |
| Accumulated amortization |   | (135                | )      | (42                    | )      |
|                     |   | $                   | 958    |                   | $      | 1,051 |   |

 

**Deferredrevenue**

 

At the end of the quarter ended March 29,2003 and the fiscal year ended December 28, 2002, SI International Telecomreceived advance payments of approximately $58,000 and $1,074,000,respectively, from a customer to purchase equipment to be used in a contract.The advances are reflected as deferred revenue as of March 29, 2003 andDecember 28, 2002 in the accompanying consolidated balance sheets.

 

**Fair value offinancial instruments**

 

The Company’s financial instruments consistprimarily of cash and cash equivalents, accounts receivable, accounts payable,credit facilities, and long-term debt. In management’s opinion, the carryingamounts of these financial instruments approximate their fair values at March29, 2003 and December 28, 2002.

 

**Stock-basedcompensation**

 

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 

 

7

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Compensation,” to provide alternative methodsof transition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company has chosen to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in APB Opinion No. 25 and related interpretations.  Accordingly, compensation expense for stockoptions is measured as the excess, if any, of the fair market value of theCompany’s stock at the date of the grant over the exercise price of the relatedoption.  The Company has adopted theannual disclosure provisions of SFAS No. 148 in its financial reports for theyear ended December 28, 2002 and has adopted the interim disclosure provisionsfor its financial reports for the quarter ended March 29, 2003.

 

|                                                                                                                       |   | **March 29,  2003** |   | **March 30,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                                                                       |   |                |   |                |   |
| Net income - as reported                                                                                                   |   | 1,488               |   | 730                 |   |
| Add: total stock-based employee compensation  expense as reported under intrinsic value method (APB No. 25) for all awards |   | 35                  |   | 34                  |   |
|                                                                                                                       |   |                |   |                |   |
| Deduct: Total stock-based compensation expense  determined under fair value based method (SFAS No. 123) for all awards     |   | (372                | )      | (81                 | )      |
| Net income - Pro forma                                                                                                     |   | 1,151               |   | 683                 |   |
| Dividends on redeemable preferred stock                                                                                    |   | —              |   | 533                 |   |
| Net income attributable to common stockholders -  Pro forma                                                                |   | 1,151               |   | 150                 |   |
|                                                                                                                       |   |                |   |                |   |
| Basic earnings per share - as reported                                                                                     |   | 0.18                |   | 0.07                |   |
|                                                                                                                       |   |                |   |                |   |
| Diluted earnings per share - as reported                                                                                   |   | 0.18                |   | 0.07                |   |
|                                                                                                                       |   |                |   |                |   |
| Basic earnings per share - Pro forma                                                                                       |   | 0.14                |   | 0.06                |   |
|                                                                                                                       |   |                |   |                |   |
| Diluted earnings per share - Pro forma                                                                                     |   | 0.14                |   | 0.06                |   |

 

**Earnings (loss)per share**

 

The Company has applied SFAS No. 128,“Earnings Per Share,” for all fiscal years presented in these consolidatedfinancial statements. SFAS No. 128 requires disclosure of basic anddiluted earnings per share (EPS). Basic EPS is computed by dividing reportedearnings available to common stockholders by the weighted average number ofshares outstanding without consideration of common stock equivalents or otherpotentially dilutive securities. Diluted EPS gives effect to common stockequivalents and other potentially dilutive securities outstanding during theperiod. Redeemable cumulative preferred stock is excluded from diluted earningsper share as it is not convertible into common stock.

 

The following details the computation of netincome (loss) per common share:

 

|                                                                              |   | **Three Months Ended** |   |
|-----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                              |   | **March 29,  2003**    |   | **March 30,  2002** |   |
|                                                                              |   |                   |   |   |   |
| Net Income (loss)                                                                 |   | $                      | 1,488  |   | $ | 730 |   |
| Dividends on redeemable cumulative preferred stock                                |   | —                 |   | 533 |   |
|                                                                              |   |                   |   |   |   |
| Net Income (loss) attributable to common stockholders – Basic &  Diluted |   | 1,488                  |   | 197 |   |
|                                                                              |   |                   |   |   |   |
| **Weighted average  share calculation:**                                          |   |                   |   |   |   |
|                                                                              |   |                   |   |   |   |
| Basic weighted average share  outstanding                                         |   | 8,442                  |   | 2,632 |   |
| Treasury stock effect of stock options                                            |   | —                 |   | 34 |   |
|                                                                              |   |                   |   |   |   |
| Diluted weighted average shares outstanding                                       |   | 8,442                  |   | 2,666 |   |
|                                                                                   |        |                        |        |  |  |  |  |

 

8

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**Reclassifications**

 

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

 

**New accountingpronouncements**

 

InNovember 2002, the Financial Accounting Standards Board issued InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (FIN 45).  FIN 45 elaborates on the disclosure to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also clarifies thata guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and initial measurement provisions of FIN 45are applicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements of FIN 45 are effective forfinancial statements of interim or annual periods ending after December 31,2002. The Company does not expect adoption of FIN 45 to have a material effecton its financial condition, results of operations of liquidity**.**

 

In January 2003, the Financial AccountingStandards Board issued Interpretation No. 46, “Consolidation of VariableInterest Entities (FIN 46).  FIN 46clarifies the application of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements, to certain entities in which equity investors do not havethe characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from the other parties. FIN 46applies immediately to variable interest entities created after January 31,2003. Management believes that the Company’s business practice does not requirethe adoption of FIN 46.

 

**3.****                                      Acquisitions:**

 

On March 9, 2000, the Company purchasedall of the outstanding common stock of SI International Engineering, Inc.,formerly System Technology Associates, Inc. (SI Engineering), forconsideration of approximately $33.0 million in cash and $4.8 millionin subordinated notes in a transaction accounted for as a purchase. Thesubordinated notes bear interest at the prime rate plus 2 percent with$3.8 million due in March 2001, subject to collection of certain accountsreceivable, and $1.0 million due in March 2002. Approximately$4.3 million of the notes were repaid at maturity in March 2001 and2002 and payments of approximately $343,000 of these notes had been withheld bythe Company as of March 29, 2003 since certain accounts receivable have notbeen fully collected.

 

**4.****                                      Accounts receivable:**

 

Accounts receivable consists of the following(in thousands):

 

|                                                                                               |   | **March 29, 2003** |   | **December 28, 2002** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
|                                                                                               |   |               |   |                  |   |
| Billed accounts receivable                                                                         |   | $                  | 16,106 |                  | $      | 18,377 |   |
| Unbilled accounts receivable:                                                                      |   |               |   |                  |   |
| Currently billable                                                                                 |   | 14,772             |   | 11,926                |   |
| Unbilled retainages and milestones payments expected to be billed  within the next 12 months       |   | 1,005              |   | 2,054                 |   |
| Indirect costs incurred and charged to cost-plus contracts in excess  of provisional billing rates |   | 753                |   | 640                   |   |
| Total unbilled accounts receivable                                                                 |   | 16,530             |   | 14,620                |   |
| Allowance for doubtful accounts                                                                    |   | (1,455             | )      | (1,096                | )      |
| Accounts receivable, net                                                                           |   | $                  | 31,181 |                  | $      | 31,901 |   |

 

9

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The currently billable amounts included asunbilled accounts receivable as of March 29, 2003 represent amounts, which arebilled during the following quarter of the current year. They are billings forservices rendered prior to quarter-end, which are billed once necessary billingdata has been collected and an invoice produced.

 

Long-term unbilled accounts receivable ofapproximately $400,000 as of March 29, 2003 and December 28, 2002 and areincluded in other assets in the accompanying consolidated balance sheets.

 

**5.****                                      Property and equipment:**

 

Property and equipment consist of thefollowing (in thousands):

 

|                                                |   | **March 29, 2003** |   | **December 28, 2002** |   |
|-----------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
| Computers and equipment                             |   | $                  | 5,791  |                  | $      | 5,620 |   |
| Software                                            |   | 1,824              |   | 1,810                 |   |
| Furniture and fixtures                              |   | 1,237              |   | 1,216                 |   |
| Leasehold improvements                              |   | 625                |   | 692                   |   |
|                                                |   | 9,477              |   | 9,338                 |   |
| Less—Accumulated depreciation and amortization |   | (5,097             | )      | (4,796                | )      |
|                                                |   | $                  | 4,380  |                  | $      | 4,542 |   |

 

Property and equipment includes assets financedunder capital lease obligations of approximately $137,000 and $272,000, net ofaccumulated depreciation, as of March 29, 2003 and December 28, 2002,respectively.

 

Depreciation expense of approximately $0.5million and $0.5 million and was recorded in the quarters ended March 29, 2003and March 30, 2002, respectively.

 

**6.****                                      Accounts payable and accrued expenses:**

 

Accounts payable and accrued expensesconsists of the following (in thousands):

 

|                                  |   | **March 29, 2003** |   | **December 28, 2002** |   |
|---------------------------------------|--------|--------------------|--------|-----------------------|--------|
|                                  |   |               |   |                  |   |
| Accounts payable                      |   | $                  | 4,841  |                  | $      | 6,660 |   |
| Accrued compensation and benefits     |   | 6,820              |   | 5,216                 |   |
| Accrued interest                      |   | 86                 |   | 45                    |   |
| Other accrued liabilities             |   | 1,473              |   | 791                   |   |
| Accounts payable and accrued expenses |   | $                  | 13,220 |                  | $      | 12,712 |   |

 

10

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**7.****                                      Debt:**

 

Debt consists of the following (inthousands):

 

|                         |   | **March 29, 2003** |   | **December 28, 2002** |   |
|------------------------------|--------|--------------------|--------|-----------------------|--------|
| Notes payable:               |   |               |   |                  |   |
| Indemnification note payable |   | $                  | 343    |                  | $      | 480 |   |
| Total debt                   |   | $                  | 343    |                  | $      | 480 |   |

 

Our credit facility consists of a$35.0 million secured revolving credit arrangement.  As of March 29, 2003, we have no borrowingsoutstanding under this credit facility.

 

**8.****                                      Commitments and contingencies:**

 

**Leases**

 

As of March 29, 2003, the Company hasnoncancelable operating leases, primarily for real estate that expire over thenext six years. Rental expense during the quarters ended March 29, 2003 andMarch 30, 2002 was approximately $1.4 million and $1.0 million, respectively.

 

**Contract costaudits**

 

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 actual rates unless collectibility isnot reasonably assured. To the extent the indirect rate differential creates aliability for the Company, the differential is recognized as a reduction torevenue when identified.

 

**Litigation andclaims**

 

The Company is a party to litigation andlegal proceedings that management believes to be a part of the ordinary courseof its business. The Company may become involved in other legal andgovernmental, administrative or contractual proceedings in the future.  While the Company cannot predict theultimate outcome of these matters, the Company currently believes, based upon informationavailable to us as of the date of this filing, that any ultimate liabilityarising out of these proceedings will not have a material adverse effect on ourfinancial position or results of operations.

 

**9.****                                      Stockholders’ equity:**

 

**Stock optionplan**

 

In December 1998, the Company adoptedthe 1998 Stock Option Plan to grant stock options to directors, consultants,executives, and other key employees of the Company. The Company may grant stockoptions to purchase up to 222,727 shares of its common stock under thisplan.  In December 2000, theCompany adopted the 2000 Nonqualified Stock Option Plan to grant stock optionsto directors, consultants, executives and other key employees of the Company topurchase shares of SI International Telecom class A common stock. TheCompany may grant stock options to purchase up to 2,900,000 shares of SIInternational Telecom common stock under this plan.

 

In January 2001, the Company adopted the2001 Nonqualified Stock Option Plan. Under the plan, the Company may grantstock options to directors, consultants, executives and other key employees ofthe Company and its affiliate to purchase its common stock. The Company maygrant stock options to purchase up to 35,056 shares of its common stock.

 

11

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In March 2001, the Company adopted the2001 Service Award Stock Option Plan to grant stock options to purchase up to16,179 shares of its common stock to its employees and employees of itsaffiliates.

 

In May 2002, the Company adopted the 2002Service Award Stock Option Plan to grant stock options to purchase up to1,700,000 shares of its common stock to its employees and employees of itsaffiliates.  In October 2002, theCompany amended this amount to 1,600,000 shares of its common stock.

 

**Item 2.   Management’s****Discussion and Analysis of Financial Condition and Results ofOperations**

 

*The followingdiscussion and analysis should be read in conjunction the consolidatedfinancial statements and related notes included elsewhere in this Form 10-Q.This discussion and analysis contains forward-looking statements that**involve known andunknown risks, uncertainties,and other factors that may causeour actual results, level of activity,performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied by such forward-looking statements. In some cases, you can identify thesestatements by forward-looking words such as “anticipate,” “believe,” “could,”“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,”and “would” or similar words. Youshould read statements that contain these words carefully because they discussour 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 able to predictaccurately or control. In particular, statements that we make in thissection relating to the sufficiency of anticipated sources of capital to meetour cash requirements are forward- looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statementsfor many reasons, including as a result of some of the factors describedbelow,  elsewhere in this Form 10-Q andin the section entitled “Risk Factors” in our Form 10-K/A for the fiscal yearended December 28, 2002.   You shouldnot place undue reliance on these forward-looking statements, which apply onlyas of the date of the filing of this Form 10-Q.*

 

*Our fiscalyear is based on a calendar year and ends each year on the Saturday closest toDecember 31 of that year. As a result, our fiscal year may be comprised of52 or 53 weeks. Our 2002 fiscal year had 52 weeks and our 2003 fiscal year has52 weeks.  Our quarters end on theSaturday nearest to the applicable quarterly month-end.  Each quarter in 2002 had 13 weeks and ourquarters in 2003 each have 13 weeks.*

 

**Overview**

 

We are a provider of information technologyand network solutions primarily to the federal government. Our clients includethe U.S. Air Force Space Command, U.S. Army, the Department of State, theImmigration and Naturalization Service and the intelligence community. Inaddition, we provide our services to a small number of commercial entities. Wecombine our technological and industry expertise to provide a full spectrum ofstate-of-the-practice solutions and services, from design and development toimplementation and operations, to assist our clients in achieving theirmissions. Our service offerings focus primarily on our clients’mission-critical needs in the areas of:

 

•                  information technology applications;

 

•                  systems engineering;

 

•                  network and telecommunications engineering; and

 

•                  mission-critical outsourcing.

 

In fiscal quarters ended March 29, 2003 andMarch 30, 2002, we received 93.7% and 90.8%, respectively of our revenues fromservices we provided to various departments and agencies of the federalgovernment and 6.3% and 9.2%, respectively of our total revenues from workperformed for commercial entities. The following table shows our revenues fromthe client groups listed as a percentage of total revenue. Revenue data for theDepartment of Defense includes revenue generated from work performed underengagements for both the Department of Defense and the intelligence community.

 

12

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|                      |   | **Three Months Ended** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **March 29,   2003**   |   | **March 30,   2002** |   |
|                      |   |                   |   |   |   |
| Department of Defense     |   | 51.6                   | %      | 43.5 | % |
| Federal civilian agencies |   | 42.1                   | %      | 47.3 | % |
| Commercial entities       |   | 6.3                    | %      | 9.2 | % |
| Total revenue             |   | 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 stronger client relationships. The following tableshows our revenues as prime contractor and as subcontractor as a percentage ofour total revenue for the following periods:

 

|                   |   | **Three Months Ended** |   |
|------------------------|--------|------------------------|--------|
|                   |   | **March 29,   2003**   |   | **March 30, 2002** |   |
|                   |   |                   |   |   |   |
| Prime contract revenue |   | 82.5                   | %      | 79.8 | % |
| Subcontract revenue    |   | 17.5                   | %      | 20.2 | % |
| Total revenue          |   | 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** |   |
|--------------------|--------|------------------------|--------|
|               |   | **March 29,  2003**    |   | **March 30,  2002** |   |
|               |   |                   |   |   |   |
| Cost reimbursable  |   | 36.8                   | %      | 36.8 | % |
| Time and materials |   | 38.9                   | %      | 46.7 | % |
| Fixed price        |   | 24.3                   | %      | 16.5 | % |
| Total              |   | 100.0                  | %      | 100.0 | % |

 

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 fiscal quarters

 

13

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ended March 29, 2003 and March30, 2002, 36.8% and 36.8%, respectively, of our revenues were derived from costreimbursable 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 fiscal quarters ended March 29, 2003 and March 30,2002, 38.9% and 46.7%, respectively, of our revenues were derived from time andmaterials contracts.

 

Under fixed price contracts, we performspecific tasks for a fixed price. Compared to cost reimbursable and time andmaterials contracts, fixed price contracts generally offer higher profit marginopportunities but involve greater financial risk because we bear the impact ofcost overruns in return for the full benefit of any cost savings. We generallydo not undertake complex, high-risk work, such as long-term softwaredevelopment, under fixed price terms. Fixed price contracts may include eithera product delivery or specific service performance throughout a period. Revenueon fixed price contracts under which we render services throughout a period isrecognized as the service is provided. In the fiscal quarters ended March 29, 2003 and March 30, 2002, 24.3%and 16.5%, respectively, of our revenues were derived from fixed pricecontracts.

 

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.

 

Approximately 9.5% of our revenue recognizedduring the fiscal quarter ended March 29, 2003 will become subject tocompetitive bids prior to the end of the government fiscal 2003.  In comparison, 14.6% of our revenuerecognized during the fiscal quarter ended March 30, 2002 was derived fromcontracts that we expected to become subject to competitive bids prior to theend of government fiscal 2002, which corresponds to the third quarter of fiscal2002.  We actively monitor ourrelationships with our clients during our engagements, as well as the qualityof the service we provide, to assist in our efforts to win recompetition bids.In addition, we strive to maintain good relationships with a wide variety ofgovernment contractors.

 

**Results ofOperations**

 

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

 

|                                            |   | **Three Months Ended** |   |
|-------------------------------------------------|--------|------------------------|--------|
|                                            |   | **March 29, 2003**     |   | **March 30, 2002** |   |
|                                            |   |                   |   |   |   |
| Revenue                                         |   | 100.0                  | %      | 100.0 | % |
| Costs and expenses:                             |   |                   |   |   |   |
| Direct costs                                    |   | 60.6                   |   | 57.2 |   |
| Indirect costs                                  |   | 31.9                   |   | 35.0 |   |
| Depreciation                                    |   | 1.2                    |   | 1.4 |   |
| Amortization                                    |   | —                 |   | — |   |
| Total operating expenses                        |   | 93.7                   |   | 93.6 |   |
| Income from operations                          |   | 6.3                    |   | 6.4 |   |
| Other income (expense)                          |   | —                 |   | — |   |
| Interest expense                                |   | (0.4                   | )      | (2.1 | ) |
| Minority interests                              |   | —                 |   | (0.1 | ) |
| Change in fair value of put warrants            |   | —                 |   | (0.3 | ) |
| Income (loss) before provision for income taxes |   | 5.9                    |   | 3.9 |   |
| Provision for income taxes                      |   | 2.3                    |   | 1.7 |   |
| Net income (loss)                               |   | 3.6                    | %      | 2.2 | % |

 

14

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**Three monthsended March 29, 2003 compared with three months ended March 30, 2002**

 

*Revenue.*  For thethree months ended March 29, 2003, our revenues increased 23.5% to$41.3 million from $33.5 million for the three months ended March 30,2002. Revenues from work under federal government contracts increased 27.6% to$38.7 million for the three months ended March 29, 2003 from $30.4 millionfor the three months ended March 30, 2002. This increase was primarily theresult of increased activities in our outsourcing, space modernization, andcommand and control services.  Consistentwith plans to focus on core government IT opportunities, commercial revenuesdeclined 15.7% to $2.6 million in the three months ended March 29, 2003 from$3.1 million in the three months ended March 30, 2002.

 

*Direct costs.*  Directcosts include direct labor and other direct costs such as materials andsubcontracts. Generally, changes in direct costs are correlated to changes inrevenue as resources are consumed in the production of that revenue. For thethree months ended March 29, 2003, direct costs increased 30.7% to$25.0 million from $19.1 million for the three months ended March 30,2002. This increase was attributable primarily to the increase in revenue. As apercentage of revenue, direct costs were 60.6% for the three months ended March29, 2003 as compared to 57.2% for the three months ended March 30, 2002.

 

*Indirect costs.*  Indirectcosts include facilities, selling, bid and proposal, indirect labor, fringebenefits and other discretionary costs. For the three months ended March 29,2003, indirect costs increased 12.1% to $13.2 million from$11.7 million for the three months ended March 30, 2002.  The increase in indirect costs was due tohigher fringe benefit expenses related to the increase in direct labor andadditional facility expense related to the relocation of our headquarters toReston, Virginia.  As a percentage ofrevenue, indirect costs were 31.9% for the three months ended March 29, 2003 ascompared to 35.0% for the three months ended March 30, 2002.

 

*Depreciation.*For the three months ended March 29, 2003,depreciation expense increased 6.4% to $0.51 million from $0.48 million for thethree months ended March 30, 2002 attributable primarily to our investment inthe restructuring and upgrading of our information technology and systemsinfrastructure.  As a percentage of revenue,depreciation expense was 1.2% for the three months ended March 29, 2003compared to 1.4% for the three months ended March 30, 2002.

 

*Income fromoperations.*  For the three months ended March 29, 2003,income from operations increased 23.8% to $2.6 million from$2.1 million for the three months ended March 30, 2002. This increase wasattributable primarily to the  higherrevenue.  As a percentage of revenue,income from operations was 6.3% for both the three months ended March 29, 2003and March 30, 2002.

 

*Interest expense.*  Interestexpense declined 76.8% to $0.2 million for the three months ended March29, 2003 from $0.7 million for the three months ended March 30, 2002. Thisdecline was attributable primarily to the repayment of debt with proceeds generatedfrom the Company’s initial public offering. As a percentage of revenue,interest expense was 0.4% for the three months ended March 29, 2003 as comparedto 2.1% for the three months ended March 30, 2002.  Interest expense included $0.1 million and $42,000 ofamortization of deferred financing costs for the first quarters of 2003 and2002, respectively.

 

*Provision for incometaxes.*  The provision for income tax was$1.0 million in the three months ended March 29, 2003, compared to aprovision of $0.6 million for the three months ended March 30, 2002.   For the three months ended March 29, 2003,we have recorded an expense for income tax which reflects an effective rate of39.5%.  For the three months ended March30, 2002, the effective tax rate of 43.6% was greater than the federalstatutory rate of 34% due primarily to the effect of state income taxes and putwarrants.

 

15

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**Liquidity andCapital Resources**

 

Our primary liquidity needs are the financing of working capital,capital expenditures and acquisitions. We rely on cash flow from operations,borrowings under our credit facility and the sale of common stock to providefor our cash needs.

 

Net cash provided by (used in) operations was $3.0 million for thethree months ended March 29, 2003 compared with $2.0 million for the threemonths ended March 30, 2002.  Cashprovided by operations in the three months ended March 29, 2003 wasattributable to net income of $1.5 million plus depreciation, amortizationand other non-cash items of $0.8 million and a decrease in working capital of$0.7 million. Cash provided by operations in three months ended March 30, 2002was attributable to net income of $0.7 million plus non-cash items of $0.7million and a decrease of $0.6 million in cash to fund operatingactivities.

 

Cash used in investing activities was $0.5 million for the three monthsended March 29, 2003, compared with $0.4 million for the three months endedMarch 30, 2002.  For both of the firstfiscal quarters of 2002 and 2003, our investing activities were primarilyattributed to the purchase of capital assets.

 

Cash used in financing activities was $44,000 for the three monthsended March 29, 2003, compared with $1.5 million for the three months endedMarch 30, 2002.  Cash used in financingactivities for the three months ended March 29, 2003 was attributable topayments for notes and leases of $159,000, and partially offset by bankoverdrafts of $115,000.  Cash used infinancing activities in the three months ended March 30, 2002 was primarilyattributable to the repayment of a contingency note in the amount of $0.9million to the seller related to the acquisition of SI InternationalEngineering and the repayment of long-term debt of $0.6 million.

 

Cash and cash equivalents as of March 29, 2003 and March 30, 2002 were$13.3 million and $0.7 million, respectively.

 

We maintain a $35.0 million secured revolving creditfacility.  As of March 29, 2003 we didnot have any borrowings under the credit facility.

 

For the three months ended March 29, 2003 as well as the three monthsended March 30, 2002, we had two contracts that generated more than 10% of ourrevenue.  Our C4I2SR contract with theU.S. Air Force Space Command represented approximately 21.3% and 19.1% of totalrevenue for each of the three months ended March 29, 2003 and March 30, 2002,respectively.   Our National Visa Centercontract with the Department of State represented approximately 14.5% and 11.3%of total revenue for the three months ended March 29, 2003 and March 30, 2002,respectively.

 

Financial data for all of our subsidiaries are included in ourconsolidated financial statements.

 

**CriticalAccounting Policies and Estimates**

 

Our significant accounting policies are described in Note 2 to ouraccompanying consolidated financial statements. We consider the accountingpolicies related to revenue recognition to be critical to the understanding ofour results of operations.  Our criticalaccounting policies also include the areas where we have made what we considerto be particularly difficult, subjective or complex judgments in makingestimates, and where these estimates can significantly impact our financialresults under different assumptions and conditions. We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States. As such, we are required to make certain estimates, judgmentsand assumptions that we believe are reasonable based upon the informationavailable. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the periods presented.Actual results could be different from these estimates.

 

*Revenue Recognition*

 

Our accounting policy regarding revenue recognition is written tocomply with the following criteria: (1) a contract has been executed;(2) the contract price is fixed and determinable; (3) delivery ofservices or products has occurred; and (4) collectibility of the contractprice is considered probable and can be reasonably estimated. Compliance withthese criteria may require us to make significant judgments and estimates.

 

For cost reimbursable contracts with fixed fees and our fixed pricecontracts, we estimate the applicable fees earned 

 

16

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as costs are incurred orservices are provided. This process requires estimation of the contemplatedlevel of effort to accomplish the tasks under contract, the cost of the effortand ongoing assessment towards completing the contract. We utilize a number ofmanagement processes to monitor contract performance and revenue estimates,including monthly in-process reviews. For cost reimbursable contracts with performance-basedfees, we estimate the applicable fees earned based on historical experience andperformance evaluations from our customers. Occasionally, facts may developthat require revisions to estimated total costs or revenues expected. Thecumulative effect of any such revisions is recorded in the period in which thefacts requiring the revision become known. The full amount of anticipatedlosses on any contract type are recognized in the period in which they becomeknown.

 

In addition, certain indirect costs are charged to contracts and paidby the client using provisional, or estimated, indirect rates that are subjectto later revision based on government audits. Any costs found to be improperlyallocated to a specific contract will not be reimbursed, and any such costsalready reimbursed must be refunded.

 

**Effect ofRecently Issued Accounting Standards**

 

In November 2002, the Financial Accounting Standards Board issuedInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).FIN 45 elaborates on the disclosure to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesthat it has issued. It also clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee. The initial recognition andinitial measurement provisions of FIN 45 are applicable on a prospective basisto guarantees issued or modified after December 31, 2002. The disclosurerequirements of FIN 45 are effective for financial statements of interim orannual periods ending after December 31, 2002. The Company does not expectadoption of FIN 45 to have a material effect on its financial condition,results of operations of liquidity**.**

 

InDecember 2002, the FASB issued Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure an Amendment of FASB Statement No. 123” (“SFAS 148”). SFAS 148amends SFAS 123 to provide alternative methods of transition for a voluntarychange to the fair value-based method of accounting for stock-based employeecompensation. In addition, SFAS 148 amends the disclosure requirements of SFAS123 to require more prominent disclosures in both annual and interim financialstatements regarding the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Thealternative methods of transition of SFAS 148 are effective for fiscal yearsending after December 15, 2002. The disclosure provision of SFAS 148 iseffective for interim periods beginning after December 15, 2002. TheCompany follows APB 25 in accounting for its employee stock options. TheCompany does not expect the adoption of SFAS 148 to have a material impact onits operating results or financial position.

 

In January 2003, the Financial Accounting Standards Board issuedInterpretation No. 46, “Consolidation of Variable Interest Entities (FIN 46).FIN 46 clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from the otherparties. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003.  Management believesthat the Company does not expect adoption of FIN 46. Management believes thatthe Company’s business practice does not require the adoption of FIN 46.

 

**Item3.    Quantitative****and Qualitative Disclosures 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 having a portfolio make-up consisting primarily of commercialpaper and notes and variable rate instruments, and to a much smaller extentovernight securities and bank instruments. Since our initial public offering, the Board of Directors approved aninvestment policy that requires we invest in relatively short-term, highquality, and high liquidity obligations.

 

**Item 4.    Controls and****Procedures.**

 

The Companyhas established and maintains disclosure controls and procedures that aredesigned to ensure that material information required to be disclosed by SIInternational in the reports that it files under the Securities Exchange

 

17

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Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that such informationis accumulated and communicated to the Company’s management, including theChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

 

Within the 90days prior to the filing date of this quarterly report, under the supervisionand with the participation of SI International’s Chief Executive Officer andChief Financial Officer, the Company carried out an evaluation of theeffectiveness of the design and operation of disclosure controls andprocedures. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective as of the date of such evaluation in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in SI International’s periodic SEC filings.

 

There havebeen no significant changes to the Company’s internal controls or in other factorsthat could significantly affect internal controls subsequent to the date theCompany carried out its evaluation.

 

**PARTII:  OTHER INFORMATION**

 

**Item1.   Legal Proceedings**

 

We are a party to litigation and legal proceedings that we believe tobe a part of the ordinary course of our business. While we cannot predict theultimate outcome of these matters, we currently believe, based upon informationavailable to us as of the date of this filing, that any ultimate liabilityarising out of these proceedings will not have a material adverse effect on ourfinancial position. We may becomeinvolved in other legal and governmental, administrative or contractualproceedings in the future.

 

**Item2.  Changes in Securities and Use ofProceeds**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

The Company appointed Mr. Charles A. Bowsher to serve as a Class Idirector with a term commencing on April 25, 2003 and expiring at the 2003Annual Meeting of Stockholders.  TheCompany’s Board is recommending a vote for the Class I directors at suchmeeting, including Mr. Bowsher.  This isdiscussed more fully in the Company’s Proxy Statement.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)          Documentsfiled as part of this Report

 

1.               Financial Statements

 

A.           Consolidated Balance Sheets as of March 29,2003 and December 28, 2002

B.             Consolidated Statements of Operations for thefiscal quarters ended March 29, 2003 and March 30, 2002

C.             Consolidated Statements of Stockholders’Equity for the fiscal quarters ended March 29, 2003 and March 30, 2002

 

18

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D.            Consolidated Statements of Cash Flows for thefiscal quarters ended March 29, 2003 and March 30, 2002

E.              Notes to Consolidated Financial Statements

 

2.               Supplementary Financial Data.

 

None.

 

3.               Exhibits.

 
| **EXHIBIT  NO.** |   | **DESCRIPTION**                                              |
|------------------|--------|--------------------------------------------------------------|
|   3.1* |   | Second  Restated Certificate of Incorporation                |
|   3.2* |   | Amended  and Restated Bylaws, as amended                     |
|   4.1* |   | Registration  Rights Agreement, as amended                   |
|   4.2* |   | Specimen  Certificate of our common stock                    |
|   4.3* |   | Stock  Purchase Agreement, as amended                        |
|   4.4* |   | Amendment  to Stock Purchase Agreements                      |
| 10.1*            |   | Form  of 2002 Stock Incentive Plan                           |
| 10.2*            |   | January  2001 Nonqualified Stock Option Plan                 |
| 10.3*            |   | SI  International, Inc. 2001 Service Award Stock Option Plan |
| 10.4*            |   | 1998  Stock Option Plan                                      |
| 10.5**           |   | Credit  Agreement                                            |
| 10.6*            |   | Executive  Employment Agreement with S. Bradford Antle       |
| 10.7*            |   | Executive  Employment Agreement with Walter J. Culver        |
| 10.8*            |   | Executive  Employment Agreement with Thomas E. Dunn          |
| 10.9*            |   | Executive  Employment Agreement with Thomas E. Lloyd         |
| 10.10*           |   | Executive  Employment Agreement with Ray J. Oleson           |
| 10.11*           |   | Form  of Indemnification Agreement                           |
| 99.1             |   | Certification  of Chief Executive Officer                    |
| 99.2             |   | Certification  of Chief Financial Officer                    |

 

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*Incorporated by reference herein from Exhibits to the Registrant’s RegistrationStatement on Form S-1 (File No. 333-87964) as declared effective bythe Commission on November 8, 2002.

 

**Incorporatedby reference herein from the Registrant’s Current Report on Form 8-K filed onNovember 18, 2002.

 

(b)  Reportson Form 8-K

 

•                       Current Report on Form 8-K dated March 17,2003, announcing reaffirmation of previously-issued guidance for the firstquarter and full fiscal year 2003.

 

•                       Current Report on Form 8-K dated March 31,2003, containing Regulation FD disclosure and reporting the release of pressreleases on March 24 and March 28, 2003, respectively announcing contract awardinformation.

 

(c)          SeeExhibits.  The exhibits required by thisitem are listed under Item 6(a)(3).

 

(d)         FinancialStatements Schedule.None.

 

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**SIGNATURES**

 

**Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, onthe 12th day of May, 2003.**

 
|   | **SI INTERNATIONAL, INC.**                                                                                    |
|--------|---------------------------------------------------------------------------------------------------------------|
|   |                                                                                                          |
|   |                 /s/ Thomas E. Dunn |
|   | **Thomas E. Dunn****Executive Vice  President and****Chief Financial  Officer**                               |
|        |                                                                                                               |  |

 

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**CERTIFICATION**

**PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF2002**

 

I, Ray J. Oleson, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of SIInternational, Inc.;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the fiscal quarter covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the fiscal quarters and fiscal years presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)  Designedsuch disclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the fiscal period in whichthis quarterly report is being prepared;

 

b)  Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)  All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)  Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

May12, 2003

 
| By:     |                                                                                                         |
|-----------------------------|--------------------------------------------------------------------------------------------------------------|
|                        |                 /s/ Ray J. Oleson |
|                        |                                                                                                         |
|                        | Ray J. Oleson**Chairman of the Board and****Chief Executive Officer**                                        |

 

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**CERTIFICATION**

**PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF2002**

 

I, Thomas E. Dunn, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of SIInternational, Inc.;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the fiscal quarter covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the fiscal quarters and fiscal years presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)  Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the fiscal period in which this quarterlyreport is being prepared;

 

b)  Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)  All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)  Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

May12, 2003

 
| By:     |                                                                                                          |
|-----------------------------|---------------------------------------------------------------------------------------------------------------|
|                        |                 /s/ Thomas E. Dunn |
|                        |                                                                                                          |
|                        | Thomas E. Dunn**Executive Vice President,  Chief Financial Officer and Treasurer**                            |

 

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