**UNITEDSTATES**

**SECURITIES 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 JUNE 26, 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 August 2, 2004, there were 8,483,512 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 June 26, 2004 (unaudited) and  December 27, 2003                                        |       |
|              | Consolidated Statements of Operations for  the three and six months ended June 26, 2004 and June 28, 2003  (unaudited) |       |
|              | Consolidated Statements of Cash Flows for  the six months ended June 26, 2004 and June 28, 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            | Changes in Securities, Use of Proceeds, and Issuer Purchases of  Equity Securities                                               |       |
| 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

----

----

 

## **PART I:  FINANCIAL INFORMATION**

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

**SI International, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                | ** ** | **June 26,  2004** | ** ** | **December 27,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                |       |                    |       |                        |       |
| **Current assets:**                                                                                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                 |       | $                       | 256        |                        | $          | 23,252 |   |
| Accounts receivable, net                                                                                                                                                                                  |       | 59,595                  |       | 34,007                      |       |
| Other current assets                                                                                                                                                                                      |       | 7,032                   |       | 4,597                       |       |
| Total current assets                                                                                                                                                                                      |       | 66,883                  |       | 61,856                      |       |
| **Property and equipment,  net**                                                                                                                                                                          |       | 4,522                   |       | 3,768                       |       |
| **Goodwill**                                                                                                                                                                                              |       | 94,027                  |       | 39,829                      |       |
| **Intangible assets,  net**                                                                                                                                                                               |       | 4,717                   |       | —                      |       |
| **Other assets**                                                                                                                                                                                          |       | 2,652                   |       | 1,174                       |       |
| Total assets                                                                                                                                                                                              |       | $                       | 172,801    |                        | $          | 106,627 |   |
| **Liabilities and  stockholders’ equity**                                                                                                                                                            |       |                    |       |                        |       |
| **Current  liabilities:**                                                                                                                                                                                 |       |                    |       |                        |       |
| Accounts payable and accrued expenses                                                                                                                                                                     |       | $                       | 23,777     |                        | $          | 17,708 |   |
| Line of credit                                                                                                                                                                                            |       | 16,000                  |       | —                      |       |
| Current portion of long-term debt                                                                                                                                                                         |       | 4,500                   |       | —                      |       |
| Current portion of operating lease  obligations                                                                                                                                                           |       | 941                     |       | —                      |       |
| Escrow payable                                                                                                                                                                                            |       | 1,263                   |       | —                      |       |
| Deferred revenue                                                                                                                                                                                          |       | 3,927                   |       | 3,975                       |       |
| Other current liabilities                                                                                                                                                                                 |       | 3,287                   |       | 465                         |       |
| Total current liabilities                                                                                                                                                                                 |       | 53,695                  |       | 22,148                      |       |
| **Long-term debt, net  of current portion**                                                                                                                                                               |       | 25,500                  |       | —                      |       |
| **Long-term operating  lease obligations**                                                                                                                                                                |       | 1,379                   |       | —                      |       |
| **Other long-term  liabilities**                                                                                                                                                                          |       | 5,289                   |       | 2,932                       |       |
| **Commitments and  contingencies**                                                                                                                                                                        |       |                    |       |                        |       |
| **Stockholders’  equity:**                                                                                                                                                                           |       |                    |       |                        |       |
| **Common stock**—$0.01  par value per share; 50,000,000 shares authorized; 8,478,311 and 8,451,507  shares issued and outstanding as of June 26, 2004 and December 27,  2003, respectively |       | 85                      |       | 85                          |       |
| Additional paid-in capital                                                                                                                                                                                |       | 75,989                  |       | 75,704                      |       |
| Deferred compensation                                                                                                                                                                                     |       | (274                    | )          | (340                        | )          |
| Retained earnings                                                                                                                                                                                         |       | 11,138                  |       | 6,098                       |       |
| Total stockholders’ equity                                                                                                                                                                           |       | 86,938                  |       | 81,547                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                           |       | $                       | 172,801    |                        | $          | 106,627 |   |

 

***See accompanyingnotes***

 

3

----

----

 

**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

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

**Unaudited**

 
| ** **                                                                                                                                                                                                                                                     | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                                                                     | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                                                                                                                                                                                                                                                           |       |                    |       |                    |       |   |   |   |   |
| **Revenue**                                                                                                                                                                                                                                                    |       | $                       | 63,814     |                    | $          | 40,724 |   | $ | 119,784 |   | $ | 82,048 |   |
| **Costs and expenses:**                                                                                                                                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Direct costs                                                                                                                                                                                                                                                   |       | 38,801                  |       | 24,264                  |       | 72,330 |   | 49,290 |   |
| Indirect costs, including $33 and $32 of  non-cash stock-based compensation in fiscal quarters ended June 26, 2004  and June 28, 2003, respectively and $66 and $67 in the six months ended  June 26, 2004 and June 28, 2003, respectively |       | 19,049                  |       | 13,167                  |       | 36,358 |   | 26,330 |   |
| Depreciation and amortization                                                                                                                                                                                                                                  |       | 598                     |       | 486                     |       | 1,187 |   | 998 |   |
| Amortization of intangible assets                                                                                                                                                                                                                              |       | 192                     |       | —                  |       | 306 |   | — |   |
|                                                                                                                                                                                                                                                           |       |                    |       |                    |       |   |   |   |   |
| Total operating expenses                                                                                                                                                                                                                                       |       | 58,640                  |       | 37,917                  |       | 110,181 |   | 76,618 |   |
| **Income from  operations**                                                                                                                                                                                                                                    |       | 5,174                   |       | 2,807                   |       | 9,603 |   | 5,430 |   |
| **Interest expense**                                                                                                                                                                                                                                           |       | (738                    | )          | (146                    | )          | (1,272 | ) | (308 | ) |
| **Income before  provision for income taxes**                                                                                                                                                                                                                  |       | 4,436                   |       | 2,661                   |       | 8,331 |   | 5,122 |   |
| **Provision for  income taxes**                                                                                                                                                                                                                                |       | 1,752                   |       | 1,052                   |       | 3,291 |   | 2,024 |   |
| **Net income**                                                                                                                                                                                                                                                 |       | $                       | 2,684      |                    | $          | 1,609 |   | $ | 5,040 |   | $ | 3,098 |   |
|                                                                                                                                                                                                                                                           |       |                    |       |                    |       |   |   |   |   |
| **Earnings per common  share:**                                                                                                                                                                                                                                |       |                    |       |                    |       |   |   |   |   |
| Basic net income per common share                                                                                                                                                                                                                              |       | $                       | 0.32       |                    | $          | 0.19 |   | $ | 0.60 |   | $ | 0.37 |   |
|                                                                                                                                                                                                                                                           |       |                    |       |                    |       |   |   |   |   |
| Diluted net income per common share                                                                                                                                                                                                                            |       | $                       | 0.30       |                    | $          | 0.19 |   | $ | 0.56 |   | $ | 0.37 |   |
|                                                                                                                                                                                                                                                           |       |                    |       |                    |       |   |   |   |   |
| **Basic  weighted-average shares outstanding**                                                                                                                                                                                                                 |       | 8,473                   |       | 8,447                   |       | 8,465 |   | 8,445 |   |
| **Diluted  weighted-average shares outstanding**                                                                                                                                                                                                               |       | 9,008                   |       | 8,447                   |       | 8,926 |   | 8,445 |   |

 

***See accompanyingnotes***

 

4

----

----

 

**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Amounts in thousands)**

**Unaudited**

 
| ** **                                                                                   | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                   | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
| **Cash flows from  operating activities:**                                                   |       |                    |       |   |   |
| Net income                                                                                   |       | $                       | 5,040      |   | $ | 3,098 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities: |       |                    |       |   |   |
| Depreciation and amortization                                                                |       | 1,187                   |       | 998 |   |
| Amortization of intangible assets                                                            |       | 306                     |       | — |   |
| Loss on disposal of fixed assets                                                             |       | —                  |       | 168 |   |
| Deferred income tax provision                                                                |       | 1,371                   |       | — |   |
| Stock-based compensation                                                                     |       | 66                      |       | 67 |   |
| Amortization of deferred financing costs                                                     |       | 226                     |       | 188 |   |
| Changes in operating assets and liabilities,  net of effect of business combination:         |       |                    |       |   |   |
| Accounts receivable, net                                                                     |       | (11,164                 | )          | 4,689 |   |
| Other current assets                                                                         |       | (1,047                  | )          | 859 |   |
| Other assets                                                                                 |       | (502                    | )          | (2 | ) |
| Accounts payable and accrued expenses                                                        |       | (360                    | )          | (549 | ) |
| Deferred revenue                                                                             |       | (49                     | )          | (1,007 | ) |
| Operating lease obligation                                                                   |       | (311                    | )          | — |   |
| Other long term liabilities                                                                  |       | 1,223                   |       | 447 |   |
| Net cash (used in) provided by operating activities                                          |       | (4,014                  | )          | 8,956 |   |
| **Cash flows from  investing activities:**                                                   |       |                    |       |   |   |
| Purchase of property and equipment                                                           |       | (803                    | )          | (786 | ) |
| Cash paid for acquisition of MATCOM                                                          |       | (66,065                 | )          | — |   |
| Net cash used in investing activities                                                        |       | (66,868                 | )          | (786 | ) |
| **Cash flows from  financing activities:**                                                   |       |                    |       |   |   |
| Proceeds from excercise of stock options                                                     |       | 285                     |       | 4 |   |
| Proceeds (repayments) from bank overdrafts                                                   |       | 2,872                   |       | (2,201 | ) |
| Net borrowings (repayments) under line of  credit                                            |       | 16,000                  |       | — |   |
| Proceeds from long-term debt                                                                 |       | 30,000                  |       | — |   |
| Payments of debt issuance fees                                                               |       | (1,201                  | )          | — |   |
| Repayments of notes payable                                                                  |       | —                  |       | (137 | ) |
| Repayments of capital lease obligations                                                      |       | (70                     | )          | (46 | ) |
| Net cash provided by (used in) financing  activities                                         |       | 47,886                  |       | (2,380 | ) |
| **Net change in cash  and cash equivalents**                                                 |       | (22,996                 | )          | 5,790 |   |
| **Cash and cash  equivalents, beginning of period**                                          |       | 23,252                  |       | 10,856 |   |
| **Cash and cash  equivalents, end of period**                                                |       | $                       | 256        |   | $ | 16,646 |   |
| **Supplemental  disclosures of cash flow information:**                                      |       |                    |       |   |   |
| Cash payments for interest                                                                   |       | $                       | 793        |   | $ | 142 |   |
| Cash payments for income taxes                                                               |       | $                       | 2,788      |   | $ | 2,181 |   |

 

***See accompanyingnotes***

 

5

----

----

 

**SI International, Inc. and Subsidiaries**

 

**Notes to consolidated financial statements**

**(Unaudited)**

 

**1.****                                      Basisof Presentation**

 

The accompanying unauditedconsolidated financial statements of SI International, Inc. and itssubsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements. In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. Operating results for the quarterand six months ended June 26, 2004 are not necessarily indicative of theresults that may be expected for the year ending December 25, 2004. Forfurther information, refer to the financial statements and footnotes includedin SI International’s Annual Report on Form 10-K/A for the year endedDecember 27, 2003.  References tothe “Company,” “we,” “us” and “our” refer to SI International, Inc. and itssubsidiaries.

 

**2.****                                      Summaryof significant accounting policies:**

 

**Principles of consolidation**

 

The accompanying consolidated financial statements include the accountsof the Company and its wholly and majority-owned subsidiaries.  All significant intercompany transactions andaccounts have been eliminated in consolidation.

 

**Use of estimates**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**Reporting periods**

 

The Company’s fiscal year is based on the calendar year and ends eachyear on the Saturday nearest but prior to December 31 of that year, andour fiscal quarters end on the Saturday nearest but prior to the applicablequarterly month end.  As a result, ourfiscal year may be comprised of 52 or 53 weeks. The fiscal quarters presented in this Form 10-Q include 13 weeks.

 

**Cash and cash equivalents**

 

The Company considers all investments with maturities of three monthsor less at the date of purchase to be cash equivalents.

 

The balances of checks the Company has written, but has not yetpresented to the bank for payment, are approximately $2,872,000 and $0 atJune 26, 2004 and December 27, 2003, respectively.  These balances have been classified in othercurrent liabilities in the accompanying consolidated balance sheets.

 

**Revenue Recognition**

 

Our accounting policy regarding revenuerecognition is written to comply with the following criteria:  (1) a contract has been executed; (2) thecontract price is fixed and determinable; (3) delivery of services or productshas occurred; and (4) collectibility of the contract price is consideredprobable and can be reasonably estimated. Compliance with these criteria may require us to make significantjudgments and estimates.

 

6

----

----

 

**Significant customers**

 

Revenue generated from contracts with the Federal government or primecontractors doing business with the Federal government accounted for asignificant percent of revenues in the fiscal quarter and six monthsending June 26, 2004 and June 28, 2003.

 
| ** **                | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                      |       |                    |       |                    |       |   |   |   |   |
| Department of Defense     |       | 52.3                    | %          | 52.8                    | %          | 51.2 | % | 52.6 | % |
| Federal civilian agencies |       | 44.3                    |       | 40.3                    |       | 45.1 |   | 40.8 |   |
| Commercial entities       |       | 3.4                     |       | 6.9                     |       | 3.7 |   | 6.6 |   |
|                      |       |                    |       |                    |       |   |   |   |   |
| Total revenue             |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |

 

For the three and six months ended June 26, 2004, as wellas the three and six months of 2003, we had two contracts that generated morethan 10% of our revenue.  Our Command,Control, Communications, Computer, Intelligence, Information, Surveillance andReconnaissance (C4I2SR) contract with the U.S. Air Force Space Commandrepresented approximately 13.5% and 21.1% of total revenue for the three monthsended June 26, 2004 and June 28, 2003, respectively, and 12.2%and 21.2% of total revenue for the six months ended June 26, 2004 andJune 28, 2003, respectively.   OurNational Visa Center contract with the Department of State representedapproximately 9.7% and 14.8% of total revenue for the three months  ended June 26, 2004 and June 28,2003, respectively, and 10.0% and 14.6% of total revenue for the six monthsended June 26, 2004 and June 28, 2003, respectively.

 

**Deferred financing costs**

 

Costs incurred in establishing our credit facility are deferred andamortized as interest expense over the term of the related debt using theeffective interest method. These deferred costs are reflected as a component ofother assets in the accompanying consolidated balance sheets. The deferredfinancing costs consist of the following (in thousands):

 
| ** **               | ** ** | **June 26,  2004** | ** ** | **December 27,  2003** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                     |       |                    |       |                        |       |
| Deferred loan costs      |       | $                       | 2,321      |                        | $          | 1,120 |   |
| Accumulated amortization |       | (647                    | )          | (421                        | )          |
|                     |       | $                       | 1,675      |                        | $          | 699 |   |

 

**Deferred revenue**

 

At the end of the quarter ended June 26, 2004 and the fiscal yearended December 27, 2003, we received advance payments of approximately$3,900,000 from a customer to purchase equipment to be used in a contract. Theadvances were reflected as deferred revenue as of June 26, 2004 andDecember 27, 2003 in the accompanying consolidated balance sheets.

 

**Fair value of financial instruments**

 

The Company’s financial instruments consist primarily of cash and cashequivalents, accounts receivable, accounts payable, credit facilities, andnotes payable. In management’s opinion, the carrying amounts of these financialinstruments approximate their fair values at June 26, 2004 andDecember 27, 2003.

 

**Stock-based compensation**

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure—an amendment of SFAS123.”  This statement amends SFAS No.123, “Accounting for Stock-Based Compensation,” to provide alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, this statement amends thedisclosure requirements of SFAS

 

7

----

----

 

No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The Company has chosen to continue to accountfor stock-based compensation using the intrinsic value method prescribed in APBOpinion No. 25 and 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 endedDecember 27, 2003 and has adopted the interim disclosure provisions forits financial reports for the quarters and six months ended June 26, 2004and June 28, 2003.

 
| ** **                                                                                                                  | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                  | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Net income - as reported                                                                                                    |       | $                       | 2,684      |                    | $          | 1,609 |   | $ | 5,040 |   | $ | 3,098 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Add: total stock-based employee  compensation expense as reported under intrinsic value method (APB No. 25)  for all awards |       | 33                      |       | 32                      |       | 66 |   | 67 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method (SFAS No. 123) for all awards      |       | (852                    | )          | (48                     | )          | (1,717 | ) | (420 | ) |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Net income - pro forma                                                                                                      |       | 1,865                   |       | 1,593                   |       | 3,389 |   | 2,745 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Basic earnings per share - as reported                                                                                      |       | 0.32                    |       | 0.19                    |       | 0.60 |   | 0.37 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Diluted earnings per share - as reported                                                                                    |       | 0.30                    |       | 0.19                    |       | 0.56 |   | 0.37 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Basic earnings per share - pro forma                                                                                        |       | 0.22                    |       | 0.19                    |       | 0.40 |   | 0.33 |   |
|                                                                                                                        |       |                    |       |                    |       |   |   |   |   |
| Diluted earnings per share - pro forma                                                                                      |       | 0.21                    |       | 0.19                    |       | 0.38 |   | 0.33 |   |
|                                                                                                                             |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

**Earnings per share**

 

Basic EPS is computed by dividing reported net income by the weightedaverage number of shares outstanding without consideration of common stockequivalents or other potentially dilutive securities. Diluted EPS gives effectto common stock equivalents and other potentially dilutive securitiesoutstanding during the period.

 

The following details the computation of net income per common share(in 000s):

 
| ** **                                  | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Net Income - Basic and Diluted              |       | $                       | 2,684      |                    | $          | 1,609 |   | $ | 5,040 |   | $ | 3,098 |   |
|                                        |       |                    |       |                    |       |   |   |   |   |
| **Weighted average  share calculation:**    |       |                    |       |                    |       |   |   |   |   |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 8,473                   |       | 8,447                   |       | 8,465 |   | 8,445 |   |
| Treasury stock effect of stock options      |       | 535                     |       | —                  |       | 461 |   | — |   |
|                                        |       |                    |       |                    |       |   |   |   |   |
| Diluted weighted average shares outstanding |       | 9,008                   |       | 8,447                   |       | 8,926 |   | 8,445 |   |
|                                             |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

8

----

----

 

**Reclassifications**

 

Certain prior year balances have been reclassified to conform to thepresentation of the current year.

 

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

 

OnJanuary 21, 2004, the Company completed the purchase of MATCOMInternational Corp., or MATCOM, a provider of information technology, systemsengineering, logistics, and training. Under the terms of the merger agreement, the Company acquired MATCOM for$65.8 million, of which $63.7 million was paid in cash to the seller. Thetransaction was funded through cash on hand and borrowings under the creditfacility.  Contemporaneously with theclosing of the acquisition of MATCOM, we amended our credit facility toincrease the maximum amount of available borrowings from $35.0 million to $80.0million, of which $30.0 million is comprised of a term loan and the remainderof a revolving credit facility, and to extend the maturity of the credit facilityto January 21, 2008.  Approximately$54.2 million of the purchase consideration has been allocated to goodwillbased primarily on the excess of the purchase price over the estimated fairvalue of net assets acquired, and approximately $5.0 million of the purchaseprice has been assigned to identifiable intangible assets of contractualcustomer relationships. The contractual customer relationships are beingamortized accelerated over its estimated remaining life of 11 years.

 

Thetotal purchase price paid, including transaction costs of $1.4 million, wasallocated as follows (in 000s):

 
| Accounts receivable                      |   | 14,425 |   |
|------------------------------------------|--------|--------|--------|
| Prepaid expense and other current assets |   | 1,631  |   |
| Income tax receivable                    |   | 1,216  |   |
| Property and equipment                   |   | 1,139  |   |
| Accounts payable & accrued expenses  |   | (9,427 | )      |
| Deferred rent                            |   | (31    | )      |
| Deferred income tax                      |   | (1,768 | )      |
| Contractual customer relationships       |   | 5,023  |   |
| Goodwill                                 |   | 54,198 |   |
| Total consideration                      |   | $      | 66,406 |   |
|                                          |        |        |        |  |

 

Thefollowing unaudited proforma combined condensed statements of operations (inthousands, except per share) set forth the consolidated results of operationsof the Company for the six months ended June 26, 2004 and June 28,2003 as if the above described acquisition had occurred at the beginning ofeach period presented. This unaudited proforma information does not purport tobe indicative of the actual financial position or the results that wouldactually have occurred if the combination had been in effect for the six monthsended June 26, 2004 and June 28, 2003.

 

| ** **                 | ** ** | **Six Months Ended**   | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 26, 2004** | ** ** | **June 28, 2003** | ** ** |
|                       |       |                   |       |   |   |
| Revenue                    |       | $                      | 123,300    |   | $ | 116,475 |   |
| Net income                 |       | $                      | 5,192      |   | $ | 4,074 |   |
| Diluted earnings per share |       | $                      | 0.58       |   | $ | 0.48 |   |

 

9

----

----

 

**4.****                                      Accountsreceivable:**

 

Accounts receivable consists of the following (in thousands):

 
| ** **                                                                                         | ** ** | **June 26, 2004** | ** ** | **December 27, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
|                                                                                               |       |                   |       |                       |       |
| Billed accounts receivable                                                                         |       | $                      | 32,311     |                       | $          | 18,215 |   |
| Unbilled accounts receivable:                                                                      |       |                   |       |                       |       |
| Currently billable                                                                                 |       | 21,154                 |       | 13,137                     |       |
| Unbilled retainages and milestones payments  expected to be billed within the next 12 months       |       | 6,564                  |       | 3,127                      |       |
| Indirect costs incurred and charged to  cost-plus contracts in excess of provisional billing rates |       | 1,081                  |       | 768                        |       |
| Total unbilled accounts receivable                                                                 |       | 28,799                 |       | 17,032                     |       |
| Allowance for doubtful accounts                                                                    |       | (1,515                 | )          | (1,240                     | )          |
| Accounts receivable, net                                                                           |       | $                      | 59,595     |                       | $          | 34,007 |   |

 

The currently billable amounts included as unbilled accounts receivableas of June 26, 2004 represent amounts that are billed during the followingquarter of the current year. They are billings for services rendered prior toquarter-end, which are billed once necessary billing data has been collectedand an invoice is produced.

 

**5.****                                      Propertyand equipment:**

 

Property and equipment consist of the following (in thousands):

 
| ** **                                      | ** ** | **June 26, 2004** | ** ** | **December 27, 2003** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Computers and equipment                         |       | $                      | 7,704      |                       | $          | 6,389 |   |
| Software                                        |       | 2,126                  |       | 1,914                      |       |
| Furniture and fixtures                          |       | 1,590                  |       | 1,339                      |       |
| Leasehold improvements                          |       | 788                    |       | 676                        |       |
|                                            |       | 12,208                 |       | 10,318                     |       |
| Less-Accumulated depreciation and  amortization |       | (7,686                 | )          | (6,550                     | )          |
| Property and equipment, net                     |       | $                      | 4,522      |                       | $          | 3,768 |   |

 

Property and equipment includes assets financed under capital leaseobligations of approximately $114,000 and $178,000, net of accumulatedamortization, as of June 26, 2004 and December 27, 2003,respectively.

 

Depreciation and amortization expense of approximately $0.6 million wasrecorded in the quarter ended June 26, 2004, compared to $0.5 million inthe quarter ended June 28, 2003.

 

**6.****                                      Accountspayable and accrued expenses:**

 

Accounts payable and accrued expenses consist of the following (inthousands):

 

| ** **                            | ** ** | **June 26, 2004** | ** ** | **December 27, 2003** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------------|------------|
|                                  |       |                   |       |                       |       |
| Accounts payable                      |       | $                      | 9,354      |                       | $          | 6,965 |   |
| Accrued compensation and benefits     |       | 7,962                  |       | 5,675                      |       |
| Other accrued liabilities             |       | 6,461                  |       | 5,068                      |       |
| Accounts payable and accrued expenses |       | $                      | 23,777     |                       | $          | 17,708 |   |

 

10

----

----

 

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

 

Debt, which is included in current and long term liabilities in theaccompanying balance sheets, consists of the following (in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **June 26, 2004** | ** ** | **December 27, 2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Credit facilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                   |       |                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| Line of credit at June 26, 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 June 26, 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, 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 |       | 30,000                 |       | —                     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| Notes payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                       |       |
| Indemnification note payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 340                    |       | 340                        |       |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                      | 46,340     |                       | $          | 340 |   |

 

The original credit facility (the 2002 credit facility) consisted of a$35.0 million secured revolving credit arrangement with Wachovia Bank, N.A.acting as Administration Agent for a consortium of lenders.  With the closing of the acquisition ofMATCOM, the Company amended the 2002 credit facility in January 2004. Theamended credit facility (the 2004 credit facility) consists of a $30 millionterm loan and a $50.0 million secured revolving credit arrangement.  The 2004 credit facility is secured bya pledge of substantially all of our current and future tangible and intangibleassets, as well as those of our current and future subsidiaries, includingaccounts receivable, inventory and capital stock of our existing and futuresubsidiaries.  In addition, the Companyis required to maintain compliance with financial and nonfinancial covenants.

 

**8.****                                      Commitmentsand contingencies:**

 

**Leases**

 

As of June 26, 2004, the Company had noncancelable operatingleases, primarily for real estate, that expire over the next ten years. Rentalexpense during the quarter ended June 26, 2004 was approximately $1.6million, compared to rental expense of approximately $1.3 million during thequarter ended June 28, 2003.

 

**Contract cost audits**

 

Payments to the Company on government cost reimbursable contracts arebased on provisional or estimated indirect rates, which are subject to audit onan annual basis by the Defense Contract Audit Agency (DCAA). The cost auditsresult in the negotiation and determination of the final indirect cost ratesthat the Company may use for the period(s) audited. The final rates, ifdifferent from the provisional rates, may create an additional receivable orliability for the Company. The Company’s revenue recognition policy calls forrevenue recognized on all cost reimbursable government contracts to be recordedat provisional rates unless collectibility is reasonably assured for costsincurred at higher rates. To the extent the indirect rate differential createsa liability for the Company, the differential is recognized as a reduction torevenue when identified.

 

11

----

----

 

**Litigation and claims**

 

Fromtime to time, the Company is involved in litigation, claims and disputes thatarise in the ordinary course of its business. In addition, the Company is subject to audit, review, and investigationby various agencies of the Federal government to determine compliance withapplicable federal statutes and regulations. As a Federal Government contractor, the Company is subject to audit bycertain federal agencies to determine if the Company’s performance andadministration of its government contracts are compliant with contractualrequirements and applicable federal statutes and regulations.  While the Company cannot predict theultimate outcome of legal proceedings, government audits, investigations,claims and disputes to which it is or may be subject, the Company currently believes, based upon informationavailable to us as of the date of this filing, that any ultimate liabilityarising out of these matters will not have a material adverse effect on ourfinancial position, results of operations, or cash flows.

 

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

 

**Stock option plan**

 

In 2002, the Company adopted the 2002 Stock Incentive Plan to grantstock options to purchase up to 1,600,000 shares of its common stock to itsemployees and employees of its affiliates. In March 2004, the Board of Directors increased the number ofreserved shares by 160,000 so that the total number of reserved sharesincreased from 1,600,000 to 1,760,000. The terms of the 2002 Stock Incentive Plan state that this ceiling of1,600,000 shares of common stock shall automatically increase at the beginningof each fiscal year by a number of shares equal to the lesser of 160,000 sharesof common stock and an amount determined by the Company’s Board ofDirectors.  As of June 26, 2004, theCompany had issued 1,377,954 stock options under the 2002 Stock Incentive Planagainst a ceiling of 1,760,000 shares of common stock authorized under thisplan.

 

**Common stock offering**

 

The Company has incurred approximately $458,000 in connection with aproposed public offering of common stock. Such costs will be netted against the proceeds and recorded instockholder’s equity upon closing of the offering.  Should the offering not be consummated, thesecosts would be recorded as an expense.

 

**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*The following discussion and analysis shouldbe read in conjunction with the consolidated financial statements and relatednotes included elsewhere in this Form 10-Q. This discussion and analysiscontains 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 carefullybecause they discuss our future expectations, contain projections of our futureresults of operations or of our financial position, or state otherforward-looking information. We believe that it is important to communicate ourfuture expectations 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 ofcapital to meet our cash requirements are forward- looking statements. Ouractual results could differ materially from those anticipated in theseforward-looking statements for many reasons, including as a result of some ofthe factors described below,  elsewherein this Form 10-Q and in the section entitled “Risk Factors” in our Form10-K/A  for the fiscal year endedDecember 27, 2003.   You should notplace undue reliance on these forward-looking statements, which apply only asof the date of the filing of this Form 10-Q.*

 

*Our fiscal year is based on the calendar yearand ends each year on the Saturday closest to but prior to December 31 ofthat year, and our fiscal quarter ends 13 weeks after the conclusion of theprevious fiscal quarter.*

 

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

 

12

----

----

 

**Overview**

 

Weare, first and foremost, a provider of information technology and networksolutions to the Federal government.  Ourclients included U.S. Air Force Space Command, the Department of State, theU.S. Army, the Department of Homeland Security, Federal Retirement ThriftInvestment 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 six months ended June 26, 2004, we received 96.6%and 96.3%, respectively, of our revenues from services we provided to variousdepartments and agencies of the Federal Government and 3.4% and 3.7%,respectively, of our total revenues from work performed for commercialentities. In comparison, for the three and six months ended June 28, 2003,we received 93.1% and 93.4%, respectively, of our revenues from services weprovided to Federal Government agencies and 6.9% and 6.6%, respectively, oftotal revenues from work performed 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.

 
| ** **                | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                      |       |                    |       |                    |       |   |   |   |   |
| Department of Defense     |       | 52.3                    | %          | 52.8                    | %          | 51.2 | % | 52.6 | % |
| Federal civilian agencies |       | 44.3                    | %          | 40.3                    | %          | 45.1 | % | 40.8 | % |
| Commercial entities       |       | 3.4                     | %          | 6.9                     | %          | 3.7 | % | 6.6 | % |
| Total revenue             |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |

 

We have derived a substantial majority of our revenues fromgovernmental contracts under which we act as a prime contractor. We alsoprovide services indirectly as a subcontractor. We intend to focus on retainingand increasing the percentage of our business as prime contractor because itprovides us with stronger client relationships. The following table shows ourrevenues as prime contractor and as subcontractor as a percentage of our totalrevenue for the following periods:

 
| ** **             | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                   |       |                    |       |                    |       |   |   |   |   |
| Prime contract revenue |       | 80.4                    | %          | 83.4                    | %          | 79.9 | % | 83.0 | % |
| Subcontract revenue    |       | 19.6                    | %          | 16.6                    | %          | 20.1 | % | 17.0 | % |
| Total revenue          |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |

 

Our services are provided under three types of contracts: costreimbursable, time and materials and fixed price contracts. The following tableshows our revenues from each of these types of contracts as a percentage of ourtotal revenue for the following periods:

 
| ** **         | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **         | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|               |       |                    |       |                    |       |   |   |   |   |
| Cost reimbursable  |       | 26.8                    | %          | 37.9                    | %          | 25.6 | % | 37.4 | % |
| Time and materials |       | 48.0                    | %          | 35.6                    | %          | 49.0 | % | 37.2 | % |
| Fixed price        |       | 25.2                    | %          | 26.5                    | %          | 25.4 | % | 25.4 | % |
| Total              |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |

 

13

----

----

 

Under cost reimbursable contracts, we are reimbursed for costs that aredetermined to be reasonable, allowable and allocable to the contract, and paida fee representing the profit margin negotiated between us and the contractingagency, which may be fixed or performance based. Under cost reimbursablecontracts we recognize revenues and an estimate of applicable fees earned ascosts are incurred. We consider fixed fees under cost reimbursable contracts tobe earned in proportion to the allowable costs incurred in performance of thecontract. For performance-based fees under cost reimbursable contracts, werecognize the relevant portion of the expected fee to be awarded by the clientat the time such fee can be reasonably estimated, based on factors such as ourprior award experience and communications with the client regardingperformance. In general, cost reimbursable contracts are the least profitableof our government contracts. In the three and six months ended June 26,2004, 26.8% and 25.6%, respectively, of our revenues were derived from costreimbursable contracts.  In the three andsix months ended June 28, 2003, 37.9% and 37.4%, respectively, of ourrevenues were derived from cost reimbursable contracts.

 

Under time and materials contracts, we are reimbursed for labor atfixed hourly rates and generally reimbursed separately for allowable materials,costs and expenses. To the extent that our actual labor costs under a time andmaterials contract are higher or lower than the billing rates under thecontract, our profit under the contract may either be greater or less than weanticipated or we may suffer a loss under the contract. We recognize revenuesunder time and materials contracts by multiplying the number of direct laborhours expended by the contract billing rates and adding the effect of otherbillable direct costs. In general, we realize a higher profit margin on work performedunder time and materials contracts than cost reimbursable contracts. In thethree and six months ended June 26, 2004, 48.0% and 49.0%, respectively,of our revenues were derived from time and materials contracts.  In the three and six months ended June 28,2003, 35.6% and 37.2%, respectively, of our revenues were derived from time andmaterial 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 six months ended June 26, 2004, 25.2% and 25.4%,respectively, of our revenues were derived from fixed price contracts.   In the three and six months endedJune 28, 2003, 26.5% and 25.4%, respectively, of our revenues were derivedfrom fixed price contracts.

 

If we anticipate a loss on a contract, we provide for the full amountof anticipated loss at the time of that determination.

 

Our most significant expense is direct cost, which consists primarilyof direct labor costs for program personnel and direct expenses incurred tocomplete contracts, including cost of materials and subcontractor costs. Our abilityto predict accurately the number and types of personnel, their salaries, andother costs, can have a significant impact on our direct cost.

 

The allowability of certain direct and indirect costs in federalcontracts is subject to audit by the client, usually through the DCAA. Certainindirect costs are charged to contracts and paid by the client usingprovisional, or estimated, indirect rates, which are subject to later revision,based on the government audits of those costs.

 

We actively monitor our relationships with our clients during ourengagements, as well as the quality of the service we provide, to assist in ourefforts to win recompetition bids. In addition, we strive to maintain goodrelationships with a wide variety of government contractors.

 

14

----

----

 

**Results of Operations**

 

The following table sets forth certain items from our consolidatedstatements of operations as a percent of revenues for the periods indicated.

 
| ** **                               | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** |
|                                     |       |                    |       |                    |       |   |   |   |   |
| Revenue                                  |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Costs and expenses:                      |       |                    |       |                    |       |   |   |   |   |
| Direct costs                             |       | 60.8                    |       | 59.6                    |       | 60.4 |   | 60.1 |   |
| Indirect costs                           |       | 29.9                    |       | 32.3                    |       | 30.3 |   | 32.1 |   |
| Depreciation                             |       | 0.9                     |       | 1.2                     |       | 1.0 |   | 1.2 |   |
| Amortization                             |       | 0.3                     |       | —                  |       | 0.3 |   | — |   |
| Total operating expenses                 |       | 91.9                    |       | 93.1                    |       | 92.0 |   | 93.4 |   |
| Income from operations                   |       | 8.1                     |       | 6.9                     |       | 8.0 |   | 6.6 |   |
|                                     |       |                    |       |                    |       |   |   |   |   |
| Interest expense                         |       | (1.2                    | )          | (0.4                    | )          | (1.1 | ) | (0.4 | ) |
|                                     |       |                    |       |                    |       |   |   |   |   |
| Income before provision for income taxes |       | 6.9                     |       | 6.5                     |       | 6.9 |   | 6.2 |   |
| Provision for income taxes               |       | 2.7                     |       | 2.6                     |       | 2.7 |   | 2.5 |   |
| Net income                               |       | 4.2                     | %          | 3.9                     | %          | 4.2 | % | 3.7 | % |

 

**Three months ended June 26, 2004compared with three months ended June 28, 2003**

 

*Revenue.*  For the three months ended June 26,2004, our revenues increased 56.7% to $63.8 million from$40.7 million for the three months ended June 28, 2003. Revenues fromwork under Federal Government contracts increased 62.4% to $61.6 millionfor the three months ended June 26, 2004 from $37.9 million for the threemonths ended June 28, 2003. This increase was primarily attributable toincreased activity in our outsourcing, learning and network solutions servicesand revenue from our most recent acquisition, Matcom InternationalCorporation.  Commercial revenuesdecreased 20.2% to $2.2 million in the three months ended June 26, 2004from $2.8 million in the three months ended June 28, 2003.  The decrease was attributable to an increasein our focus on Federal Government business.

 

*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 June 26, 2004,direct costs increased 59.9% to $38.8 million from $24.3 million forthe three months ended June 28, 2003. This increase was attributableprimarily to the increase in revenue. As a percentage of revenue, direct costswere 60.8% for the three months ended June 26, 2004 as compared to 59.6%for the three months ended June 28, 2003.

 

*Indirect costs.*  Indirect costs include facilities, selling,bid and proposal, indirect labor, fringe benefits and other discretionarycosts. For the three months ended June 26, 2004, indirect costs increased44.7% to $19.0 million from $13.2 million for the three months endedJune 28, 2003.  This $5.8 million increase was primarilyattributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs as well as the integrationof MATCOM and the growth in our sales and marketing efforts.  As a percentage of revenue, indirectcosts were 29.9% for the three months ended June 26, 2004 as compared to32.3% for the three months ended June 28, 2003.

 

*Depreciation.*Forthe three months ended June 26, 2004, depreciation expense increased 23.0%to $0.60 million from $0.49 million for the three months ended June 28,2003.  This increase was attributableprimarily to increased levels of capital expenditures. As a percentage ofrevenue, depreciation expense was 0.9% for the three months ended June 26,2004 compared to 1.2% for the three months ended June 28, 2003.

 

15

----

----

 

*Amortization of intangible assets.*Forthe three months ended June 26, 2004, amortization of intangible assetswas $0.2 million, compared to $0 for the three months ended June 28,2003.  This increase was attributed to the acquisition of MATCOM on January 21,2004.  The Company uses an acceleratedmethod of amortization.

 

*Income from operations.*  For the three months ended June 26,2004, income from operations increased 84.3% to $5.2 million from$2.8 million for the three months ended June 28, 2003. This increasewas attributable primarily to increased revenues.  As a percentage of revenue, income fromoperations was 8.1% for the three months ended June 26, 2004 compared to6.9% for the three months ended June 28, 2003.

 

*Interest expense.*  Interest expense increased 405.5% to$0.74 million for the three months ended June 26, 2004 from$0.15 million for the three months ended June 28, 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 1.2% for the three months endedJune 26, 2004 as compared to 0.4% for the three months ended June 28,2003.  We anticipate interest expense to remain at higher levels throughout fiscalyear 2004 as compared to the same periods in 2003.

 

*Provision for/benefit from income taxes.*  The provision for income tax was$1.8 million in the three months ended June 26, 2004, compared to$1.1 million for the three months ended June 28, 2003.   Oursecond quarters of  both 2004 and 2003tax provision represent an effective tax rate of 39.5%.  Our effective tax rate is greater than thefederal statutory rate of 34% due primarily to state income tax rates.

 

**Six months ended June 26, 2004 comparedwith six months ended June 28, 2003**

 

*Revenue.*  For the six months ended June 26, 2004,our revenues increased 46.0% to $119.8 million from $82.0 million forthe six months ended June 28, 2003. Revenues from work under FederalGovernment contracts increased 50.4% to $115.4 million for the six monthsended June 26, 2004 from $76.6 million for the six months endedJune 28, 2003. This increase was attributable primarily to increasedactivities in our outsourcing, applications development and network solutionsservices.  Commercial revenues decreased19.0% to $4.4 million in the six months ended June 26, 2004 from $5.4million in the six months ended June 28, 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 six months ended June 26, 2004, directcosts increased 46.7% to $72.3 million from $49.3 million for the sixmonths ended June 28, 2003. This increase was attributable primarily tothe increase in revenue. As a percentage of revenue, direct costs were 60.4%for the six months ended June 26, 2004 as compared to 60.1% for the sixmonths ended June 28, 2003.

 

*Indirect costs.*  Indirect costs include facilities, selling,bid and proposal, indirect labor, fringe benefits and other discretionarycosts. For the six months ended June 26, 2004, indirect costs increased38.1% to $36.4 million from $26.3 million for the six months endedJune 28, 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 integration of MATCOM and the growthin our sales and marketing efforts.    As a percentage of revenue, indirect costswere 30.3% for the six months ended June 26, 2004 as compared to 32.1% forthe six months ended June 28, 2003.

 

*Depreciation.*Forthe six months ended June 26, 2004 was $1.2 million as compared to $1.0million for the six months ended June 28, 2003.  As a percentage of revenue, depreciationexpense was 1.0% for the six months ended June 26, 2004 compared to 1.2%for the six months ended June 28, 2003.

 

*Amortization of intangible assets.*Forthe six months ended June 26, 2004, amortization of intangible assets was$0.3 million, compared to $0 for the six months ended June 28, 2003.  Thisincrease was attributed to the acquisition of MATCOM on January 21,2004.  The Company uses an acceleratedmethod of amortization.

 

*Income from operations.*  For the six months ended June 26, 2004,income from operations increased 76.9% to $9.6 million from$5.4 million for the six months ended June 28, 2003. This increasewas attributable primarily to the  higherrevenue.  As a percentage of revenue,income from operations was 8.0% for the six months ended June 26, 2004compared to 6.6% for the six months ended June 28, 2003.

 

16

----

----

 

*Interest expense.*  Interest expense increased 313.0% to$1.27 million for the six months ended June 26, 2004 from$0.31 million for the six months ended June 28, 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 six months endedJune 26, 2004 as compared to 0.4% for the six months ended June 28,2003.  We anticipate interest expense to remain at higher levels throughoutfiscal year 2004 as compared to the same periods in 2003.

 

*Provision for/benefit from income taxes.*  The provision for income tax was$3.3 million in the six months ended June 26, 2004, compared to$2.0 million for the six months ended June 28, 2003.   For both the six months ended June 26,2004 and June 28, 2003, we have recorded an expense for income tax, whichreflects an effective rate of 39.5%.

 

**Liquidity and Capital Resources**

 

Ourprimary liquidity needs are the financing of working capital, capitalexpenditures and acquisitions. We have historically relied primarily on cashflow from operations, borrowings under our credit facility and from some of ourstockholders and the sale of common and preferred stock to provide for our cashneeds.

 

Net cash used in operations was $4.0 million for the six months endedJune 26, 2004 compared with $9.0 million net cash provided byoperations for the six months ended June 28, 2003.  Cash used in operations in the six monthsended June 26, 2004 was attributable to net income of $5.0 million,depreciation, amortization and other non-cash items of $3.2 million, offset byan increase in net operating assets by $12.2 million. Cash provided by operationsin the six months ended June 28, 2003 was attributable to net income of$3.1 million, depreciation, amortization and other non-cash items of $1.4million, and a decrease in net operating assets of $4.5 million.

 

Cash used in investing activities was $66.9 million for the six monthsended June 26, 2004 and $0.8 million for the six months endedJune 28, 2003.  For the six monthsended June 26, 2004, we acquired MATCOM for $65.9 million and invested$0.8 million in capital assets.  For thesix months ended June 28, 2003, we invested $0.8 million in capitalassets.

 

Cash provided by financing activities was $47.9 million for the sixmonths ended June 26, 2004, compared with cash used in financingactivities of $2.4 million for the six months ended June 28, 2003.  Cash provided by financing activities for thesix months ended June 26, 2004 was attributable to $16.0 million netborrowings under our revolving line of credit and $30.0 million of long-term debtprovided by our credit facility, $2.9 million from bank overdrafts, and $0.3million provided by proceeds from the exercise of stock options, partiallyoffset by $1.2 million repayments of debt issuance fees, and $70,000 of capitallease payments.

 

Cash and cash equivalents as of June 26, 2004 and June 28,2003 were $256,000  and $16.6 million, respectively.

 

Inconnection with the acquisition of MATCOM on January 21, 2004, we amendedour credit facility to increase the borrowing capacity from $35 million to$80 million and extended the term to January 21, 2008.

 

Theamended credit facility includes a $30 million term loan and a$50 million revolving credit facility. Under the term loan, we arerequired to make three $1.5 million quarterly principal payments startingon June 30, 2004, eight $1.875 million quarterly principal paymentsstarting on March 31, 2005, three $2.25 million quarterly principalpayments starting on March 31, 2007, and a final $3.75 millionprincipal payment on December 31, 2007.

 

Theamended credit facility permits us, subject to our compliance with financialand nonfinancial covenants and customary conditions, to make up to$50.0 million of revolving credit borrowings and also provides for theissuance of letters of credit, although the amount of available revolvingcredit borrowings are reduced by the amount of any outstanding letters ofcredit issued under the facility.

 

Anyborrowings outstanding under the facility will, at our option, bear interesteither at floating rates equal to LIBOR plus a spread ranging from 275 to 350basis points or a specified base rate plus a spread ranging from 175 to 250basis points, with the exact spread determined upon the basis of our ratio ofoutstanding indebtedness to our earnings before interest, taxes, anddepreciation and amortization expense, as defined in the new credit facility.

 

Weand each of our existing and future subsidiaries are jointly and severallyliable with respect to the payment of all borrowings and other amounts due andperformance of all obligations under the new credit facility. The new creditfacility is secured by a pledge of substantially all of our current and futuretangible and intangible assets, as well as those of our current

 

17

----

----

 

andfuture subsidiaries, including accounts receivable, inventory and capital stockof our existing and future subsidiaries. The new credit facility requires us tomake mandatory prepayments of outstanding borrowings, with a correspondingreduction in the maximum amount of borrowings available under the facility,with net proceeds from certain insurance recoveries and asset sales, and with100% of the net proceeds from debt issuances, and with 50% of the net proceedsfrom certain equity issuances subject to specified exceptions. Also, the new creditfacility includes a number of restrictive covenants including, among otherthings, limitations on our leverage and capital expenditures, limitations onour ability to incur additional indebtedness or liens, requirements that wemaintain minimum ratios of cash flow to fixed charges and prohibitions onpayment of dividends on our capital stock, limitations on our ability to enterinto mergers, acquisitions or sales of our assets, and prohibitions on certaintransactions among our subsidiaries and affiliated companies. The new creditfacility also contains events of default, including, among other events, anytransaction resulting in a new stockholder or group of stockholders acquiringcontrol of our board of directors or ownership of greater than 40% of ouroutstanding capital stock, any default by us under any material governmentcontract or other material contract to which we are a party, the suspension ofour ability to enter into contracts with the federal, state or localgovernments generally.

 

Wecurrently anticipate that cash flow from operations and borrowings availableunder our new credit facility will be sufficient to meet our presentlyanticipated capital needs for at least the next twelve months, but may beinsufficient to provide funds necessary for any future acquisitions we maymake, whether during the next twelve months or thereafter. To the extent thatwe require additional funds, whether for acquisitions or otherwise, we may seekadditional equity or debt financing.  OnMarch 22, 2004, we filed a shelf registration statement with theSecurities and Exchange Commission relating to the future offering of up to anaggregate of $100 million of our common stock, preferred stock, depositaryshares, debt securities and warrants exercisable for common or preferredstock.  The shelf registration statementalso registers the offering of up to 1,500,000 shares of common stock held byaffiliates of Frontenac Company, our largest stockholder.  On May 21, 2004, the shelf registrationstatement was declared effective by the Securities and ExchangeCommission.  We have not yet issued anysecurities pursuant to the shelf registration statement.  We believe the shelf registration statementwill provide us with more efficient and immediate access to capital marketswhen considered appropriate.  However,equity or debt financing may not be available to us on terms that areacceptable to us, if at all, and any equity financing may be dilutive to ourstockholders. To the extent that we obtain additional debt financing, our debtservice obligations will increase and the relevant debt instruments may, amongother things, impose additional restrictions on our operations, require us tocomply with additional financial covenants or require us to pledge assets tosecure our borrowings.

 

Financialdata for all of our subsidiaries are included in our consolidated financialstatements.

 

**Critical Accounting 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.

 

 *RevenueRecognition*

 

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 fixed pricecontracts, we estimate the applicable fees earned 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 such 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 withperformance-based fees, we estimate the applicable fees earned based onhistorical experience and performance evaluations from our customers. For fixedprice contracts, which are based on unit pricing, we

 

18

----

----

 

recognize revenue for the number of units delivered in any given fiscalperiod.  For fixed price contracts, whichare based on the proportionate performance method and involve a specifiednumber of similar acts, we recognize revenue based on the proportion of thoseacts completed compared to the number of total specified acts required by thecontract.  For fixed price contracts,which are based on the proportionate performance method and involve a specifiednumber of defined but not similar acts, we recognize revenue based on theproportion of the project’s percentage total costs incurred  compared to the estimated total costsassociated with the entire transaction. Occasionally, facts may develop that require revisions to estimatedtotal costs or revenues expected. The cumulative effect of any such revisionsis recorded in the period in which the facts requiring the revision becomeknown. The full amount of anticipated losses on any contract type arerecognized in the period in which they become known.

 

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.

 

**Item 3.****                Quantitative andQualitative Disclosures About Market Risk.**

 

Historically, our investment positions have been relativelysmall and short-term in nature. We have typically made investments in a fundwith an effective average maturity of fewer than 40 days and a portfoliomake-up consisting primarily of commercial paper and notes, variable rateinstruments, and, to a lesser degree, overnight securities and bankinstruments.  Since our initial publicoffering, the Board of Directors approved an investment policy that requires usto invest in relatively short-term, high quality, and high liquidityobligations.

 

**Item 4.****                Controls andProcedures.**

 

TheCompany has established and maintains disclosure controls and procedures thatare designed to ensure that material information required to be disclosed bythe Company in the reports that it files under the Securities Exchange Act of1934, as amended, 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 theCompany’s management, including the Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Underthe supervision and with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, the Company carried out an evaluation ofthe effectiveness of the design and operation of disclosure controls andprocedures as of June 26, 2004. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective at the reasonable assurance level as of June 26, 2004 in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

 

During the three months ended June 26, 2004, there were nochanges to the Company’s internal control over financial reporting thatmaterially affected, or are reasonable likely to materially affect, theCompany’s internal control over financial reporting

 

**PARTII:  OTHER INFORMATION**

 

**Item1.****           Legal Proceedings**

 

Fromtime to time, the Company is involved in litigation, claims and disputes thatarise in the ordinary course of its business. In addition, the Company is subject to audit, review, and investigationby various agencies of the Federal Government to determine compliance with applicablefederal statutes and regulations.  As aFederal Government contractor, the Company is subject to audit by certainfederal agencies to determine if the Company’s performance and administrationof its government contracts are compliant with contractual requirements andapplicable federal statutes and regulations. While the Company cannot predict the ultimate outcome of legalproceedings, government audits, investigations, claims and disputes to which itis or may be subject, the Companycurrently believes, based upon information available to us as of the date ofthis filing, that any ultimate liability arising out of these matters will nothave a material adverse effect on our financial position, results ofoperations, or cash flows.

 

19

----

----

 

**Item2.  Changes in Securities****, Use of Proceeds and Issuer Purchases of Equity Securities**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

**Item4.****           Submission of MattersTo a Vote of Security Holders**

 

During the fiscal quarter ended June 26, 2004, we submittedcertain matters to a vote of our stockholders through the notice of annualmeeting of stockholders and the solicitation of proxies related thereto.  The proxy materials related to theRegistrant’s Second Annual Meeting of Stockholders were distributed onor about May 6, 2004 and the annual meeting of stockholders was held onJune 16, 2004, in Colorado Springs, Colorado.  As of the record date prior to such meeting,8,466,903 shares of the Registrant’s common stock were outstanding and entitledto vote at the meeting.  At the annualstockholders meeting on June 16, 2004, 7,897,492 shares of theRegistrant’s common stock were present in person or by proxy, representing93.2749% of the outstanding shares of common stock of the Registrant.  The following sets forth the matterspresented for a vote by the stockholders and the votes cast for, withheld,abstained, and broker non-votes:

 
| **Matter**                                                                                                                         | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|
| (1)   Election  of Mr. Ray J. Oleson as a Class II director with a term serving until  the 2007 Annual Meeting           |       | 7,731,138     |       | 166,354            |       | 0               |       | 0                    |       |
| (2)   Election  of General R. Thomas Marsh as a Class II director with a term serving until  the 2007 Annual Meeting     |       | 7,775,564     |       | 121,928            |       | 0               |       | 0                    |       |
| (3)   Election  of Mr. John P. Stenbit as a Class II director with a term serving until  the 2007 Annual Meeting         |       | 7,788,582     |       | 108,910            |       | 0               |       | 0                    |       |
| (4)   Ratification  of the appointment of Ernst & Young LLP as our independent auditors for  the current fiscal year |       | 7,645,619     |       | 0                  |       | 15,132          |       | 0                    |       |

 

**Item5.  Other Information**

None.

 

**Item6.  Exhibits and Report on Form 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 May 19, 2004 announcing an amendment to our  universal shelf registration statement to withdraw the preliminary prospectus  supplement relating to a proposed underwritten public offering. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

20

----

----

 

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:  August 6, 2004 |                    |                                                  |   |

 

21

----

----

 

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) |

 

22

----

----