10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2006

Commission File Number 0-8401

 


CACI International Inc

(Exact name of registrant as specified in its charter)

 


Delaware

(State or other jurisdiction of incorporation or organization)

54-1345888

(I.R.S. Employer Identification No.)

1100 North Glebe Road, Arlington, VA 22201

(Address of principal executive offices)

(703) 841-7800

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  x.

As of May 8, 2006, the Registrant had 30,552,146 shares of common stock issued and outstanding.

 



Table of Contents

CACI INTERNATIONAL INC

 

         PAGE
PART I: FINANCIAL INFORMATION   
Item 1.   Financial Statements   
  Condensed Consolidated Statements of Operations (Unaudited) for the three months Ended March 31, 2006 and 2005    3
  Condensed Consolidated Statements of Operations (Unaudited) for the nine months Ended March 31, 2006 and 2005    4
  Consolidated Balance Sheets (Unaudited) as of March 31, 2006 and June 30, 2005    5
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months Ended March 31, 2006 and 2005    6
  Consolidated Statements of Comprehensive Income (Unaudited) for the nine months Ended March 31, 2006 and 2005    7
  Notes to Unaudited Condensed Consolidated Financial Statements    8
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    22
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    29
Item 4.   Controls and Procedures    29
PART II : OTHER INFORMATION   
Item 1.   Legal Proceedings    30
Item 1.A   Risk Factors    31
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    31
Item 3.   Defaults Upon Senior Securities    31
Item 4.   Submission of Matters to a Vote of Security Holders    31
Item 5.   Other Information    31
Item 6.   Exhibits    31
  Signatures    32

 

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PART 1

FINANCIAL INFORMATION

Item 1. Financial Statements

CACI INTERNATIONAL INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except per share data)

 

     Three Months Ended
March 31,
     2006    2005
          (as restated
for FAS 123R)
     

Revenue

   $ 435,359    $ 414,946

Costs and expenses:

     

Direct costs

     279,142      259,738

Indirect costs and selling expenses

     111,281      110,975

Depreciation and amortization

     8,118      8,075
             

Total costs and expenses

     398,541      378,788
             

Income from operations

     36,818      36,158

Interest expense, net

     4,346      3,652
             

Income before income taxes

     32,472      32,506

Income taxes

     11,115      12,211
             

Net income

   $ 21,357    $ 20,295
             

Basic earnings per share

   $ 0.71    $ 0.68
             

Diluted earnings per share

   $ 0.69    $ 0.66
             

Weighted-average basic shares outstanding

     30,226      29,913
             

Weighted-average diluted shares outstanding

     31,159      30,713
             

See notes to the Unaudited Condensed Consolidated Financial Statement.

 

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CACI INTERNATIONAL INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except per share data)

 

     Nine Months Ended
March 31,
     2006    2005
          (as restated
for FAS 123R)
     

Revenue

   $ 1,277,995    $ 1,193,284

Costs and expenses:

     

Direct costs

     820,759      741,193

Indirect costs and selling expenses

     324,108      323,909

Depreciation and amortization

     23,595      24,072
             

Total costs and expenses

     1,168,462      1,089,174
             

Income from operations

     109,533      104,110

Interest expense, net

     11,736      10,945
             

Income before income taxes

     97,797      93,165

Income taxes

     35,047      35,399
             

Net income

   $ 62,750    $ 57,766
             

Basic earnings per share

   $ 2.08    $ 1.95
             

Diluted earnings per share

   $ 2.02    $ 1.89
             

Weighted-average basic shares outstanding

     30,142      29,579
             

Weighted-average diluted shares outstanding

     31,081      30,557
             

See notes to the Unaudited Condensed Consolidated Financial Statements.

 

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CACI INTERNATIONAL INC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(amounts in thousands, except per share data)

 

     March 31,
2006
    June 30, 2005  
           (as restated for
FAS 123R)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 73,916     $ 132,965  

Accounts receivable, net:

    

Billed

     321,070       311,046  

Unbilled

     39,382       27,009  
                

Total accounts receivable, net

     360,452       338,055  
                

Deferred income taxes

     9,086       6,504  

Prepaid expenses and other current assets

     19,739       15,406  
                

Total current assets

     463,193       492,930  
                

Goodwill

     679,481       555,347  

Intangible assets, net

     92,312       81,259  

Property and equipment, net

     25,016       24,261  

Supplemental retirement savings plan assets

     31,655       24,805  

Accounts receivable, long-term, net

     9,508       10,529  

Deferred income taxes

     438       2,479  

Other long-term assets

     18,547       15,029  
                

Total assets

   $ 1,320,150     $ 1,206,639  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 3,543     $ 3,641  

Accounts payable

     42,600       36,900  

Income taxes payable

     —         8,909  

Accrued compensation and benefits

     96,811       91,663  

Other accrued expenses

     66,571       67,631  
                

Total current liabilities

     209,525       208,744  
                

Long-term debt, net of current portion

     365,203       342,861  

Supplemental retirement savings plan obligations

     32,187       25,059  

Other long-term obligations

     9,711       8,941  
                

Total liabilities

     616,626       585,605  
                

Shareholders’ equity:

    

Common stock $.10 par value, 80,000 shares authorized, 38,177 and 37,807 shares issued and outstanding, respectively

     3,818       3,781  

Additional paid-in-capital

     298,924       279,496  

Retained earnings

     420,612       357,862  

Accumulated other comprehensive income

     2,750       2,721  

Treasury stock, at cost (7,808 and 7,813 shares, respectively)

     (22,580 )     (22,826 )
                

Total shareholders’ equity

     703,524       621,034  
                

Total liabilities and shareholders’ equity

   $ 1,320,150     $ 1,206,639  
                

See notes to the Unaudited Condensed Consolidated Financial Statements.

 

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CACI INTERNATIONAL INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)

 

     Nine Months Ended
March 31,
 
     2006     2005  
           (as restated for
FAS 123R)
 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 62,750     $ 57,766  

Reconciliation of net income to net cash provided by operating activities:

    

Depreciation and amortization

     23,595       24,072  

Amortization of deferred financing costs

     1,065       1,008  

Stock-based compensation expense

     12,635       8,601  

Deferred income tax benefit

     1,859       91  

Changes in operating assets and liabilities, net of effect of business acquisitions:

    

Accounts receivable, net

     17,794       (9,913 )

Prepaid expenses and other current assets

     (2,050 )     1,714  

Accounts payable and other accrued expenses

     (12,605 )     (18,608 )

Accrued compensation and benefits

     1,919       3,587  

Income taxes payable

     (19,720 )     (7,226 )

Supplemental retirement savings plan obligations and other long-term liabilities

     6,679       4,969  
                

Net cash provided by operating activities

     93,921       66,061  
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures

     (7,620 )     (6,727 )

Cash paid for business acquisitions, net of cash acquired

     (175,853 )     (7,267 )

Proceeds from sale of marketable securities

     —         515  

Other long term assets

     (4,151 )     (257 )
                

Net cash used in investing activities

     (187,624 )     (13,736 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings under credit facilities

     25,000       —    

Principal payments made under credit facilities

     (2,755 )     (64,847 )

Proceeds from employee stock purchase plans

     5,758       5,255  

Proceeds from exercise of stock options

     7,635       14,483  

Repurchases of common stock

     (5,849 )     (5,954 )

Other

     5,252       9,802  
                

Net cash provided by (used in) financing activities

     35,041       (41,261 )
                

Effect of exchange rate changes on cash and cash equivalents

     (387 )     745  
                

Net (decrease) increase in cash and cash equivalents

     (59,049 )     11,809  

Cash and cash equivalents, beginning of period

     132,965       63,029  
                

Cash and cash equivalents, end of period

   $ 73,916     $ 74,838  
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period for income taxes

   $ 48,819     $ 32,481  
                

Cash paid during the period for interest

   $ 13,053     $ 10,630  
                

See notes to the Unaudited Condensed Consolidated Financial Statements.

 

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CACI INTERNATIONAL INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(amounts in thousands)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
     2006    2005     2006     2005
          (as restated for
FAS 123R)
          (as restated for
FAS 123R)

Net income

   $ 21,357    $ 20,295     $ 62,750     $ 57,766

Change in foreign currency translation adjustment, net

     390      (585 )     (1,329 )     1,640

Change in fair value of interest rate swap agreement

     535      —         1,358       —  
                             

Comprehensive income

   $ 22,282    $ 19,710     $ 62,779     $ 59,406
                             

See notes to the unaudited Condensed Consolidated Financial Statements.

 

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CACI INTERNATIONAL INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands except share and per share data)

 

A. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the periods presented. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest annual report to the Securities and Exchange Commission on Form 10-K/A for the year ended June 30, 2005. The results of operations for the three and nine months ended March 31, 2006 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year.

Certain reclassifications have been made to the prior period’s financial statements to conform to the current presentation.

 

B. Adoption and Retrospective Application of FAS 123R

Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment (FAS 123R), using the modified retrospective application transition method. Prior to July 1, 2005, the Company had accounted for stock-based compensation using the intrinsic method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), as amended by Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation. The Company also followed the disclosure provisions of SFAS No. 123, Accounting for Stock Based Compensation (FAS 123), for periods prior to July 1, 2005.

Under the modified retrospective application method, the Company will restate its consolidated statements of operations, comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2005, and its consolidated balance sheets as of June 30, 2005 and 2004. Restatements of selected footnote disclosures in the consolidated financial statements included with the Company’s annual report on Form 10-K/A will also be made. The Company plans to file these consolidated financial statements, as restated, to reflect the retrospective application of FAS 123R.

Under the modified retrospective application transition method, the Company has calculated the cumulative impact of stock-based compensation expense as though it had adopted the provisions of FAS 123 effective July 1, 1995. The impact of stock-based compensation expense on earnings, comprehensive income, deferred income taxes, additional paid-in-capital, and cash flows for all equity grants made since this date have been calculated. The consolidated statements of operations, comprehensive income, and cash flows for the three and nine months ended March 31, 2005 have been restated to reflect the retrospective application of the new standard, and the impact on net earnings and cash flows as previously reported is as follows:

 

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Three Months Ended

March 31, 2005

 
     As Previously
Reported
   

Effect of
Retrospective

Application of FAS
123R

    As Restated  

Consolidated Statement of Operations:

      

Indirect costs and selling expenses

   $ 108,827     $ 2,148     $ 110,975  
                        

Income from operations

     38,306       (2,148 )     36,158  
                        

Income before income taxes

     34,654       (2,148 )     32,506  

Income taxes

     13,018       (807 )     12,211  
                        

Net income

   $ 21,636     $ (1,341 )   $ 20,295  
                        

Earnings per share:

      

Basic

   $ 0.72     $ (0.04 )   $ 0.68  
                        

Diluted

   $ 0.71     $ (0.05 )   $ 0.66  
                        

Consolidated Statement of Cash Flows:

      

Cash flows provided by operations

   $ 45,258     $ (338 )   $ 44,920  
                        

Cash flows used in financing activities

   $ (20,926 )   $ 338     $ (20,588 )
                        

Consolidated Statement of Comprehensive Income:

      

Comprehensive income

   $ 21,051     $ (1,341 )   $ 19,710  
                        
    

Nine Months Ended

March 31, 2005

 
     As Previously
Reported
   

Effect of

Retrospective
Application of FAS
123R

    As Restated  

Consolidated Statement of Operations:

      

Indirect costs and selling expenses

   $ 317,216     $ 6,693     $ 323,909  
                        

Income from operations

     110,803       (6,693 )     104,110  
                        

Income before income taxes

     99,858       (6,693 )     93,165  

Income taxes

     37,945       (2,546 )     35,399  
                        

Net income

   $ 61,913     $ (4,147 )   $ 57,766  
                        

Earnings per share:

      

Basic

   $ 2.09     $ (0.14 )   $ 1.95  
                        

Diluted

   $ 2.03     $ (0.14 )   $ 1.89  
                        

Consolidated Statement of Cash Flows:

      

Cash flows provided by operations

   $ 75,863     $ (9,802 )   $ 66,061  
                        

Cash flows used in financing activities

   $ (51,063 )   $ 9,802     $ 41,261  
                        

Consolidated Statement of Comprehensive Income:

      

Comprehensive income

   $ 63,553     $ (4,147 )   $ 59,406  
                        

 

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The Company has also restated the consolidated balance sheet as of June 30, 2005 for the retrospective application of FAS 123R. The cumulative effect on deferred tax assets, additional paid-in-capital, and retained earnings as of June 30, 2005, as previously reported, is as follows:

 

     Balances as of June 30, 2005
     As Previously
Reported
   Effect of
Retrospective
Application
of FAS 123R
    As
restated

Deferred tax assets, long term

   $ —      $ 2,479     $ 2,479

Deferred tax liabilities, long term

   $ 6,367    $ (6,367 )   $ —  

Additional paid-in-capital

   $ 245,053    $ 34,443     $ 279,496

Retained earnings

   $ 383,459    $ (25,597 )   $ 357,862

 

C. Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2006 and June 30, 2005, consisted of the following (cost approximates fair value):

 

    

March 31,

2006

  

June 30,

2005

Money market funds

   $ 46,829    $ 120,426

Cash

     27,087      12,539
             

Total cash and cash equivalents

   $ 73,916    $ 132,965
             

 

D. Accounts Receivable

Total accounts receivable are net of allowance for doubtful accounts of approximately $4,846 and $4,168 at March 31, 2006 and June 30, 2005, respectively. Accounts receivable consisted of the following:

 

      March 31,
2006
   June 30,
2005

Billed receivables:

     

Billed receivables, net

   $ 284,117    $ 265,781

Billable receivables at end of period

     36,953      45,265
             

Total billed receivables, net

     321,070      311,046
             

Unbilled receivables:

     

Unbilled pending receipt of contractual documents authorizing billing

     39,382      27,009

Unbilled retainages and fee withholdings expected to be billed beyond the next 12 months

     9,508      10,529
             

Total unbilled receivables

     48,890      37,538
             

Total accounts receivable, net

   $ 369,960    $ 348,584
             

 

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E. Intangible Assets

Intangible assets related to customer contracts and programs acquired are as follows:

 

     March 31,
2006
   June 30,
2005

Customer contracts and related customer relationships

   $ 136,952    $ 111,862

Covenants not to compete

     1,062      787

Other

     742      742
             

Intangible assets, at cost

     138,756      113,391

Less accumulated amortization

     46,444      32,132
             

Total intangible assets, net

   $ 92,312    $ 81,259
             

Intangible assets are being amortized on an accelerated basis over periods ranging from 12 to 120 months. The weighted-average period of amortization for the intangible assets as of March 31, 2006 is 7.5 years, and the weighted-average remaining period of amortization is 5.6 years. Amortization expense was $5,136 and $14,242 for the three and nine months ended March 31, 2006, respectively, and $4,854 and $14,645 for the three and nine months ended March 31, 2005, respectively. During the three months ended March 31, 2006, the Company recorded $19,490 of intangible assets related to the estimated value of customer contract and related customer relationships in connection with its acquisition of Information Systems Support, Inc (ISS). The Company is utilizing an outside valuation expert to complete the analysis of the estimated fair value of the contracts and related customer relationship intangible assets. The recorded value will be adjusted based on the results of the valuation.

The accumulated amortization balances of $46,444 and $32,132, as of March 31, 2006 and June 30, 2005, respectively, pertain to the customer contract and related customer relationships value. The expected amortization expense of customer contract and related customer relationships value for future periods, is as follows:

 

     Amount

Remainder of fiscal year ended June 30, 2006

   $ 6,452

Fiscal year ended June 30, 2007

     22,399

Fiscal year ended June 30, 2008

     18,680

Fiscal year ended June 30, 2009

     16,680

Fiscal year ended June 30, 2010

     14,465

Periods thereafter

     13,636
      
   $ 92,312
      

 

F. Accrued Compensation and Benefits

Accrued compensation and benefits consisted of the following:

 

     March 31,
2006
   June 30,
2005

Accrued salaries and withholdings

   $ 52,855    $ 51,648

Accrued leave

     34,384      30,990

Accrued fringe benefits

     9,572      9,025
             

Total accrued compensation and benefits

   $ 96,811    $ 91,663
             

 

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G. Other Accrued Expenses

Other accrued expenses consisted of the following:

 

     March 31,
2006
   June 30,
2005

Contract loss reserves

   $ 4,073    $ 13,384

Vendor obligations

     41,010      32,051

Accrued sales and property taxes

     3,594      3,982

Accrued interest

     1,434      1,155

Deferred revenue

     13,278      12,031

Other

     3,182      5,028
             

Total other accrued expenses

   $ 66,571    $ 67,631
             

 

H. Long-Term Debt

Long-term debt consists of the following:

 

     March 31,     June 30,  
     2006     2005  

Bank credit facilities – term loan

   $ 343,000     $ 345,625  

Revolving credit facility

     25,000       —    

Mortgage note payable

     746       777  

Covenant not-to-compete note payable

     —         100  
                

Total long term debt

     368,746       346,502  

Less current portion

     (3,543 )     (3,641 )
                

Long-term debt, net of current portion

   $ 365,203     $ 342,861  
                

Effective May 3, 2004, the Company entered into a $550,000 credit facility (the 2004 Credit Facility), consisting of a $200,000 revolving credit facility (the Revolving Facility) and a $350,000 institutional term loan (the Term Loan). The 2004 Credit Facility also provides for stand-by letters of credit aggregating up to $25,000 that reduce the funds available under the Revolving Facility when issued.

The Revolving Facility is a five-year, secured facility that permits continuously renewable borrowings of up to $200,000, with an expiration date of May 2, 2009, and annual sub-limits on amounts borrowed for acquisitions. The Revolving Facility permits one, two, three and six month interest rate options. The Company pays a fee on the unused portion of the Revolving Facility, based on its leverage ratio, as defined. The Company received a $25,000 advance on March 1, 2006 under the Revolving Facility to help finance its acquisition of Information Systems Support, Inc. (ISS). There were no other advances or repayments of outstanding balances under the Revolving Facility during the nine months ended March 31, 2006.

The Term Loan is a seven-year secured facility under which principal payments are due in quarterly installments of $875 at the end of each fiscal quarter through March 2011 and the balance of $325,500 is due in full on May 2, 2011.

Borrowings under both the Revolving Facility and the Term Loan bear interest at rates based on LIBOR or the higher of the prime rate or federal funds rate plus 0.5 percent, as elected by the Company, plus applicable margins based on the leverage ratio as determined quarterly. To date, the Company has elected to apply LIBOR to outstanding borrowings. For the three months ended March 31, 2006, the effective interest rate, excluding the effect of the amortization of debt financing costs, for the outstanding borrowings under the 2004 Credit Facility was 5.89 percent. Interest expense under the 2004 Credit Facility for the three and nine months ended March 31, 2006 was $5,195 and $14,355, respectively.

The 2004 Credit Facility contains financial covenants that stipulate a minimum amount of net worth, a minimum fixed-charge coverage ratio, and a maximum leverage ratio. Substantially all of the Company’s assets serve as collateral under the 2004 Credit Facility. As of March 31, 2006, the Company was in compliance with the financial covenants of the 2004 Credit Facility.

The Company capitalized $8,234 of debt issuance costs in May 2004 associated with the origination of the 2004 Credit Facility. The Company capitalized an additional $450 of financing costs to amend the 2004 Credit Facility in May 2005 by re-pricing downward the margins that are applied to the interest rate options on the term loan. Other key terms of the 2004 Credit Facility were not changed. All debt financing costs are being amortized from the date incurred to the expiration date of the Term Loan. The unamortized balance of $6,042 at March 31, 2006, is included in other current and long-term assets.

 

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Long-term debt as of March 31, 2006, also includes $703 due under a mortgage note payable agreement. The Company assumed obligations of the mortgage as part of its acquisition of MTL Systems, Inc. in January 2004. Outstanding balances under the mortgage note payable bear interest at 5.88 percent and are secured by interest in real property located in Dayton, Ohio.

As a condition of its 2004 Credit facility, in May 2005, the Company entered into two forward interest rate swap agreements under which it will exchange floating-rate interest payments for fixed-rate interest payments. The agreements cover a combined notional amount of debt totaling $98,000, provide for swap payments over a two-year period beginning in March 2006, and are settled on a quarterly basis. The weighted-average fixed interest rate provided by the agreements is 4.22 percent.

The Company accounts for its interest rate swap agreements under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and has determined that the two swap agreements qualify as effective hedges. Accordingly, the fair value of the interest rate swap agreements at March 31, 2006 of $1,884 has been reported in other accrued expenses, with an offset of $1,168, net of an income tax effect, included in accumulated other comprehensive income in the accompanying consolidated balance sheet as of March 31, 2006. The changes in fair value of $535 and $1,358, which are net of income tax effects, are reported as other comprehensive income in the accompanying consolidated statement of comprehensive income for the three and nine-months ended March 31, 2006, respectively. This amount will be reclassified into interest expense as yield adjustments in the periods during which the related floating-rate interest is incurred.

 

I. Commitments and Contingencies

General Legal Matters

The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business. Management is of the opinion that any liability or loss associated with such matters, either individually or in the aggregate, will not have a material adverse effect on the Company’s operations and liquidity.

Iraq Investigations

On April 26, 2004, the Company received information indicating that one of its employees was identified in a report authored by U.S. Army Major General Antonio M. Taguba as being connected to allegations of abuse of Iraqi detainees at the Abu Ghraib prison facility. To date, despite the Taguba Report and the subsequently-issued Fay Report addressing alleged inappropriate conduct at Abu Ghraib, no present or former employee of the Company has been officially charged with any offense in connection with the Abu Ghraib allegations. The Company does not believe the outcome of this matter will have a material adverse effect on its financial position.

Subcontract Purchase Commitment

The Company has entered into a subcontract agreement with a vendor to purchase a number of directional finding units to be ordered in connection with the performance of one of the Company’s contracts. The subject subcontract provides for unit price decreases as the number of units purchased under the subcontract increases. Management believes that the Company will purchase a sufficient number of units over the subcontract term to allow it to realize the lowest unit cost available, and based upon this expectation, has recognized unit costs incurred to date at the lowest unit cost provided under the subcontract. Based on the number of units ordered to date and assuming that no other units are ordered under the subcontract, the Company’s maximum unit price exposure (the difference between the unit price that would be applicable to the number of units actually purchased as compared to the discount price at which the Company has recognized the purchases to date) is estimated to be $2,994. This amount has not been recorded in the Company’s consolidated financial statements as of March 31, 2006.

State Tax Contingency

In November 2005, the Company settled with the State of Indiana its outstanding matter involving a claim by Indiana for state income taxes. The settlement had no material effect on the consolidated financial statements.

D&IG Acquisition Arbitration

As part of its agreement to acquire the D&IG, the Company agreed to pay additional consideration of up to $10,000 in cash if the net worth of the D&IG upon the closing of the transaction exceeded an amount as stipulated in the purchase agreement. Conversely, the Company could have received up to $10,000 if the net worth of the D&IG was below a specified level.

The Company and the seller submitted the matter to an arbitrator, and the arbitrator ruled in favor of the Company by decision on November 16, 2005. No additional consideration is due from CACI to the seller.

 

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Department of Energy Office of Inspector General Subpoena

On March 27, 2006, CACI received a subpoena from the Department of Energy, Office of Inspector General (OIG) seeking documents regarding “alliance benefits” received and granted by CACI. By the way of example, some types of agreements that may involve alliance benefits include teaming agreements, strategic partnering agreements and reseller agreements. CACI is in discussions with OIG to clearly understand the scope of the subpoena, and will engage in document production once the scope of the subpoena is narrowed. While the Company is unable to assess the significance of the inquiry based on information received to date, management believes that the Company has properly considered the benefits attributable to alliance arrangements and that the resolution of this matter will not have a material impact on its financial position on results of operation.

Notice of Organization Conflict of Interest

The Company currently performs certain work for a customer that has been determined to represent an organizational conflict of interest as defined by procurement standards. The Company and customer personnel are negotiating a resolution for the conflict, including the potential sale of all or a portion of the work creating the conflict. The Company estimates that the final resolution of this matter will not have a material effect on its financial position or results of operations.

Fixed-Price Contract Negotiation

The Company has received a customer request to provide certain incremental software development services under an existing fixed-price contract. Management believes that the services requested do not fall within the scope of the current contract, and is negotiating with customer personnel to reach an agreement on how to proceed. The Company believes that the ultimate resolution of this matter will not have a material effect on its financial position or results of operations.

 

J. Stock Based Compensation

Adoption and Effects of New Standard

Effective July 1, 2005, the Company adopted the provisions of FAS 123R using the modified retrospective transition method and has restated the consolidated statements of operations, cash flows, and comprehensive income for the three and nine months ended March 31, 2005. The effects of this restatement are included in note B.

The adoption of FAS 123R had a significant non-cash impact on earnings as well as classification of cash flows for the three and nine months ended March 31, 2006 and 2005. Net income for the three months ended March 31, 2006 and 2005 was reduced $895 and $1,341, respectively, net of the effect of income taxes, as a result of recognizing compensation for the amortization of the value of stock options. Net income for the nine months ended March 31, 2006 and 2005, again net of the effect of income taxes, was reduced by $5,622 and $4,147, respectively, due to the application of FAS 123R. A summary of the components of stock-based compensation expense recognized during the three and nine months ended March 31, 2006 and 2005, together with the income tax benefits realized, is as follows:

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,
     2006    2005    2006    2005
Stock-based compensation included in indirect cost and         (as restated for
FAS 123R)
        (as restated for
FAS 123R)

selling expense:

           

Non-qualified stock option expense

   $ 1,361    $ 2,148    $ 8,762    $ 6,693

Restricted stock and restricted stock unit expense

   $ 1,591    $ 443    $ 3,873    $ 1,908
                           

Total stock-based compensation expense

   $ 2,952    $ 2,591    $ 12,635    $ 8,601
                           

Income tax benefit recognized for stock-based compensation expense

   $ 1,010    $ 973    $ 4,528    $ 3,272
                           

Prior to the adoption of FAS 123R, the Company followed the provisions of APB No. 25 in recognizing stock-based compensation expense, and thereunder recognized only the costs of restricted stock units (RSUs) in its consolidated financial statements. The stock-based compensation expense included in net income for the three and nine months ended March 31, 2005, as previously reported, was $443 and $1,908, respectively. Under FAS 123R, the Company recognizes stock-based compensation expense based on the fair value of both RSUs and stock options. Stock-based compensation expense is recognized on a straight-line basis ratably over the respective vesting periods, and is adjusted as required for options subject to graded vesting schedules.

 

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The Company also considers the effect of expected forfeitures of equity grants in recording stock-based compensation expense under FAS 123R. Under the new standard, the Company estimates an expected forfeiture rate for grants of equity instruments, and adjusts stock-based compensation expense for its effect. This effect is adjusted to reflect actual forfeitures as equity instruments vest. Previously under APB No. 25, the Company recognized the actual effect of forfeitures as they occurred.

The new accounting standard also requires that certain income tax benefits realized upon the exercise of stock options, or the vesting of restricted stock units, be reported as financing cash flows. Previously, the tax benefits resulting from the excess of the income tax deduction over the expense recognized for financial reporting purposes were reported as operating cash flows. The effect of this change is a decrease in operating cash flows, and an increase in financing cash flows.

During the nine months ended March 31, 2006 and 2005 (as restated), the Company recognized $4,114 and $9,726, respectively, of excess tax benefits, which have been reported as financing cash inflows in the accompanying consolidated statements of cash flows.

Equity Grants and Valuation

The Company issues non-qualified stock options and shares of restricted stock (RSUs through December 31, 2005) on an annual basis to its directors and key employees under the 1996 Stock Incentive Plan (The 1996 Plan). Shares of restricted stock (RSUs through December 31, 2005) are also issued under the Management Stock Purchase Plan (MSPP), and the Director Stock Purchase Plan (DSPP) (see note K).

The number of shares authorized by shareholders for grants under the 1996 Plan was 7,450,000 as of March 31, 2006. Shares represented by forfeited options, restricted shares, RSUs, and vested options that expire, do not count towards the maximum number of shares grants that may be made under the 1996 Plan. Cumulative grants of 7,586,461 non-qualified stock options, restricted shares and RSUs have been awarded, and 1,366,771 of these grants have been forfeited, as of March 31, 2006.

Under the 1996 Plan, non-qualified stock options granted prior to January 1, 2004 lapse and are no longer exercisable if not exercised within ten years of the date of grant. Options, restricted shares and RSUs granted on or after January 1, 2004 have a term of seven years. For option grants made prior to July 1, 2004, grantees whose employment has terminated have 60 days after their termination date to exercise vested options, or they forfeit their right to the options. Grantees whose employment is terminated due to death or permanent disability will vest in 100 percent of their option grants. Also, effective for grants made on or after July 1, 2004, grantees retiring on or after age 65 will vest in 100 percent of their option grants. The vesting provisions involving death, permanent disability and retirement at or after age 65 also pertain to all restricted share and RSU grants.

The Company began issuing RSUs under the 1996 Plan during the year ended June 30, 2004, and restricted share grants effective January 1, 2006. All awards granted under the 1996 Plan to date have been in the form of non-qualified stock options, restricted shares and RSUs. Stock options vest ratably over a three, four, or five year period, depending on the year of grant, and restricted shares and RSUs vest in full three years from the date of grant. The exercise prices of all non-qualified stock option grants, and the value of all restricted share and RSU grants, have been set at the market price of the Company stock on the date of grant.

The fair values of options awarded during the nine months ended March 31, 2006 and 2005, have been estimated on the date of grant using the Black-Scholes valuation model and the following assumptions:

 

    

Nine Months

ended March 31,

 
     2006     2005  

Expected volatility

   32% – 35 %   34% - 36 %

Expected dividends

   —       —    

Expected term (in years)

   3 - 6     5  

Risk-free rate

   4.5 %   3.7 %

The weighted-average volatility rate for grants made during the nine months ended March 31, 2006 and 2005, are consistent with the expected volatility rates above. Expected volatilities are based on implied volatilities from traded options on the Company’s common stock, historical volatility rates, and other factors. The expected term of the option grants represents the period of time options are expected to be outstanding and is based on the contractual term of the grant, vesting schedules, and past exercise behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of the grant.

The weighted-average fair value of stock options granted during the nine months ended March 31, 2006, and 2005 was $26.41 and $15.99, respectively, and the weighted-average fair value of restricted shares and RSUs granted was $62.39 and $41.21, respectively.

 

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Stock Option and RSU Activity

Stock option activity for all outstanding options, and the corresponding price information, for the nine months ended March 31, 2006, is as follows:

 

    

Number

of Shares

   

Exercise

Price

   Weighted
Average
Exercise
Price

Outstanding options, June 30, 2005

   2,245,948     $ 7.50 - $64.36    $ 28.44

Options issued

   857,395       21.40 - 65.04      60.57

Options exercised

   (361,676 )     7.50 - 46.37      21.11

Options cancelled

   (104,566 )     21.40 - 62.48      37.77
                   

Outstanding options, March 31, 2006

   2,637,101     $ 7.71 - $65.04    $ 39.40
                   

Options exercisable, March 31, 2006

   1,373,435     $ 7.71 - $64.36    $ 26.26
                   

Changes in the number of unvested stock options during the nine months ended March 31, 2006, together with the corresponding weighted-average fair values are as follows:

 

    

Number of

Options

   

Weighted-

Average

Grant Date

Fair Value

Unvested at July 1, 2005:

   844,671     $ 14.99

Granted

   857,395       26.41

Vested

   (333,834 )     19.38

Forfeited

   (104,566 )     16.66
            

Unvested at March 31, 2006

   1,263,666     $ 21.44
            

During the nine months ended March 31, 2006, the Company granted 125,480 RSUs, and during this same period, 6,727 RSUs were forfeited due to employee terminations. As of March 31, 2006, there were 245,525 RSUs outstanding under the 1996 Plan. Beginning January 1, 2006, the Company started granting shares of restricted stock in lieu of RSUs, and made grants of 7,200 restricted shares during the three months ended March 31, 2006.

Information regarding the cash proceeds received, and the intrinsic value and income tax benefits realized resulting from option exercises during the nine months ended March 31, 2006, and 2005, is as follows:

 

     2006    2005

Amounts realized or received from stock option exercises:

     

Cash proceeds received

   $ 7,716    $ 14,817
             

Intrinsic value realized

   $ 15,101    $ 31,791
             

Income tax benefit realized

   $ 5,390    $ 12,081
             

The total intrinsic value of RSUs that vested during the nine months ended March 31, 2006, and the tax benefit realized by the Company, was $476 and $171, respectively. There were no RSUs under the 1996 Plan that vested during the nine months ended March 31, 2005.

The fair value of stock options that vested during the nine months ended March 31, 2006 and 2005 was $6,470 and $7,623, respectively.

 

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Outstanding Stock Option Information

Information regarding outstanding and exercisable stock options as of March 31, 2006, is as follows:

 

     Options Outstanding    Options Exercisable

Range of Exercise Price

  

Number

of Options

   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
  

Intrinsic

Value

  

Number

of Options

   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
  

Intrinsic

Value

$0.00-$9.99

   273,652    $ 8.91    $ 3.02    $ 15,555    273,652    $ 8.91    $ 3.02    $ 15,555

$10.00-$19.99

   99,731      10.64      4.12      5,496    99,731      10.64      4.12      5,496

$20.00-$29.99

   331,533      21.50      5.28      14,670    331,533      21.50      5.28      14,670

$30.00-$39.99

   723,714      35.28      6.83      22,053    577,768      35.58      6.73      17,432

$40.00-$49.99

   371,542      41.34      5.72      9,069    52,001      47.17      7.50      966

$50.00-$59.99

   58,000      55.53      3.64      274    6,750      53.97      0.63      80

$60.00-$69.99

   778,929      63.13      6.27      2,043    32,000      64.36      3.67      45
                                                   
   2,637,101    $ 39.40    $ 5.74    $ 69,160    1,373,435    $ 26.26    $ 5.38    $ 54,244
                                                   

As of March 31, 2006, there was $19,967 of total unrecognized compensation costs related to stock options scheduled to be recognized over a weighted average period of 3.75 years, and $8,191 of total unrecognized compensation cost related to restricted shares and RSUs scheduled to be recognized over a weighted-average period of 2.03 years.

Effects of Non-substantive Vesting Provisions

During the year-end June 30, 2004, the Company began to include a provision in RSU grants that provided for accelerated vesting upon retirement at or after age 65. The Company extended this accelerated vesting condition to grants of non-qualified stock options beginning July 1, 2004.

In conjunction with its adoption of FAS 123R, the Company began to recognize the expense associated with RSUs and non-qualified stock options granted on or after July 1, 2005, to employees that have reached, or are close to reaching, age 65, in accordance with EITF Bulletin No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, (EITF 00-23). EITF 00-23 requires that the value of equity instruments awarded to employees that are eligible for retirement, and that contain terms which provide for immediate vesting upon retirement, be recognized in full on the date of grant. EITF 00-23 also requires that the value of such equity instruments granted to employees nearing retirement age be recognized ratably over the period from the date of grant to the date the grantee is eligible for retirement. Immediate recognition of expense (the non-substantive vesting method) is required even when the grantee has remained, or plans to remain, an employee of the Company beyond the eligible retirement age.

Prior to July 1, 2005, the Company did not apply the non-substantive vesting method in recognizing compensation expense pertaining to RSUs in its consolidated financial statements. Furthermore, the Company historically did not apply this provision of EITF 00-23 when disclosing, in the notes to its consolidated financial statements under the provisions of FAS 123, the pro-forma effect of stock-based compensation expense pertaining to stock options granted to those age 65 or older. Under the modified retrospective application method of FAS 123R, the Company has recognized the expense attributed to such grants consistently with the manner previously applied for pro-forma disclosure purposes.

 

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Had the Company applied the non-substantive vesting method of EITF 00-23, the net income and basic and diluted earnings per share for the nine months ended March 31, 2005, as restated, would have been as follows (unaudited):

 

    

Amount As Restated
for Retrospective
Application of

FAS 123R

   Effect of Retirement
Vesting Provisions
To RSU and Stock
Option Expense
    Amounts
As Adjusted for
Application of
Retirement Vesting
Provisions

Net income

   $ 57,766    $ (1,451 )   $ 56,315

Weighted-average earnings per share:

       

Basic

   $ 1.95    $ (0.05 )   $ 1.90

Diluted

   $ 1.89    $ (0.05 )   $ 1.84

For all RSU and stock option grants made on or after July 1, 2005, the Company is applying the non-substantive vesting method for stock-based compensation expense recognition purposes, and during the nine months ended March 31, 2006, the Company recognized $4,909 of expense related to stock options and RSUs, respectively, under this vesting method.

 

K. Stock Purchase Plans

The Company adopted the 2002 Employee Stock Purchase Plan (ESPP), Management Stock Purchase Plan (MSPP), and Director Stock Purchase Plan (DSPP) in November 2002, and implemented these plans beginning July 1, 2003. There are 500,000, 300,000, and 75,000 shares authorized for grants under the ESPP, MSPP and DSPP, respectively. These plans provide employees, management, and directors with an opportunity to acquire or increase ownership interest in the Company through the purchase of shares of the Company’s common stock, subject to certain terms and conditions.

For periods through June 30, 2005, the ESPP allowed eligible full-time employees to purchase shares of common stock at 85 percent of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees were provided the opportunity to acquire Company common stock once each quarter. The maximum number of shares that an eligible employee could purchase during any quarter was equal to two times an amount determined as follows: 20 percent of such employee’s compensation over the quarter, divided by 85 percent of the lower of the fair market value of a share of common stock on the last day of the offering period.

Effective July 1, 2005, in connection with the adoption of FAS 123R, the Company amended the terms of the ESPP by reducing the discount at which employees could purchase stock from 15 percent to 5 percent of the fair market value. In addition, the feature whereby the discount was applied to the lower of the fair market value of a share of common stock at the beginning or end of a quarter was replaced with a requirement to apply the discount to the price of a share on the last day of each quarter. Eligible employees continue to be provided the opportunity to acquire Company common stock once each quarter.

In connection with the Company’s retrospective application of the provisions of FAS 123R, stock compensation costs pertaining to the shares of common stock purchased under the ESPP for the three and nine months ended March 31, 2005, have been reflected in the consolidated statement of operations, as restated, for this period. Stock compensation expense related to the employee purchase of shares of common stock for the three and nine months ended March 31, 2005 was $450 and $1,300, respectively.

Under FAS 123R, the Company’s ESPP, as amended, is not compensatory. Therefore, the Company was not required to recognize compensation expense related to shares sold under the ESPP for the three and nine months ended March 31, 2006.

As of March 31, 2006, participants have purchased approximately 362,000 shares under the ESPP at a weighted average price per share of $43.01. Of these shares, approximately 24,000 were purchased at $54.51 per share during the three months ended March 31, 2006, and approximately 100,000 were purchased at a weighted average price per share of $51.62 during the nine months ended March 31, 2006.

The MSPP provides those senior executives with stock holding requirements a mechanism to receive RSUs in lieu of up to 30 percent of their annual bonus. For fiscal years through June 30, 2005, RSUs were awarded under the MSPP at 85 percent of the market price of the Company’s common stock on the date of the award. RSUs awarded in lieu of bonuses earned in periods beginning July 1, 2005, will be granted at 95 percent of the market price of the Company’s common stock on the date of the award. RSUs granted under the MSPP vest at the earlier of 1) three years from the grant date, 2) upon a change of control of the Company, 3) upon a participant’s retirement at or after age 65, or 4) upon a participant’s death or permanent disability. Vested RSUs are settled in shares of common stock.

 

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The Company has recognized the value of the discount applied to RSUs granted under the MSPP as stock compensation expense ratably over the three-year vesting period. The expense related to these RSUs totaled $153 and $86 for the nine months ended March 31, 2006 and 2005, respectively, and is included within indirect costs and selling expenses in the accompanying consolidated statements of operations.

As of March 31, 2006, there were 55,750 RSUs outstanding under the MSPP at a weighted-average price per share of $37.22. During the nine months ended March 31, 2006, the Company issued 12,553 RSUs at a weighted-average price per share of $53.11 per share, of which none have been forfeited.

The DSPP allows directors to elect to receive shares of restricted stock (RSUs through December 31, 2005) at the market price of the Company’s common stock on the date of the award in lieu of up to 50 percent of their annual retainer fees. Vested RSUs will be settled in shares of common stock. As of March 31, 2006, 3,359 shares of restricted stock and RSUs had been issued under the DSPP at a weighted-average price per share of $45.45, and 2,452 remain outstanding at a weighted-average price per share of $45.71.

 

L. Income Taxes

The effective income tax rate for the three months ended March 31, 2006 was 34.2%. This tax rate reflects the benefits realized from research and development credits, and lower state taxes based upon recently filed tax returns.

The Company completed a study of its research and development activities, primarily related to the D&IG, during the nine months ended March 31, 2006, and recognized a portion of an expected tax benefit to be claimed under the research and development credit provisions of the Internal Revenue Code. The remaining portion of the benefit will be recognized through June 30, 2006.

 

M. Earnings Per Share

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share exclude dilution and are computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options, restricted stock and restricted stock units calculated using the treasury stock method. The chart below shows the calculation of basic and diluted earnings per share for the three- and nine-month periods ended March 31, 2006 and 2005, respectively:

 

     Three Months Ended    Nine Months Ended
   March 31,    March 31,
     2006    2005    2006    2005
          (as restated
for FAS 123R)
        (as restated
for FAS 123R)

Net income

   $ 21,357    $ 20,295    $ 62,750    $ 57,766

Weighted-average number of basic shares outstanding during the period

     30,226      29,913      30,142      29,579

Dilutive effect of stock options, restricted shares and restricted stock units after application of treasury stock method

     933      800      939      978
                           

Weighted-average number of diluted shares outstanding during the period

     31,159      30,713      31,081      30,557
                           

Basic earnings per share

   $ 0.71    $ 0.68    $ 2.08    $ 1.95
                           

Diluted earnings per share

   $ 0.69    $ 0.66    $ 2.02    $ 1.89
                           

 

N. Acquisitions

On October 1, 2005, the Company acquired all of the outstanding stock of Tech Computer Office Limited (TCO), a company based in the United Kingdom, which sells proprietary resource management software mainly to UK government departments, as well as specified products for architects and engineers. TCO contributed $2,700 of revenue for the period of October 1, 2005 to March 31, 2006.

On October 16, 2005, the Company acquired all of the outstanding shares of National Security Research, Inc. (NSR), headquartered in Arlington, Virginia. The acquisition allows the Company to expand its strategic consulting services in the areas of homeland security, command and control, missile defense and international security. NSR contributed revenue of $9.4 million for the period of October 16, 2005 to March 31, 2006.

 

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The combined purchase consideration to acquire TCO and NSR was $38.8 million, of which $38 million has been paid as of March 31, 2006. The remaining $0.8 million due pertains to the acquisition of TCO, and is scheduled to be paid on an installment basis through December 2008, subject to earnings of TCO through this period.

Approximately $22.9 million of the combined purchase consideration for TCO and NSR has been allocated to goodwill, based on a combined value of net tangible assets of $7.1 million, and an estimated combined value of $8.8 million of identifiable intangible assets, consisting primarily of contract work backlog and customer relationship values. The value attributed to the identifiable intangible assets is being amortized on an accelerated basis over periods ranging from one to seven years.

On March 1, 2006, the Company acquired substantially all of the assets of ISS, a certified information technology provider with clients in the Department of Defense and other agencies of the federal government. ISS is headquartered in Gaithersburg, Maryland, and brings approximately 950 employees to the Company. ISS contributed $13.8 million of revenue during the one month ended March 31, 2006. The total purchase consideration for the ISS business was $145.8 million, of which $7.3 million has been deposited to various escrow accounts pending achievement of goals and objectives as defined, and final determination of the net worth of the assets acquired.

Based on a preliminary analysis, approximately $99 million of the purchase consideration has been allocated to goodwill, based on a value of net tangible assets of $27.3 million, and an estimated combined value of $19.5 million of identifiable intangible assets, consisting primarily of contract work backlog and customer relationship values. The value attributed to the identifiable intangible assets is being amortized on an accelerated basis over periods ranging from one to seven years.

For each of these acquisitions, the Company is in the process of completing its evaluation of assets acquired and obligations assumed, and will adjust the valuations of the net assets upon completing these studies. The Company does not expect adjustments arising from the final evaluations to have a significant impact on its financial statements.

The following unaudited pro forma combined condensed statement of operations information sets forth the consolidated revenue, net income and diluted earnings per share of the Company for the three and nine months ended March 31, 2006 and 2005, as if each of the above-mentioned acquisitions had occurred January 1, 2006 and July 1, 2005, respectively. This unaudited pro forma information does not purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the dates indicated.

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,

(amounts in thousands, except per share data)

   2006    2005    2006    2005

Revenue

   $ 462,219    $ 461,797    $ 1,421,897    $ 1,349,254

Net income

     22,197      21,291      64,825      59,933

Diluted earnings per share

     0.71      0.69      2.09      1.96

 

O. Subsequent Event

On May 1, 2006, the Company completed its merger with AlphaInsight Corporation, an information technology company that specializes in serving the federal government primarily in the areas of software and systems engineering, network engineering and management, and information assurance and security. AlphaInsight increases the Company’s business with civilian agencies of the federal government and adds approximately 360 employees, most of whom hold security clearances.

 

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P. Business Segment Information

The Company reports operating results and financial data in two segments: domestic operations and international operations. Domestic operations provide information technology and communications solutions through all four of the Company’s major service offerings: systems integration, managed network services, knowledge management and engineering services. Its customers are primarily U.S. federal agencies. However the Company also serves a number of agencies of foreign governments and serve customers in the commercial and state and local sectors. International operations offer services to both commercial and government customers primarily through the Company’s systems integration line of business. The Company evaluates the performance of its operating segments based on income before income taxes. Summarized financial information concerning the Company’s reportable segments is shown in the following tables.

 

(amounts in thousands)

   Domestic    International    Total

Three Months Ended March 31, 2006

        

Revenue from external customers

   $ 419,776    $ 15,583    $ 435,359

Pre-tax income

     31,624      848      32,472

Three Months Ended March 31, 2005

   $ 400,651    $ 14,295    $ 414,946

Revenue from external customers

     31,543      963      32,506

Pre-tax income – as restated

        

Nine Months Ended March 31, 2006

   $ 1,232,449    $ 45,546    $ 1,277,995

Revenue from external customers

     93,645      4,152      97,797

Pre-tax income

        

Nine Months Ended March 31, 2005

   $ 1,153,146    $ 40,138    $ 1,193,284

Revenue from external customers

     90,627      2,538      93,165

Pre-tax income – as restated

        

 

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

Results of Operations for the three months ended March 31, 2006 and 2005.

Revenue. The table below sets forth revenue by customer segment with related percentages of total revenue for the three months ended March 31, 2006 (FY2006) and 2005 (FY2005), respectively:

 

     Three Months Ended March 31,     Change  

(amounts in thousands)

   2006     2005     $     %  

Department of Defense

   $ 320,064    73.5 %   $ 301,505    72.6 %   $ 18,559     6.2 %

Federal Civilian Agencies

     91,049    20.9 %     90,295    21.8 %     754     0.8 %

Commercial

     18,131    4.2 %     16,926    4.1 %     1,205     7.1 %

State & Local Governments

     6,115    1.4 %     6,220    1.5 %     (105 )   (1.7 )%
                                        

Total

   $ 435,359    100.0 %   $ 414,946    100.0 %   $ 20,413     4.9 %
                                        

For the three months ended March 31, 2006, total revenue increased by 4.9%, or $20.4 million, over revenue from the same period a year ago. The revenue growth for the quarter was generated by businesses acquired thus far in FY 2006, including National Security Research, Inc. (NSR) and Tech Computer Office Limited (TCO), a company based in the United Kingdom, in October 2005, and substantially all of the assets and operations of Information Systems Support, Inc. (ISS), effective March 1, 2006. For the month of March, ISS alone contributed $13.8 million of revenue. Revenue from existing operations was essentially flat quarter over quarter. The increase in revenue from existing operations attributed to higher levels of materials and subcontract services provided to our customers was largely offset by the loss of certain re-compete work.

Department of Defense (DoD) revenue increased 6.2%, or $18.6 million, for the three months ended March 31, 2006, as compared to the same period a year ago. The majority of this growth came from revenue generated by businesses acquired during FY 2006, including $5.5 million from NSR, and $11.7 million from ISS. The balance of growth is attributed to a net increase in revenue earned from existing customers. Greater revenue earned from services and materials provided to our U.S. Navy and intelligence agency customers was largely offset by a decrease in quarter over quarter revenue caused by the loss of re-compete work, most of which was provided to Department of Defense customers.

Revenue from Federal Civilian Agencies increased 0.8%, or $0.75 million, for the three months ended March 31, 2006 as compared to the same period a year ago. The net increase is comprised of increases in revenue attributed to ISS and additional services provided to the Veterans Benefit Administration (VBA), and a decrease in revenue earned from the Company’s Department of Justice (DOJ) litigation support contract, where case work on some programs is approaching its conclusion. ISS contributed $1.6 million of incremental federal and civilian agency revenue during the quarter, and additional services and materials provided to the VBA generated $3.4 million of incremental revenue. These increases were largely offset by a $4.5 million reduction in revenue earned under the DOJ litigation support contract, which decreased from $23.8 million for the three months ended March 31, 2005 versus $19.3 million earned in the current period.

Commercial revenue increased 7.1%, or $1.2 million for the third quarter ended March 31, 2006 as compared to the same period a year ago. Commercial revenue is derived from both international and domestic operations. The international operations accounted for $15.6 million, or 85.9%, of the total Commercial revenue, while the domestic operations accounted for $2.5 million, or 14.1%. All of the increase results from our acquisition of TCO in the U.K.

Revenue from State and Local Governments decreased slightly by 1.7%, or $0.1 million, for the quarter ended March 31, 2006, as compared to the same period a year ago. This decrease is primarily the result of fewer services provided under a single contract within the State and Local Government marketplace. Revenue from State and Local Governments represented 1.4% and 1.5% of the Company’s total revenue for the three months ended March 31, 2006 and 2005, respectively.

 

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Income from Operations. The following table sets forth the relative percentage that certain items of expense and earnings bore to revenue for the quarters ended March 31, 2006 (FY2006) and 2005 (FY2005), respectively.

 

     Dollar Amount Three
Months Ended March 31,
   Percentage of Revenue
Three Months Ended
March 31,
    Second Quarter
Increase (Decrease)
 

(amounts in thousands)

   FY2006    FY2005    FY2006     FY2005     $     %  
         

(as restated

for FAS
123R)

         (as restated
for FAS
123R)
             

Revenue

   $ 435,359    $ 414,946    100.0 %   100.0 %   $ 20,413     4.9 %

Costs and expenses:

              

Direct costs

     279,142      259,738    64.1     62.6       19,404     7.5  

Indirect costs and selling expenses

     111,281      110,975    25.5     26.7       306     0.3  

Depreciation and amortization

     8,118      8,075    1.9     2.0       43     0.5  
                                        

Total costs and expenses

     398,541      378,788    91.5     91.3       19,753     5.2  

Income from operations

     36,818      36,158    8.5     8.7       660     1.8  

Interest expense, net

     4,346      3,652    1.0     0.8       694     19.0  
                                        

Earnings before income taxes

     32,472      32,506    7.5     7.8       (34 )   (0.1 )

Income taxes

     11,115      12,211    2.6     2.9       (1,096 )   (9.0 )
                                        

Net Income

   $ 21,357    $ 20,295    4.9 %   4.9 %   $ 1,062     5.2 %
                                        

The Company began complying with Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (FAS 123R) effective July 1, 2005. FAS 123R addresses the expensing of stock options and other equity awards to a company’s employees and directors. The results described in this reflect the adoption of FAS 123R effective July 1, 2005, using the modified retrospective approach. Accordingly the third quarter of fiscal year 2005 (FY2005) has been restated to reflect the effect of recognizing stock option and other stock-based compensation expense.

Income from operations was $36.8 million for the third quarter ended March 31, 2006, an increase of $0.66 million, or 1.8%, over restated income from operations of $36.2 million for the three months ended March 31, 2005. Income from operations as a percent of revenue declined from 8.7 percent to 8.5 percent quarter over quarter primarily due to the greater concentration of other direct costs relative to total direct costs. As described below, other direct costs increased $18.8 million during the three months ended March 31, 2006 versus the same period a year ago. The services and material components of other direct costs do not provide operating margins as high as those provided by direct labor services, and thus have the effect of decreasing the overall operating margin rates.

As a percent of revenue, direct costs were 64.1% and 62.6% for the three months ended March 31, 2006 and 2005, respectively. Direct costs include direct labor and “other direct costs” such as equipment purchases, subcontractor costs and travel expenses. Other direct costs are common in our industry; incurred in response to specific client tasks, and vary from period to period.

Direct labor was $128.2 million and $127.6 million for the third quarters of FY2006 and FY2005, respectively. The net increase in direct labor is attributed to offsetting factors. Direct labor increased as a result of salary and wage increases as well as incremental labor brought on with the businesses acquired thus far in FY 2006. These increases were almost entirely offset by decreases in direct labor resulting from the loss of certain re-compete work and the reduction in services provided to DOJ.

Other direct costs were $150.9 million and $132.1 million during the third quarters of FY2006 and FY2005, respectively. The $18.8 million increase was the result of increased volume of tasking orders across all service offerings of the Company, in particular to those provided to intelligence agencies of the federal government, as well as other direct costs incurred within the ISS business acquired effective March 1, 2006.

Indirect costs and selling expenses include fringe benefits, marketing and bid and proposal costs, indirect labor, stock based compensation, and other discretionary costs. Many of these expenses are highly variable. As a percentage of revenue, indirect costs and selling expenses were 25.5% and 26.7% for the nine months ended March 31, 2006 and 2005, respectively. Increases in indirect costs and selling expenses resulting from the recent business acquisitions were largely offset by decreases in fringe benefit costs resulting from reductions in direct labor as described earlier. This decrease in percentage from FY2005 to FY2006 also results from the increase in other direct costs, which generally do not require additional or incremental indirect costs.

 

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One component of indirect cost and selling expenses is stock compensation. Under its 1996 Stock Incentive Plan, the Company grants non-qualified stock options, shares of restricted stock, and restricted stock units to senior executives and officers as a form of long-term incentive compensation. Total stock compensation expense for the three months ended March 31, 2006, increased $0.4 million, to $3.0 million, versus the same period a year ago. The increase results primarily from a greater level of outstanding and unvested equity instruments during the three months ended March 31, 2006, relative to the same period a year ago, and increased valuations assigned to equity instrument grants in recent years. The value assigned to non-qualified stock options has increased from a weighted average of $11.89 per option during the fiscal year ended June 30, 2004, to $15.96 for FY2005, and to $26.41 for the nine months ended March 31, 2006. The weighted average values of restricted shares and restricted stock units, which are valued at the price of a share of common stock on the grant date were $62.39 and $41.21 for grants made during the nine months ended March 31, 2006 and 2005, respectively.

Depreciation and amortization expense was $8.1 million for both the three months ended March 31, 2006, and 2005, respectively. As a percentage of revenue, depreciation and amortization expense remained approximately the same at 1.9% and 2.0% for the third quarters ended March 31, 2006 and 2005, respectively.

The Company incurred net interest expense of $4.3 million and $3.7 million for the quarters ended March 31, 2006 and 2005, respectively. The majority of the interest expense relates to the Company’s borrowings made in May 2004 to help finance the acquisition of the Defense and Intelligence Group (the D&IG) of American Management Systems, Inc. The increase during the three months ended March 31, 2006, versus the same period a year ago, resulted from the three acquisitions completed thus far in FY2006. To finance the acquisitions, the Company used existing cash and marketable securities, which caused interest income to subsequently decrease and, for the ISS acquisition on March 1, 2006, received a $25 million advance under the Company’s credit facility.

The effective income tax rates for the three months ended March 31, 2006 and 2005, were 34.2% and 37.6%, respectively. The lower tax rate for the three months ended March 31, 2006, primarily reflects the benefits realized from increasing research and development credits, and lower state rates based upon recently filed tax returns. The research and development credits were generated primarily from activities of the D&IG business and are expected to provide tax benefits through June 30, 2006.

 

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Table of Contents

Results of Operations For the nine months Ended March 31, 2006 and 2005.

Revenue. The table below sets forth revenue by customer segment with related percentages of total revenue for the nine months ended March 31, 2006 (FY2006) and 2005 (FY2005), respectively:

 

     Nine Months Ended March 31,     Change  

(amounts in thousands)

   2006     2005     $    %  

Department of Defense

   $ 934,600    73.1 %   $ 863,906    72.4 %   70,694    8.2 %

Federal Civilian Agencies

     272,119    21.3 %     262,495    22.0 %   9,624    3.7 %

Commercial

     53,020    4.2 %     49,248    4.1 %   3,772    7.7 %

State & Local Governments

     18,256    1.4 %     17,635    1.5 %   621    3.5 %
                                     

Total

   $ 1,277,995    100.0 %   $ 1,193,284    100.0 %   84,711    7.1 %
                                     

For the nine months ended March 31, 2006, total revenue increased by 7.1% or $84.7 million, over the same period a year ago. Approximately $58.8 million or 69.5% of this growth was organic and across a broad base of Department of Defense, intelligence and federal civilian agency customers. This growth is primarily for the support of mission-critical needs of its Army, Navy and Intelligence community customers. The acquisitions of ISS, NSR and TCO accounted for 30.5%, or $25.9 million of the revenue growth.

Department of Defense revenue increased 8.2%, or $70.7 million, for the nine months ended March 31, 2006, as compared to the same period a year ago. The Company’s work with the U.S. Army is driven by the need to support the warfighter, particularly through its tactical military intelligence, communications and logistics capabilities. The Company showed growth in its work with the U.S. Navy, with increased levels of work coming through the Seaport Enhanced contract vehicle and from its growing presence in supporting Naval Aviation. The acquisitions of ISS and NSR accounted for 29.3%, or $20.7 million of the growth within the Department of Defense revenue.

Revenue from Federal Civilian Agencies increased 3.7% or $9.6 million, during the nine months ended March 31, 2006 as compared to the same period a year ago. This was driven primarily from the Company’s work with the Veterans Benefit Administration and national intelligence customers along with the previously mentioned acquisitions of ISS and NSR. These revenue gains were partially offset by the decrease in DoJ litigation support work. Approximately 22.0% of the Federal Civilian Agency revenue was derived from the DoJ. Revenue from DoJ was $59.8 million and $69.7 million for the nine months ended March 31, 2006 and 2005, respectively. This decrease of $9.9 million was attributable to the decline of certain DoJ litigation case work which is approaching its conclusion.

Commercial revenue increased 7.7%, or $3.8 million, during the first nine months of FY2006 as compared to the same period a year ago. Commercial revenue is derived from both international and domestic operations. The international operations accounted for $45.5 million, or 85.9%, of the total Commercial revenue, while the domestic operations accounted for $7.5 million, or 14.1%. The growth in commercial revenue came from international operations within the United Kingdom (UK). The UK growth was attributable primarily to the Company’s marketing systems group that supplies demographic software and data services and the Company’s software services business particularly in the retail and telecommunications sectors. The acquisition of TCO also added to the revenue growth in this area.

Revenue from State and Local Governments increased by 3.5%, or $621,000, for the nine months ended March 31, 2006, as compared to the same period a year ago. This increase is attributed to an increased demand for information technology services that were provided across a number of states. Revenue from State and Local Governments represented 1.4% and 1.5% of the Company’s total revenue through the first nine months of FY2006 and FY2005, respectively.

 

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Income from Operations. The following table sets forth the relative percentage that certain items of expense and earnings bore to revenue for the nine months ended March 31, 2006 (FY2006) and 2005 (FY2005), respectively.

 

    

Dollar Amount

Nine Months Ended
March 31,

   Percentage of Revenue
Nine Months Ended
March 31,
    Change  

(amounts in thousands)

   2006    2005    2006     2005     $     %  
          (as restated
for FAS
123R)
         (as restated
for FAS
123R)
             

Revenue

   $ 1,277,995    $ 1,193,284    100.0 %   100.0 %     84,711     7.1 %

Costs and expenses:

              

Direct costs

     820,759      741,193    64.2 %   62.1 %     79,566     10.7 %

Indirect costs and selling expenses

     324,108      323,909    25.4 %   27.2 %     199     0.1 %

Depreciation and amortization

     23,595      24,072    1.8 %   2.0 %     (477 )   (2.0 )%
                                        

Total costs and expenses

     1,168,462      1,089,174    91.4 %   91.3 %     79,288     7.3 %

Income from operations

     109,533      104,110    8.6 %   8.7 %     5,423     5.2 %

Interest expense, net

     11,736      10,945    0.9 %   0.9 %     791     7.2 %
                                        

Earnings before income taxes

     97,797      93,165    7.7 %   7.8 %     4,632     5.0 %

Income taxes

     35,047      35,399    2.8 %   3.0 %     (352 )   (1.0 )%
                                        

Net Income

   $ 62,750    $ 57,766    4.9 %   4.8 %   $ 4,984     8.6 %
                                        

The Company began complying with Statement of Financial Accounting Standards 123R, “Share Based Payment” (FAS 123R), effective July 1, 2005. FAS 123R addresses the expensing of stock options and other equity awards to a company’s employees and directors. The results described in this section include the adoption of this rule. As the Company elected to adopt FAS 123R using the modified retrospective approach, the first nine months of fiscal year 2005 (FY2005) have been restated to reflect the effect of recognizing stock option and other stock-based compensation expense.

Income from operations was $109.5 million for the nine months ended March 31, 2006. This is an increase of $5.4 million or, 5.2%, over restated income from operations of $104.1 million at March 31, 2005.

As a percent of revenue, direct costs were 64.2% and 62.1% for the nine months ended March 31, 2006 and 2005, respectively. Direct costs include direct labor and “other direct costs” such as equipment purchases, subcontractor costs and travel expenses. Other direct costs are common in our industry, are incurred in response to specific client tasks, and vary from period to period.

Direct labor was $368.4 million and $364.7 million for the first nine months of FY2006 and FY2005, respectively. The increase in direct labor was attributable to the internal growth within federal government business and the acquisitions of ISS, NSR, and TCO. This was partially offset by the loss of certain re-compete contract work, and a reduction in services provided under a litigation support contract with the Department of Justice.

Other direct costs were $452.3 million and $376.5 million during the first nine months of FY2006 and FY2005, respectively. The increase in other direct costs was the result of increased volume of tasking across all of the service offerings, primarily within the national intelligence and defense agencies, along with the acquisitions of ISS, NSR and TCO.

Indirect costs and selling expenses include fringe benefits, marketing and bid and proposal costs, indirect labor, stock-based compensation, and other discretionary costs. Many of these expenses are highly variable. As a percent of revenue, indirect costs and selling expenses were 25.4% and 27.2% for the nine months ended March 31, 2006 and 2005, respectively. The decrease from FY2006 to FY2005 is primarily the result of the increase in other direct costs, which generally do not require additional or incremental indirect costs.

 

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One component of indirect cost and selling expenses is stock compensation. Under its 1996 Stock Incentive Plan, the Company grants non-qualified stock options, shares of restricted stock, and restricted stock units to senior executives and officers as a form of long-term incentive compensation. Total stock compensation expense for the nine months ended March 31, 2006, increased $4.0 million, to $12.6 million, versus the same period a year ago. The increase results primarily from the accounting treatment of certain stock option grants made to employees that were 65 or older. For these options, the full value of the underlying grant is expensed immediately on the date of the grant, rather than amortized over a period of time. This accounting treatment was applied to equity awards beginning this fiscal year. The Company’s stock option expense for the first quarter of FY2006, and for each fiscal first quarter going forward, is expected to be higher than for the remaining quarters due to grants occurring in the first quarter to employees at or above the age of 65.

The increase is also attributable to a greater level of outstanding and unvested equity instruments during the nine months ended March 31, 2006, relative to the same period a year ago, and increased valuations assigned to equity instrument grants in recent years. The value assigned to non-qualified stock options has increased from a weighted average of $11.89 per option during the fiscal year ended June 30, 2004, to $15.96 for FY2005, and to $26.41 for the nine months ended March 31, 2006. The weighted-average value of grants of restricted stock and restricted stock units which are valued at the price of a share of common stock on the date of grant were $62.39 and $41.21 for grants made during the nine months ended March 31, 2006 and 2005, respectively

Depreciation and amortization expense was $23.6 million and $24.1 million for the nine months ended March 31, 2006, and 2005, respectively. As a percentage of revenue, depreciation and amortization expense was 1.8% and 2.0% for the first nine months of FY2006 and FY2005, respectively. This decrease of $0.5 million, or 2.0%, is the result of reduced intangible amortization of assets acquired in the recent acquisitions, primarily the May 2004 acquisition of the D&IG. The intangible assets from the acquisition of the D&IG as well as those acquired with other recent acquisitions are being amortized on an accelerated basis.

The Company incurred net interest expense of $11.7 million and $10.9 million for the nine months ended March 31, 2006 and 2005, respectively. The majority of the interest expense relates to the Company’s borrowings made in May 2004 to help finance the acquisition of the D&IG. The $0.8 million increase in net interest expense during the nine months ended March 31, 2006, versus the same period a year ago resulted from the three business acquisitions completed thus far in FY2006. To finance these acquisitions of ISS, NSR and TCO, the Company used existing cash, which caused interest income to subsequently decrease, and a $25 million advance under the Company’s credit facility.

The effective income tax rates for the nine months ended March 31, 2006 and March 31, 2005 were 35.8% and 38.0%, respectively. The lower tax rate for the nine months ended March 31, 2006 primarily reflects the benefits realized from increasing research and development credits, and lower state taxes based upon recently filed tax returns. The research and development credits were generated primarily from activities of the D&IG business and are expected to provide tax benefits through June 30, 2006.

 

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Table of Contents

Liquidity and Capital Resources

Historically, the Company’s positive cash flow from operations, and its available credit facilities, have provided adequate liquidity and working capital to fund the Company’s operational needs. Cash flows from operations totaled $93.9 million and $66.1 million for the nine months ended March 31, 2006 and 2005, respectively.

Between March 2002 and May 2004, the principal source of liquidity and capital to fund business acquisitions were the proceeds from the Company’s March 2002 offering of 4.9 million shares of common stock. The Company raised $161.5 million from this offering, and during the period between March 2002 and May 2004, invested approximately $170.2 million in the acquisition of eight businesses. Operating cash flows and borrowings under credit facilities were used to supplement the offering proceeds, as necessary, to fund the acquisition of these eight businesses.

To fund the acquisition of the D&IG, the Company entered into a $550 million credit facility (the 2004 Credit Facility), which includes a $200 million revolving credit facility (the Revolving Facility), and a $350 million institutional term loan (the Term Loan). The initial borrowings under the 2005 Credit Facility were $422.6 million. During the nine months ended March 31, 2006, the Company received a $25 million advance under the Revolving Facility to help finance its acquisition of ISS. The outstanding balances under the Term Loan and Revolving Facility were $343 million and $25 million, respectively, at March 31, 2006.

The Revolving Facility is a five-year, secured facility that permits continuously renewable borrowings of up to $200 million, with annual sublimits on amounts borrowed for acquisitions. The Revolving Facility permits one, two, three and six month interest rate options. The Company pays a fee on the unused portion of this facility.

The Term Loan portion of the 2004 Credit Facility is a seven-year secured facility under which principal payments are due in quarterly installments of $0.875 million at the end of each fiscal quarter through March 2011, and the balance of $325.5 million is due in full on May 2, 2011.

Interest rates for both revolving credit and term-loan borrowings are based on LIBOR, or the higher of the prime rate, or federal funds rate, plus applicable margins. Margin and unused fee rates are determined quarterly based on the Company’s leverage ratios. The Company is expected to operate within certain limits on leverage, net worth and fixed-charge coverage ratios throughout the term of the 2004 Credit Facility. The total costs associated with securing the 2004 Credit Facility were approximately $8.2 million, and are being amortized over the life of the 2004 Credit Facility.

In May 2005, the Company amended the 2004 Credit Facility by reducing the margins applicable to the LIBOR and prime and federal funds rate factors, and in June entered an interest rate swap agreement covering a portion of the outstanding term loan balance. The Company incurred approximately $0.5 million of fees to amend the 2004 Credit Facility, which has been capitalized and is being amortized over the remaining term of the 2004 Credit Facility.

The Company also has amounts due under a lease agreement classified as a capital lease for reporting purposes, amounts due under a mortgage note payable, and maintains a line of credit facility in the United Kingdom. The total principal due under the capital lease agreement and the mortgage note payable was $1.3 million at March 31, 2006. The total amount available under the line-of-credit facility in the UK, which is scheduled to expire in December 2006, is approximately $0.9 million. As of March 31, 2006, the Company had no borrowings under this facility.

Cash and equivalents were $73.9 million and $133.0 million at March 31, 2006 and June 30, 2005, respectively. The Company’s operating cash flow increased to $93.9 million for the first nine months of FY2006, as compared to $66.1 million over the same period a year ago. The primary driver behind the higher operating cash flow was improvement in days-sales-outstanding (DSO). DSO decreased to 73 days as of March 31, 2006, down 3 days from March 31, 2005.

The Company used cash in investing activities of $187.6 million and $13.7 million for the nine months ended March 31, 2006 and 2005, respectively. This increase of approximately $173.9 million was primarily the result of the Company’s acquisitions of ISS, NSR and TCO, all of which were completed in FY2006.

Cash provided by financing activities totaled $35.0 million in the first nine months of FY2006, while cash used in financing activities was $41.3 million in the first nine months of FY2005. This increase was primarily attributable to $64.8 million of repayments under the Company’s Revolving Facility in FY2005, versus net borrowings of $22.2 million in FY2006.

Cash flows from financing activities benefited from proceeds received from the exercise of stock options, and purchases of stock under the Company’s Employee Stock Purchase Plan. Proceeds from these activities totaled $13.4 million and $19.7 million during the first nine months of FY2006 and FY2005, respectively. These amounts were offset by cash used to purchase stock to fulfill obligations under the Employee Stock Purchase Plan. Cash used to acquire stock was $5.8 million and $6.0 million during the first nine months of FY2006 and FY2005, respectively.

On February 14, 2005, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission to sell up to $400 million of common stock, preferred stock, or debt securities from time to time in one or more public offerings. The registration statement was amended and became effective in May 2005. The net proceeds from any sale of the securities would be used for acquisitions and other general corporate purposes including repayment of debt, share repurchases, and capital expenditures.

 

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The Company believes that the combination of internally generated funds, available bank borrowings, cash and cash equivalents on hand, will provide the required liquidity and capital resources necessary to fund on-going operations, customary capital expenditures, and other working capital requirements.

Forward Looking Statements

There are statements made herein which may not address historical facts and, therefore, could be interpreted to be forward looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: regional and national economic conditions in the United States and United Kingdom, including conditions that result from terrorist activities or war; changes in interest rates; currency fluctuations; failure to achieve contract awards in connection with recompetes for present business and/or competition for new business; the risks and uncertainties associated with client interest in and purchases of new products and/or services; continued funding of U.S. Government or other public sector projects, based on a change in spending patterns, or in the event of a priority need for funds, such as homeland security, the war on terrorism or rebuilding Iraq; government contract procurement (such as bid protest, small business set asides, etc.) and termination risks; the results of government investigations into allegations of improper actions related to the provision of services in support of U.S. military operations in Iraq; the results of various audits conducted by the Defense Contract Audit Agency; individual business decisions of our clients; the financial condition of our clients; paradigm shifts in technology; competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances); our ability to complete and implement acquisitions appropriate to achievement of our strategic plans; material changes in laws or regulations applicable to our businesses, particularly in connection with (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) competition for task orders under Government Wide Acquisition Contracts (GWACS) and/or schedule contracts with the General Services Administration; and (iv) expensing of stock options; our own ability to achieve the objectives of near term or long range business plans; and other risks described in the Company’s Securities and Exchange Commission filings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The interest rates on both the Term Loan and the Revolving Facility are affected by changes in market interest rates. The Company has the ability to manage these fluctuations in part through interest rate hedging alternatives. A 1.0% change in interest rates on variable rate debt would have resulted in the Company’s interest expense fluctuating by approximately $2.6 million for the quarter ended March 31, 2006.

Approximately 3.6% and 3.4% of the Company’s total revenue in the first nine months of FY2006 and FY2005, respectively, were derived from our international operations, primarily in the United Kingdom. The Company’s practice in its international operations is to negotiate contracts in the same currency in which the predominant expenses will be incurred, thereby mitigating the exposure to foreign currency exchange fluctuations. It is not possible to accomplish this in all cases; thus, there is some risk that profits will be affected by foreign currency exchange fluctuations. As of March 31, 2006, the Company had approximately $11.8 million in cash held in pounds sterling in the United Kingdom. This allows the Company to better utilize its cash resources on behalf of its foreign subsidiaries, thereby mitigating foreign currency conversion risks.

Item 4. Controls and Procedures

As of the end of the 90 day period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitation, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that and system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information knows in a timely manner to appropriate levels of management.

Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to its management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

The Company reports that no changes in its internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2006.

 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Appeal of CACI International Inc, ASBCA No. 5305

Reference is made to Part II, Item 1, Legal Proceedings, in the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2005, for the most recently filed information concerning the appeal filed on September 27, 2000, with the Armed Services Board of Contract Appeals (“ASBCA”) challenging the Defense Information Systems Agency’s (“DISA”) denial of its claim for breach of contract damages. The Registrant’s appeal seeks damages arising from DISA’s breach of a license agreement pursuant to which the Department of Defense agreed to conduct all electronic data interchanges (which can be broadly understood to mean e-commerce) exclusively through certified value-added networks, such as the network maintained by Registrant’s wholly-owned subsidiary, CACI, INC.-FEDERAL, for the period from September 2, 1994 through April 22, 1998. The ASBCA held that the Government breached its contract, but determined that no damages flowed to the Company as a result of that breach.

Since the filing of Registrant’s report indicated above, the Federal Circuit Court of Appeals heard oral argument on April 6, 2006 and issued its decision affirming the ASBCA decision on April 7, 2006.

CACI Dynamics Systems, Inc. v. Delphinus Engineering, Inc., et al

Reference is made to Part II, Item 1, Legal Proceedings, in the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2005 for the most recently filed information concerning the suit filed on October 1, 2002 in the United States District Court for the Eastern District of Virginia against Delphinus Engineering, Inc., V. Allen Spicer and James R. Everett seeking damages and attorney’s fees arising from defendant’s efforts to move business from CACI to Delphinus. The Company has collected the entire judgment against Delphinus and Mr. Everett.

Since the filing of Registrant’s report described above, we have been continuing efforts to collect the judgment against Mr. Spicer.

Saleh, et al. v. Titan Corp., et al, Case No. 04 CV 1143 R (NLS) (S.D. Cal. 2005)

Reference is made to Part II, Item 1, Legal Proceedings, in the Registrant’s Quarterly Report on Form 10-Q for the period ending December 31, 2005 for the most recently filed information concerning the suit filed in the United States District Court for the Southern District of California against CACI International Inc, CACI, INC.–FEDERAL, CACI N.V., and former CACI employee, Stephen A. Stefanowicz, among other defendants, seeking a permanent injunction, declaratory relief, compensatory and punitive damages, treble damages and attorney’s fees arising from defendant’s alleged acts against plaintiffs, who were detainees at Abu Ghraib prison and elsewhere in Iraq.

Since the filing of Registrant’s report described above, the U.S. District Court in Virginia reconsidered its decision to transfer the case and again transferred the case to the U.S. District Court for the District of Columbia. On March 22, 2006, plaintiffs filed a Third Amended Complaint that added CACI Premier Technology, Inc. and two former CACI employees as defendants. The Third Amended Complaint consists of several counts under the Alien Tort Statute, and for each of these claims, two related counts – one for conspiracy and one for aiding and abetting – to commit the wrong that is allegedly a violation of the Alien Tort Statute. Plaintiffs’ claims also include state tort claims for assault and battery, sexual assault and battery, wrongful death, and intentional infliction of emotional distress, again in each instance with two related counts for conspiracy and aiding and abetting. Plaintiffs also plead two tort counts for negligent hiring and supervision and for the negligent infliction of emotional distress. Finally, the Third Amended Complaint included two claims pursuant to the Racketeer Influenced and Corrupt Organizations Act. On April 7, 2006, the Company filed a motion to dismiss the Third Amended Complaint.

Ibrahim, et al. v. Titan Corp., et al., Case No. 1:04-CV-01248-JR (D.D.C. 2005)

Reference is made to Part II, Item 1, Legal Proceedings, in the Registrant’s Quarterly Report on Form 10-Q for the period ending December 31, 2005 for the most recently filed information concerning the suit filed in the United States District Court for the District of Columbia against CACI International Inc, CACI, INC.–FEDERAL, CACI N.V. and Titan Corporation, seeking compensatory and punitive damages for physical injury, emotional distress, and/or wrongful death allegedly suffered as a result defendants’ wrongful acts against plaintiffs, who were detainees at Abu Ghraib prison and elsewhere in Iraq.

Since the filing of Registrant’s report described above, CACI Premier Technology, Inc. (“CACI PT”) was substituted as a defendant for the other three CACI companies, which were dismissed from the case. CACI PT filed a Motion for Summary Judgment with respect to the remaining claims in the case. In April 2006, the Court entered an Order addressing the discovery the plaintiffs are permitted to pursue for purposes of opposing the Motion for Summary Judgment.

 

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Item 1A. Changes in Risk Factors

During the three months ended March 31, 2006, there were no material changes in the risk factor as reported in the Company’s annual report on Form 10-K/A as filed on September 21, 2005.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

 

 

2.1    Asset Purchase Agreement between CACI and Information Systems Support, Inc. dated February 16, 2006, is incorporated by reference from Exhibit 99.6 of Form 8-K filed with the Securities and Exchange Commission on March 1, 2006.
3.1    Certificate of Incorporation of the Registrant, as amended to date, is incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended June 30, 2000.
3.2    By-laws of the Registrant, as amended to date, is incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended June 30, 2000.
31.1    Section 302 Certification    Dr. J.P. London
31.2    Section 302 Certification    Mr. Stephen L. Waechter
32.1    Section 906 Certification    Dr. J.P. London
32.2    Section 906 Certification    Mr. Stephen L. Waechter

Reports

 

    The Registrant filed a Current Report on Form 8-K on January 25, 2006, in which the Registrant furnished its financial results for the second quarter of fiscal year 2006.

 

    The Registrant filed a Current Report on Form 8-K on January 27, 2006, in which the Registrant announced it had entered into an agreement with Paul M. Cofoni, President of its U.S. Operations in regards to Mr. Cofoni’s retirement payments.

 

    The Registrant filed a Current Report on Form 8-K on January 31, 2006, in which the Registrant announced a delay in the closing of its acquisition of substantially all of the assets of Information Systems Support, Inc. (ISS) due to ISS losing a recompetition of a significant contract which will require a revised valuation of ISS.

 

    The Registrant filed a Current Report on Form 8-K on February 16, 2006, in which the Registrant announced it had signed an amended and restated definitive agreement to purchase substantially all of the assets of Information Systems Support, Inc. (ISS).

 

    The Registrant filed a Current Report on Form 8-K on March 1, 2006, in which the Registrant announced its purchase of substantially all of the assets of Information Systems Support, Inc.

 

    The Registrant filed a Current Report on Form 8-K on March 27, 2006, in which the Registrant announced that it had signed a definitive merger agreement to acquire all of the outstanding shares of AlphaInsight Corporation.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

CACI International Inc

  Registrant
Date: May 10, 2006   By:  

/s/ Dr. J. P. London

   

Dr. J. P. London

Chairman of the Board, President

Chief Executive Officer and Director

(Principal Executive Officer)

Date: May 10, 2006   By:  

/s/ Stephen L. Waechter

   

Stephen L. Waechter

Executive Vice President

Chief Financial Officer and Treasurer

(Principal Financial Officer)

Date: May 10, 2006   By:  

/s/ S. Mark Monticelli

   

S. Mark Monticelli

Senior Vice President, Corporate Controller

and Chief Accounting Officer

(Principal Accounting Officer)

 

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