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<SEC-DOCUMENT>0001163842-03-000038.txt : 20030311
<SEC-HEADER>0001163842-03-000038.hdr.sgml : 20030311
<ACCEPTANCE-DATETIME>20030311165938
ACCESSION NUMBER: 0001163842-03-000038
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20030310
FILED AS OF DATE: 20030311
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ANTEON INTERNATIONAL CORP
CENTRAL INDEX KEY: 0001163842
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373]
IRS NUMBER: 133880755
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-31258
FILM NUMBER: 03599770
BUSINESS ADDRESS:
STREET 1: 3211 JERMANTOWNE ROAD
STREET 2: SUITE 700
CITY: FAIRFAX
STATE: VA
ZIP: 22030-2801
BUSINESS PHONE: (703) 246-0200
MAIL ADDRESS:
STREET 1: 3211 JERMANTOWN ROAD
STREET 2: SUITE 700
CITY: FAIRFAX
STATE: VA
ZIP: 22030-2801
FORMER COMPANY:
FORMER CONFORMED NAME: AZIMUTH TECHNOLOGIES INC
DATE OF NAME CHANGE: 20011219
</SEC-HEADER>
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<SEQUENCE>1
<FILENAME>fiscal2003.txt
<DESCRIPTION>10-K
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number: 001-31258
-----------------------
ANTEON INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3880755
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3211 Jermantown Road
Fairfax, VA 22030-2801
(Address of Principal Executive Offices)
(703) 246-0200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Name of each exchange on which registered: New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act:
None
-----------------------
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 (1) is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2002 was $491,132,028 (based on the closing
price of $25.28 per share on June 28, 2002, as reported by the New York
Stock Exchange- Corporate Transactions). For this computation, the
registrant excluded the market value of all shares of its common stock
reported as beneficially owned by named executive officers and directors of
the registrant; such exclusion shall not be deemed to constitute an
admission that any such person is an "affiliate" of the registrant.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
|_|
There were 34,452,928 shares of common stock outstanding as of February 25,
2003.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-K includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future projects, developments and business
strategies.
These forward-looking statements are identified by their use of terms
and phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, and may also include references to assumptions. These statements are
contained in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and other sections of
this Form 10-K.
Such forward-looking statements include, but are not limited to:
o funded backlog;
o estimated contract value;
o our expectations regarding the Federal government's procurement
budgets and reliance on outsourcing of services; and
o our financial condition and liquidity, as well as future cash flows
and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the following:
o changes in general economic and business conditions;
o changes in federal government procurement laws, regulations, policies
and budgets;
o the number and type of contracts and task orders awarded to us;
o technological changes;
o the integration of acquisitions without disruption to our other
business activities;
o the ability to attract and retain qualified personnel;
o competition;
o our ability to retain our contracts during any rebidding process; and
o the other factors outlined under "Risk Factors."
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
1
<PAGE>
RISK FACTORS
Risks related to our business
Federal Government Contracting Risks--Our business could be adversely
affected by significant changes in the contracting or fiscal policies of the
U.S. federal government.
We derive substantially all of our revenues from contracts with the U.S.
federal government or subcontracts under federal government prime contracts, and
we believe that the success and development of our business will continue to
depend on our successful participation in federal government contract programs.
Accordingly, changes in federal government contracting policies could directly
affect our financial performance. Among the factors that could materially
adversely affect our federal government contracting business are:
o budgetary constraints affecting federal government spending generally,
or specific departments or agencies in particular, and changes in
fiscal policies or available funding;
o changes in federal government programs or requirements;
o curtailment of the federal government's use of technology services
firms;
o the adoption of new laws or regulations;
o technological developments;
o federal governmental shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment offices
due to problems with, or upgrades to, government information systems,
or for other reasons;
o competition and consolidation in the information technology industry;
and
o general economic conditions.
These or other factors could cause federal governmental agencies, or prime
contractors where we are acting as a subcontractor, to reduce their purchases
under contracts, to exercise their right to terminate contracts or not to
exercise options to renew contracts, any of which could have a material adverse
effect on our financial condition and operating results. Many of our federal
government customers are subject to stringent budgetary constraints. We have
substantial contracts in place with many federal departments and agencies, and
our continued performance under these contracts, or award of additional
contracts from these agencies, could be materially adversely affected by
spending reductions or budget cutbacks at these agencies.
EarlyTermination of Contracts-- Our federal government contracts may be
terminated by the government at any time prior to their completion, and if we do
not replace them, our operating results may be harmed.
We derive substantially all of our revenues from U.S. federal government
contracts and subcontracts under federal government prime contracts that
typically are awarded through competitive processes and span one or more base
years and one or more option years. The option periods typically cover more than
half of the contract's potential duration. Federal government agencies generally
have the right not to exercise these option periods. In addition, our contracts
typically also contain provisions permitting a government client to terminate
the contract on short notice, with or without cause. A decision not to exercise
option periods or to terminate contracts would reduce the profitability of these
contracts to us. Our contractual costs and revenues are subject to adjustment as
a result of federal government audits. See "Contracts Subject to Audit."
2
<PAGE>
Upon contract expiration, if the customer requires further services of the
type provided by the contract, there is frequently a competitive rebidding
process and there can be no assurance that we will win any particular bid, or
that we will be able to replace business lost upon expiration or completion of a
contract. The unexpected termination of one or more of our significant contracts
could result in significant revenue shortfalls. The termination or nonrenewal of
any of our significant contracts, short-term revenue shortfalls, the imposition
of fines or damages or our suspension or debarment from bidding on additional
contracts could harm operating results for those periods.
Most federal government contract awards are subject to protest by
competitors. If specified legal requirements are satisfied, these protests
require the federal agency to suspend the contractor's performance of the newly
awarded contract pending the outcome of the protest. These protests could also
result in a requirement to resubmit bids for the contract or in the termination,
reduction or modification of the awarded contract.
Contracts Subject to Audit--Our business could be adversely affected by a
negative audit by the Defense Contract Audit Agency. We could be required to
reimburse the U.S. federal government for costs that we have expended on our
contracts and our ability to compete successfully for future contracts could be
materially impaired.
The Defense Contract Audit Agency, or the "DCAA," and other government
agencies routinely audit and investigate government contracts. These agencies
review a contractor's performance on its contract, cost structure and compliance
with applicable laws, regulations and standards. The DCAA also reviews the
adequacy of, and a contractor's compliance with, its internal control systems
and policies, including the contractor's purchasing, property, estimating,
compensation and management information systems. Any costs found to be
improperly allocated to a specific contract will not be reimbursed, while such
costs already reimbursed must be refunded. Therefore, a DCAA audit could
materially affect our competitive position and result in a substantial
adjustment to our revenues. If a government audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or debarment from doing business
with the federal government. In addition, we could suffer serious reputational
harm if allegations of impropriety were made against us. If we were suspended or
debarred from contracting with the federal government generally, or any
significant agency in the intelligence community or Department of Defense, if
our reputation or relationship with government agencies were impaired, or if the
government otherwise ceased doing business with us or significantly decreased
the amount of business it does with us, our operating results would be
materially harmed.
Contract Types and Risks--Our estimates of the time, resources and expenses
required to complete our contractual commitments may not be accurate.
We enter into three principal types of contracts with the federal
government: cost-plus, time and materials and fixed price. For the twelve months
ended December 31, 2002, approximately 35% of our federal contracts were
cost-plus, 37% were time and materials and 28% were fixed price (a substantial
majority of which were fixed price level of effort). Under cost-plus type
contracts, which are subject to a contract ceiling amount, we are reimbursed for
allowable costs and paid a fee, which may be fixed or performance based.
However, if our costs exceed the contract ceiling, funding has not been received
or costs are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all such costs.
Under time and materials contracts, we are paid for labor at negotiated hourly
billing rates and for certain expenses. There is financial risk to us should our
costs to perform time and materials contracts exceed the negotiated hourly
billing rates. Under fixed price contracts, we are required to perform the
contract tasks at a fixed price irrespective of the actual costs we incur, and
consequently, any costs in excess of the fixed price are absorbed by us. Fixed
price contracts, in comparison to cost-plus contracts, typically offer higher
profit opportunities because we bear the risk of cost-overruns and receive the
benefit of cost savings. For all contract types, there is risk associated with
the assumptions we use to formulate our pricing of the proposed work. In
addition, when we serve as a subcontractor under our contracts, we are exposed
to the risks of delays in payment from the prime contractor for the services we
provide.
3
<PAGE>
Risks Under Indefinite Delivery/Indefinite Quantity Contracts, GSA Schedule
contracts and GWACs--Many of our U.S. federal government customers spend their
procurement budgets through Indefinite Delivery/Indefinite Quantity Contracts,
GSA Schedule contracts and GWACs under which we are required to compete for
post-award orders.
Budgetary pressures and reforms in the procurement process have caused many
U.S. federal government customers to increasingly purchase goods and services
through Indefinite Delivery/Indefinite Quantity, or "ID/IQ," contracts, General
Services Administration, or "GSA," Schedule contracts and other multiple award
and/or Government Wide Acquisition Contracts, or "GWAC," vehicles. These
contract vehicles have resulted in increased competition and pricing pressure
requiring that we make sustained post-award efforts to realize revenues under
the relevant contract. There can be no assurance that we will continue to
increase revenues or otherwise sell successfully under these contract vehicles.
Our failure to compete effectively in this procurement environment could harm
our operating results.
Government Regulations--We may be liable for penalties under various
procurement rules and regulations. Changes in government regulations could harm
our operating results.
Our defense and federal civil agency businesses must comply with and are
affected by various government regulations. Among the most significant
regulations are:
o the Federal Acquisition Regulations, and agency regulations
supplemental to the Federal Acquisition Regulations, which
comprehensively regulate the formation, administration and
performance of government contracts;
o the Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with
contract negotiations;
o the Cost Accounting Standards, which impose accounting
requirements that govern our right to reimbursement under certain
cost-based government contracts; and
o laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
These regulations affect how our customers and we can do business and, in
some instances, impose added costs on our businesses. In addition, we are
subject to industrial security regulations of the Department of Defense and
other federal agencies that are designed to safeguard against foreigners' access
to classified information. If we were to come under foreign ownership, control
or influence, our federal government customers could terminate or decide not to
renew our contracts, and it could impair our ability to obtain new contracts.
Any changes in applicable laws and regulations could also harm our operating
results. Any failure to comply with applicable laws and regulations could result
in contract termination, price or fee reductions or suspension or debarment from
contracting with the federal government.
Risks Relating to Reductions or Changes in Military Expenditures--A decline
in the U.S. defense budget may adversely affect our operations.
Sales under contracts with the U.S. Department of Defense, including under
subcontracts having the Department of Defense as the ultimate purchaser,
represented approximately 78% and 69% of our sales for the twelve months ended
December 31, 2002 and for the twelve months ended December 31, 2001,
respectively. The U.S. defense budget declined from time to time in the late
1980s and the early 1990s, resulting in a slowing of new program starts, program
delays and program cancellations. These reductions caused most defense-related
government contractors to experience declining revenues, increased pressure on
operating margins and, in some cases, net losses. While spending authorizations
for defense-related programs by the government have increased in recent years,
and in particular after the September 11, 2001 terrorist attacks, these spending
levels may not be sustainable, and future levels of expenditures and
authorizations for those programs may decrease, remain constant or shift to
programs in areas where we do not currently provide services. A general
significant decline in military expenditures could harm our operating results.
4
<PAGE>
We are not able to guarantee that contract orders included in our estimated
contract value will result in actual revenues in any particular fiscal period or
that the actual revenues from such contracts will equal our estimated contract
value.
There can be no assurance that any contracts included in our estimated
contract value presented in this filing will result in actual revenues in any
particular period or that the actual revenues from such contracts will equal our
estimated contract value. Further, there can be no assurance that any contract
included in our estimated contract value that generates revenue will be
profitable. Our estimated contract value consists of funded backlog, which is
based upon amounts actually appropriated by a customer for payment of goods and
services, and unfunded contract value, which is based upon management's estimate
of the future potential of our existing contracts (including contract options)
to generate revenues. These estimates are based on our experience under such
contracts and similar contracts, and we believe such estimates to be reasonable.
However, there can be no assurances that all of such estimated contract value
will be recognized as revenue.
In addition, the federal government's ability to select multiple winners
under ID/IQ contracts and GWACs, as well as its right to compete subsequent task
orders among such multiple winners, means that there is no assurance that
certain of our existing contracts will result in actual orders. Further, the
federal government enjoys broad rights to unilaterally modify or terminate such
contracts and task orders, including the right not to exercise options to extend
multi-year contracts through the end of their potential terms. Accordingly, most
of our existing contracts and task orders are subject to modification and
termination at the federal government's discretion. In addition, funding for
orders from the federal government is subject to approval on an annual basis by
Congress pursuant to the appropriations process.
Government Intent to Replace Legacy Systems--Our business will be harmed if
government agencies are unwilling to replace or supplement expensive legacy
systems.
Government agencies have spent substantial resources over an extended
period of time to develop computer systems and to train their personnel to use
them. These agencies may be reluctant to abandon or supplement these legacy
systems with Internet and other advanced technology systems because of the cost
of developing them or the additional cost of re-training their personnel. Such
reluctance would make it more difficult to acquire new contracts, which would
harm our business prospects.
Reliance on Subcontractors--We regularly employ subcontractors to assist us
in satisfying our contractual obligations. If these subcontractors fail to
adequately perform their contractual obligations, our prime contract performance
and our ability to obtain future business could be materially and adversely
impacted.
Our performance of government contracts may involve the issuance of
subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our customers. There is a risk that
we may have disputes with subcontractors concerning a number of issues including
the quality and timeliness of work performed by the subcontractor, customer
concerns about the subcontractor, our decision not to extend existing task
orders or issue new task orders under a subcontract, or our hiring of former
personnel of a subcontractor. A failure by one or more of our subcontractors to
satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform
the agreed-upon services may materially and adversely impact our ability to
perform our obligations as a prime contractor. In extreme cases, such
subcontractor performance deficiencies could result in the government
terminating our contract for default. A default termination could expose us to
liability for excess costs of reprocurement by the government and have a
material adverse effect on our ability to compete for future contracts and task
orders.
5
<PAGE>
Dependence on Key Personnel --If we lose our technical personnel or members
of senior management, our business may be adversely affected.
Our continued success depends in large part on our ability to recruit and
retain the technical personnel necessary to serve our clients effectively.
Competition for skilled personnel in the information technology and systems
engineering services industry is intense and technology service companies often
experience high attrition among their skilled employees. Excessive attrition
among our technical personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our clients'
needs and constrain our future growth. In addition, we must often comply with
provisions in federal government contracts that require employment of persons
with specified levels of education, work experience and security clearances. The
loss of any significant number of our existing key technical personnel or the
inability to attract and retain key technical employees in the future could have
a material adverse effect on our ability to win new business and could harm our
operating results. There is also a risk that our efforts to hire personnel of
our competitors or subcontractors or other persons could lead to claims being
asserted against us that our recruitment efforts violate contractual
arrangements or are otherwise wrongful.
In addition, we believe that the success of our business strategy and our
ability to operate profitably depends on the continued employment of our senior
management team, led by Joseph M. Kampf. None of our senior management team has
an employment contract with us. If Mr. Kampf or other members of our senior
management team become unable or unwilling to continue in their present
positions, our business and financial results could be materially adversely
affected.
Security Clearance--If we cannot obtain the necessary security clearances,
we may not be able to perform classified work for the government and our
revenues may suffer.
Certain government contracts require our facilities and some of our
employees, to maintain security clearances. If we lose or are unable to obtain
required security clearances, the client can terminate the contract or decide
not to renew it upon its expiration. As a result, to the extent we cannot obtain
the required security clearances for our employees working on a particular
contract, we may not derive the revenue anticipated from the contract, which, if
not replaced with revenue from other contracts, could seriously harm our
operating results.
Security Issues--Security breaches in sensitive government systems could
result in the loss of clients and negative publicity.
Many of the systems we develop involve managing and protecting information
involved in national security and other sensitive government functions. A
security breach in one of these systems could cause serious harm to our
business, could result in negative publicity and could prevent us from having
further access to such critically sensitive systems or other similarly sensitive
areas for other governmental clients.
Client Expectations--We could lose revenues and clients and expose our
company to liability if we fail to meet client expectations.
We create, implement and maintain technology solutions that are often
critical to our clients' operations. If our technology solutions or other
applications have significant defects or errors or fail to meet our clients'
expectations, we may:
o lose future contract opportunities due to receipt of poor past
performance evaluations from our customers;
o have contracts terminated for default and be liable to our
customers for reprocurement costs and other damages;
o receive negative publicity, which could damage our reputation and
adversely affect our ability to attract or retain clients; and
6
<PAGE>
o suffer claims for substantial damages against us, regardless of
our responsibility for the failure.
While many of our contracts limit our liability for damages that may arise
from negligent acts, errors, mistakes or omissions in rendering services to our
clients, we cannot be sure that these contractual provisions will protect us
from liability for damages if we are sued. Furthermore, our general liability
insurance coverage may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims, or the insurer may
disclaim coverage as to any future claim. The successful assertion of any large
claim against us could seriously harm our business. Even if not successful, such
claims could result in significant legal and other costs and may be a
distraction to management.
Acquisition Strategy--We intend to pursue future acquisitions which may
adversely affect our business if we cannot effectively integrate these new
operations.
We have completed and substantially integrated five strategic acquisitions
since 1997. The federal government information technology solutions and systems
engineering services industry remains fragmented, and we believe that
acquisition and consolidation opportunities will continue to present themselves
periodically. We intend to continue to selectively review acquisition candidates
with a focus on companies with complementary skills or market focus. Our
continued success may depend upon our ability to integrate any businesses we may
acquire in the future. The integration of such businesses into our operations
may result in unforeseen operating difficulties, may absorb significant
management attention and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of our business.
Such difficulties of integration may involve the necessity of coordinating
geographically dispersed organizations, integrating personnel with disparate
business backgrounds and reconciling different corporate cultures. In addition,
in certain acquisitions, federal acquisition regulations may require us to enter
into contract novation agreements with the government, a routinely
time-consuming process. Government agencies may delay in recognizing us as the
successor contractor in these situations, thereby possibly preventing our
realization of some of the anticipated benefits of such acquisitions. There can
be no assurance that acquired entities will operate profitably, that we will
realize anticipated synergies or that these acquisitions will cause our
operating performance to improve.
Although management regularly engages in discussions with and submits
acquisition proposals to acquisition targets, there can be no assurance that
suitable acquisition targets will be available in the future on reasonable
terms. In addition, to the extent that we complete any additional acquisitions,
no assurance can be given that acquisition financing will be available on
reasonable terms or at all, that any new businesses will generate revenues or
net income comparable to our existing businesses or that such businesses will be
integrated successfully or operated profitably.
Potential Undisclosed Liabilities Associated with Acquisitions--We may be
subject to certain liabilities assumed in connection with our acquisitions that
could harm our operating results.
We conduct due diligence in connection with each of our acquisitions. In
connection with any acquisition made by us, there may be liabilities that we
fail to discover or that we inadequately assess in our due diligence efforts. In
particular, to the extent that prior owners of any acquired businesses or
properties failed to comply with or otherwise violated applicable laws or
regulations, or failed to fulfill their contractual obligations to the federal
government or other customers, we, as the successor owner, may be financially
responsible for these violations and failures and may suffer reputational harm
or otherwise be adversely affected. The discovery of any material liabilities
associated with our acquisitions could harm our operating results.
Our Employees may Engage in Improper Activities with Adverse Consequences
to our Business.
As with other government contractors, we are faced with the possibility
that our employees may engage in misconduct, fraud or other improper activities
that may have adverse consequences to our prospects and results of operations.
Misconduct by employees could include failures to comply with federal government
procurement regulations, violation of federal requirements concerning the
protection of classified information, improper labor and cost charging to
contracts and misappropriation of government or third party property and
information. The occurrence of any such employee activities could result in our
suspension or debarment from contracting with the federal government, as well as
the imposition of fines and penalties, which would cause material harm to our
business.
7
<PAGE>
Risks Associated with International Operations--Our international business
exposes us to additional risks including exchange rate fluctuations, foreign tax
and legal regulations and political or economic instability that could harm our
operating results.
In connection with our international operations, (including international
operations under U.S. government contracts), we are subject to risks associated
with operating in and selling to foreign countries, including:
o devaluations and fluctuations in currency exchange rates;
o changes in or interpretations of foreign regulations that may
adversely affect our ability to sell all of our products or
repatriate profits to the United States;
o imposition of limitations on conversions of foreign currencies
into dollars;
o imposition of limitations on or increase of withholding and other
taxes on remittances and other payments by foreign subsidiaries
or joint ventures;
o compliance with the local labor laws of the countries in which we
operate;
o hyperinflation or political instability in foreign countries;
o potential personal injury to our personnel who may be exposed to
military conflict situations in foreign countries;
o imposition or increase of investment and other restrictions or
requirements by foreign governments; and
o U.S. arms export control regulations and policies, which govern
our ability to supply foreign affiliates and customers.
Although our international operations are not currently substantial, to the
extent we expand our international operations, these and other risks associated
with international operations are likely to increase. Although such risks have
not harmed our operating results in the past, no assurance can be given that
such risks will not harm our operating results in the future.
Risks related to our capital structure
Leverage--Our debt could adversely affect our financial health.
As of December 31, 2002, our debt was $105.7 million. You should be aware
that this level of debt could have important consequences. Below we have
identified some of the material potential consequences resulting from this
amount of debt.
o We may be unable to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate
purposes.
o A significant portion of our cash flow from operations must be
dedicated to the repayment of indebtedness, thereby reducing the
amount of cash we have available for other purposes.
o Our ability to adjust to changing market conditions may be
hampered. We may be more vulnerable in a volatile market.
8
<PAGE>
Additional Borrowings Available--Despite current debt levels, we and our
subsidiaries may still be able to incur substantially more debt. This could
further increase the risks described above.
We and our subsidiaries may be able to incur additional indebtedness in the
future. The terms of the indenture governing our 12% senior subordinated notes
due 2009, or the "12% Notes," and of our Amended and Restated Credit Agreement,
or "Credit Facility," limit but do not prohibit us or our subsidiaries from
doing so. As of December 31, 2002, our Credit Facility would have permitted
additional borrowings of up to $108.3 million. If new debt is added by us or our
subsidiaries, the related risks that we and they now face could intensify.
Ability to Service Debt--To service our debt, we will require a significant
amount of cash. Our ability to generate cash depends on many factors beyond our
control.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance. We cannot assure you that
our business strategy will succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a
number of factors, many of which are beyond our control. These factors include:
o the current economic and competitive conditions in the
information technology industry;
o budgetary constraints affecting federal government spending, and
changes in fiscal policies or available funding;
o federal government shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment
offices due to problems with, or upgrades to, government
information systems, or for other reasons;
o any operating difficulties, operating costs or pricing pressures
we may experience;
o the passage of legislation or other regulatory developments that
affect us adversely; and
o any delays in implementing any strategic projects we may have.
If our financial performance declines and we are unable to pay our debts,
we will be required to pursue one or more alternative strategies, such as
selling assets, refinancing or restructuring our indebtedness or selling
additional equity capital. Also, certain alternative strategies would require
the consent of our senior secured lenders before we engage in any such strategy.
Restrictive Debt Covenants--The terms of our Credit Facility and the
indenture governing our 12% Notes impose significant restrictions on our ability
and that of our subsidiaries to take certain actions which may have an impact on
our business, operating results and financial condition.
The indenture and our Credit Facility impose significant operating and
financial restrictions on us and our subsidiaries and require us to meet certain
financial tests. These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
o incurring or guaranteeing additional debt;
o paying dividends or other distributions to our stockholders or
redeeming, repurchasing or retiring our capital stock or
subordinated obligations;
o making investments;
o creating liens on our assets;
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o issuing or selling capital stock of our subsidiaries;
o transforming or selling assets currently held by us;
o engaging in transactions with affiliates; and
o engaging in mergers or consolidations.
The failure to comply with any of these covenants would cause a default
under the indenture and our Credit Facility. A default, if not waived, could
result in acceleration of our debt, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us.
Item 1. BUSINESS
General
We are a leading provider of information technology solutions and systems
engineering and integration services to government clients as measured by
revenue. We design, integrate, maintain and upgrade state-of-the-art information
systems for national defense, intelligence, emergency response and other high
priority government missions. We also provide many of our government clients
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations.
We currently serve over 800 U.S. federal government clients, as well as
state and foreign governments. For the twelve months ended December 31, 2002, we
estimate that approximately 90% of our revenue was from contracts where we were
the lead, or "prime," contractor on our projects. We provide our services under
long-term contracts that have a weighted average term of 8 years. Additionally,
we have contracts with an estimated remaining contract value of $4.3 billion as
of December 31, 2002.
From January 1, 1996 to December 31, 2002, we increased revenues at a
compound annual growth rate, or "CAGR," of approximately 34%. Over the same
period, revenues grew organically at a 15% compound annual rate (which includes
revenue growth from acquired businesses only after the date of acquisition).
During 2002, our revenues grew organically at a rate of 16.9%.
The Federal Government Technology Services Market
The U.S. federal government is the largest single customer for information
technology solutions and systems engineering services in the United States. The
U.S. federal government technology services market is large and growing, with
total expenditures of more than $115.0 billion in the federal government's
fiscal year 2002. Government agency budgets for technology services are forecast
to grow at least 5% annually through government fiscal year 2005. Government
agency budgets for information technology are forecast to grow by 12-14% in
2004, based on the President's requested budget.
Additionally, it is anticipated that technology services spending will grow
an additional $6.0 billion annually over the next five years in the areas
emphasized by the U.S. government's evolving military strategy, including
homeland security, missile defense, information security, logistics management
systems modernization, weapon systems design improvements and military personnel
training. Defense spending is projected to exceed $365.0 billion in fiscal year
2003, a 10% increase over government fiscal year 2002. The President's proposed
budget for fiscal year 2004 includes defense spending of $380.0 billion, a 4%
increase over fiscal year 2003, and the largest Department of Defense budget in
history in actual dollars. Defense budgets are expected to grow by 32% over the
next six years, based on the Department of Defense spending plan submitted to
Congress.
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Government Contracts and Contracting
The federal technology services procurement environment has evolved in
recent years due to statutory and regulatory changes resulting from procurement
reform initiatives. Federal government agencies traditionally have procured
technology solutions and services through agency-specific contracts awarded to a
single contractor. However, the number of procurement contracting methods
available to federal government customers for services procurements has
increased substantially. Today, there are three predominant contracting methods
through which government agencies procure technology services: traditional
single award contracts, GSA Schedule contracts, and Indefinite Delivery and
Indefinite Quantity, or "ID/IQ," contracts.
Traditional single award contracts specify the scope of services that will
be delivered and the contractor that will provide the specified service. These
contracts have been the traditional method for procurement by the federal
government. When an agency has a requirement, interested contractors are
solicited, qualified, and then provided with a request for a proposal. The
process of qualification, request for proposals and evaluation of bids requires
the agency to maintain a large, professional procurement staff and can take a
year or more to complete.
GSA Schedule contracts are listings of services, products and prices of
contractors maintained by the GSA for use throughout the federal government. In
order for a company to provide services under a GSA Schedule contract, the
company must be pre-qualified and selected by the GSA. When an agency uses a GSA
Schedule contract to meet its requirement, the agency or the GSA, on behalf of
the agency, conducts the procurement. The user agency, or the GSA on its behalf,
evaluates the user agency's services requirements and initiates a competition
limited to GSA Schedule qualified contractors. Use of GSA Schedule contracts
provides the user agency with reduced procurement time and lower procurement
costs.
ID/IQ contracts are contract forms through which the federal government
creates preferred provider relationships with contractors. These umbrella
contracts outline the basic terms and conditions under which the government may
order services. An umbrella contract typically is managed by one agency, the
sponsoring agency, and is available for use by any agency of the federal
government. The umbrella contracts are competed within the industry and one or
more contractors are awarded contracts to be qualified to perform the work. The
competitive process for procurement of work to be performed under the contract,
called task orders, is limited to the pre-selected contractor(s). If the ID/IQ
contract has a single prime contractor, the award of task orders is limited to
that single party. If the contract has multiple prime contractors, the award of
the task order is competitively determined. Multiple-contractor ID/IQ contracts
that are open for any government agency to use for the procurement of services
are commonly referred to as GWACs. Due to the lower cost, reduced procurement
time, and increased flexibility of GWACs, there has been greater use of GWACs
among many agencies for large-scale procurements of technology services.
Key Factors Driving Growth
There are several key factors which we believe will continue to drive the
growth of the federal technology services market and our business:
o Increased Outsourcing. The downsizing of the federal government
workforce, declining availability of information technology
management skills among government personnel, and a concomitant
growth in the backlog of software maintenance tasks at many
government agencies are contributing to an increase in technology
outsourcing. According to the Office of Management and Budget,
spending on outsourced information technology solutions is
projected to grow at a rate substantially faster than overall
federal government information technology expenditures. In
government fiscal year 2002, 80% of the federal government's
total information technology solutions spending flowed to
contractors. By government fiscal year 2007, this rate of
outsourcing is projected to increase to 86% of total information
technology spending.
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o Government Efficiency Initiatives. Political pressures and
budgetary constraints are forcing government agencies to improve
their processes and services and to operate in a manner more
consistent with commercial enterprises. To meet these challenges,
government agencies are investing heavily in information
technology to improve effectiveness, enhance productivity and
deliver new services.
o Continued Dependence on Commercial Off-the-Shelf Hardware and
Software. The federal government has increased its use of lower
cost, open architecture systems using commercial off-the-shelf,
or "COTS," hardware and software, which are rapidly displacing
the single purpose, custom systems historically favored by the
federal government. The need for COTS products and COTS
integration services is expected to increase as the government
seeks to ensure the future compatibility of its systems across
agencies. In addition, the continued shortening of software
upgrade cycles is expected to increase the demand for the
integration of new COTS products.
o Increased Spending on National Defense. After years of spending
declines, national defense spending is projected to grow
substantially over the next five years with the Bush
Administration increasing the government's commitment to
strengthen the nation's security, defense and intelligence
capabilities. This support for increased defense spending has
been further reinforced by Congress following the September 2001
terrorist attacks on the United States, and resulted in approval
of 2002 Department of Defense appropriations of $332 billion, an
increase of 12% over fiscal year 2001. The government is
investing in improved homeland security, greater information
systems security, more effective intelligence operations, and new
approaches to warfare simulation training. Additionally, Congress
passed the largest Department of Defense budget (in actual
dollars) ever for fiscal year 2003. The President's proposed
budget for 2004 defense spending is $380 billion, a 4% increase
over fiscal year 2003 and the largest defense budget in actual
dollars.
o Emphasis on System Modernization. To balance the costs of new
initiatives like homeland security with the costs of ongoing
military operations, the Department of Defense is emphasizing
upgrading existing platforms to next generation technologies
rather than procuring completely new systems. For example, rather
than replace an entire generation of aircraft and ships, the U.S.
Air Force and the U.S. Navy have decided to invest in upgrades,
using the latest information technology and weapons systems. To
accomplish this in an environment of military personnel
reductions, the armed services are increasingly dependent on
highly skilled contractors that can provide the full spectrum of
services needed to support modernization activities.
o Continuing Impact of Procurement Reform. Recent changes in
federal procurement regulations have incorporated commercial
buying practices, including preferred supplier relationships in
the form of GWACs, into the government's procurement process.
These changes have produced lower acquisition costs, faster
acquisition cycles, more flexible contract terms, and more stable
supplier/customer relationships. Federal expenditures through
GWACs has grown significantly over the past three years, and the
GSA projects growth in its GWAC and Schedule contracts will
average 14% annually over the next three years.
Our Capabilities and Services
We are a leading provider of information technology solutions to government
clients. We design, integrate, maintain and upgrade state-of-the art information
systems for national defense, intelligence, emergency response and other
critical government missions. As a total solutions provider, we maintain the
comprehensive information technology skills necessary to support the entire
lifecycle of our clients' systems, from conceptual development through
operational support. We provide requirements definition and analysis, process
design or re-engineering, systems engineering and design, networking and
communications design, COTS hardware and software evaluation and procurement,
custom software and middleware development, system integration and testing, and
software maintenance and training services. Depending upon client needs, we may
provide total system solutions employing our full set of skills on a single
project, or we may provide more targeted, or "bundled," services designed to
meet the client's specific requirements. For example, we have built and are now
upgrading the National Emergency Management Information System, or "NEMIS," an
enterprise wide management information system, for the Federal Emergency
Management Agency, or "FEMA." This system has been procured in three phases:
system definition and design, base system development and deployment, and
upgrades to incorporate current web technology.
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We also are a leading provider of systems engineering and integration
services to government clients, primarily within the defense community. We
provide these defense clients with the systems analysis, integration and program
management skills necessary to manage the continuing development of their
mission systems, including ships, aircraft, weapons and communications systems.
As a solutions provider in this market, we also maintain the comprehensive
skills to manage the client's system lifecycle. We provide mission area and
threat analyses, research and development management, systems engineering and
design acquisition management, systems integration and testing, operations
concept planning, systems maintenance and training. For example, we provide
threat analysis, operations concept planning and systems integration and testing
for certain U.S. Navy systems, including the radar, missile and command and
control systems, employed to protect its fleet from ballistic missile attack.
Like information technology solutions, these skills may be procured as a
comprehensive mission solution, or they may be procured as specially prescribed
tasks.
Our Service Competencies and Contract Examples
The key to our success in both our information technology solutions and
systems engineering services businesses is a combination of in-depth customer
and mission knowledge, or domain expertise, and comprehensive technical skills.
We believe this combination provides long-term, sustainable competitive
advantage, performance excellence and customer satisfaction. Accordingly, we
have focused our growth strategy on several business areas where the mix of our
domain expertise and our end-to-end technical skills provides us with a strong
competitive advantage and the opportunity to cross-sell our solutions and
services.
The following paragraphs briefly describe our service competencies in our
information technology and systems engineering and integration services
businesses, and provide examples of selected programs in which we utilize these
competencies.
INFORMATION TECHNOLOGY SOLUTIONS
Intelligence Systems. We have more than eleven years of experience in
designing, developing and operating information systems used for intelligence
missions. These missions focus on data and imagery collection, as well as
information analysis and dissemination of information to the battlefield.
o Linked Operations/Intelligence Centers Europe, or "LOCE." In June
1999, we entered into a three-year, $52 million contract with the
Department of Defense to provide U.S., N.A.T.O., and other allied
military forces with near-real-time, correlated situation and
order of battle information for threat analysis, target
recommendations, indications and warnings. Following a six-month
extension of the initial contract award, in December 2002 we
began a new, one year $49 million contract for continued and
expanded support. LOCE is one of the most widely used command,
control, computers, communication and intelligence, or "C4I,"
systems within the international intelligence community. We
provide systems engineering and technical assistance, software
development, configuration management, operational support and
user training. This program recently has been expanded to include
the deployment of new systems to Central Asia and funding for
government fiscal year 2002 was increased significantly to cover
additional system deployments to the Pacific Rim.
Emergency Response Management. We have unique experience in developing
information technology systems to support emergency response management
requirements. Our expertise includes large-scale system design, development,
testing, implementation, training and operational support.
o National Emergency Management Information System. Since early
1995, we have supported the development of the NEMIS system for
FEMA through a series of contracts and task orders. The NEMIS
program, which is expected to continue at least through December
2003, generated total revenues of approximately $87 million
through December 31, 2002. NEMIS is an enterprise-wide
client/server management information system that connects several
thousand desktop and mobile terminals/handsets, providing FEMA
with a fully mobile, nationwide, rapid response disaster
assessment and mitigation system. We designed, developed,
integrated, tested and implemented the NEMIS system. We continue
to provide enhancements to and are beginning the project to
web-enable the system. Additionally, we believe the NEMIS program
will experience growth as FEMA migrates to the Department of
Homeland Security and its role as first responder to disasters
and terrorist attacks.
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Logistics Modernization. We provide a wide range of logistics management
information technology solutions, including process design and re-engineering,
technology demonstrations, proof-of-concept systems development, new systems
development and existing systems upgrades.
o U.S. Air Force Cargo Movement Operations System, or "CMOS." We
designed and developed this system and have maintained it since
1989. It is used by the Department of Defense Traffic Management
Office to provide in-transit visibility of cargo from the
shipment originator to its final destination. CMOS allows our
client to automate the process of cargo movement throughout
Department of Defense bases worldwide. We continue to design and
develop enhancements to the system to take advantage of new
technology, including web-enablement and electronic data
interchange applications.
o Joint Logistics Warfighting Initiative. In March 2000, we entered
into the Joint Logistics Warfighting Initiative, or "JLWI,"
contract. JLWI is a five-year, $24.5 million Department of
Defense contract focused on facilitating the military's logistics
transformation and improving military readiness through business
process improvements and the insertion of new and emerging
technologies. We are providing process re-engineering, system
design, and data base integration as we conduct a variety of
client directed process and technology experiments and
demonstrations. We have developed a proof-of-concept for web
enabling the military's legacy logistics systems in order to
provide real-time visibility of logistics information on the
battlefield (the JLWI Shared Data Environment). Third party
independent validation and verification of the JLWI Shared Data
Environment reflects that it has already gained significant
support through its use by units in the U.S. and in overseas
locations like Afghanistan and Kuwait.
Government Enterprise Solutions. Our supply chain management, software
engineering and integration experience allows us to develop large-scale
e-commerce applications tailored for the specific needs of the federal
government environment. These applications provide end-users with significantly
decreased transaction costs, increased accuracy, reduced cycle times, item price
savings, real-time order status and visibility of spending patterns.
o U.S. Postal Service E-Buy System. In September 1994, we entered
into a 10-year, $65 million contract to develop and implement an
electronic commerce application to serve an estimated 80,000 to
100,000 Postal Service employees, who purchase a wide range of
products on the U.S. Postal Service intranet site. Pre-negotiated
supplier catalogs are hosted on an intranet for security and
performance. Web-based purchasing provides catalog management
capability, multi-catalog searching, self-service ordering,
workflow and approval processing and other status and receiving
functions. Achieving the U.S. Postal Service's requirement to
serve up to 100,000 employees required the development of a very
robust transaction processing application.
Modeling, Simulation and Training. We provide a comprehensive set of
information technology solutions and services to our clients, including
computer-based training, web-based training, distant learning, interactive
electronic technical manuals, performance support systems and organizational
assessment methods.
o Military Operations on Urban Terrain. We entered into two
contracts with the U.S. Army, the first in July 1997, a $60
million five-year contract, which has been subsequently extended
through December 31, 2003, and the second in May 2000, a $20
million three-year contract, which has also been subsequently
extended through December 31, 2003, to design, integrate and
operate the Simulation Training and Instrumentation Command's
most advanced real life urban battlefield training site at Ft.
Polk, Louisiana. The site allows trainers to continuously
observe, control, monitor and record the conduct of training. The
system captures every second of a training exercise through the
use of nearly 1,000 cameras tied together via a fiber optic
backbone and local area network to the control room. The system
is also designed to control targetry and has the flexibility to
support both simulated fire and live fire exercises. We have
received orders for six fixed sites to be built throughout the
U.S. and in Europe and Korea. In addition, two mobile sites have
been ordered for use in Kuwait and Afghanistan.
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o STRICOM. Since January 2000, we have provided life cycle support
for constructive training at 14 U.S. Army Simulation and Training
Command Simulation centers worldwide. This eight-year contract
has grown from an initial value of $126 million to nearly $350
million, with additional growth anticipated. We have more than
500 personnel supporting this program at more than 50 sites
throughout the United States, Germany, Italy and Korea. We
provide program management and exercise support for
computer-driven and manual battle simulations, including
planning, coordination, personnel support, instructional aid
development, simulation training, database and scenario
development and system integrity. We support a variety of mission
specific simulations using highly qualified professionals,
certified in all aspects of simulation support, in each of the
U.S. Army's Battle Simulation Centers.
Healthcare Services. We deliver information technology solutions in
healthcare programs for the Department of Defense, Army, Navy, Air Force and
Marine Corps. Our support for medical research includes statistical analysis,
data mining of complex medical databases and health surveillance. Our solutions
for patient care include diagnostics, image processing, and medical records
management.
o U.S. Army Medical Department. We provide technical, scientific,
and administrative support to the Office of the Surgeon General,
the U.S. Army Medical Research and Material Command and the U.S.
Army Medical Command and its subordinate activities,
laboratories, and medical facilities. This support, which we
began in 1989 under several contracts, generated revenue of
approximately $14 million in the year ended December 31, 2001 and
approximately $15 million for the year ended December 31, 2002.
We support the research, development, acquisition, and/or
fielding of medical equipment and supplies, drugs, vaccines,
diagnostics, and advanced information technology. We assist with
policy development and implementation, strategic planning,
decision-making, information systems design and development,
information management, studies and analyses, logistics planning
and medical research. These services entered into areas of
homeland security, domestic medical preparedness and Chemical
Biological Radiological Nuclear Defense programs.
SYSTEMS ENGINEERING AND INTEGRATION SERVICES
Platform and Weapons Systems Engineering Support. We have more than 10
years experience in providing critical systems engineering and technology
management services in support of defense platform and weapon systems programs.
Our experience encompasses systems engineering and development, mission and
threat analysis and acquisition management for the majority of U.S. Navy and
U.S. Air Force weapon systems. We provide core systems engineering disciplines
in support of most major surface ship and submarine programs as well as
virtually all Air Force weapon systems.
o Secretary of the Air Force Technical and Analytical Support, or
"SAFTAS." In December 2000, we entered into a 15-year contract
with the U.S. Air Force to provide technical and analytical
support to the Headquarters Air Force and Secretary of the Air
Force organizations. Originally estimated at $544 million, the
contract is now estimated to have a total 15-year value of $640
million. Our support under this contract generated revenue of
approximately $27 million for the year ended December 31, 2001
and approximately $37 million for the year ended December 31,
2002. The contract includes support to the Assistant Secretary of
the Air Force for Acquisition, the Joint Strike Fighter Program
Office, the Under Secretary for Space, and all of the Program
Executive Offices which oversee all aircraft, munitions, space
and Command, Control, Computer, Communications, Intelligence,
Surveillance and Reconnaissance, or "C4ISR", systems. We provide
program, budgetary, policy and legislative analysis, information
technology services, systems engineering and technical management
services for all major Air Force acquisition programs. We believe
that this program, as well as similar programs for the U.S. Navy,
will continue to experience growth as the Department of Defense
plans for billions of dollars of system upgrades over the next
decade.
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Missile Defense. We have more than a decade of experience in missile
defense programs. We provide long-range planning, threat assessment, systems
engineering and integration, acquisition support services and program management
services.
o Theater-Wide Ballistic Missile Defense, or "TBMD." In January
1999, we entered into a five-year, $62 million contract with the
U.S. Navy to provide program management, systems engineering and
technical support to the TBMD program. We provide a broad range
of support to develop, test, evaluate, and produce the Navy's
future ballistic missile defense systems. Due to our Navy
Theater-Wide Missile Defense System experience, we were selected
to provide similar support to the National Missile Defense
program. In June 2001, we entered into a 15-year, $130 million
blanket purchase agreement with the Department of Defense's
Missile Defense Agency to provide concept development, systems
analysis and engineering, program management support, and
acquisition support. We believe this program also will experience
near-term growth as the Department of Defense moves forward to
meet the Bush Administration's mandate for a national missile
defense system.
Our Growth Strategy
Our objective is to continue to profitably grow our business as a premier
provider of comprehensive technology solutions and services to the federal
government market. Our strategy to achieve this objective includes the
following.
o Continue to Increase Market Penetration. In the past 10 years,
the federal government's shift towards using significantly
larger, more comprehensive contracts, such as GWACs, has favored
companies with a broad range of technical capabilities and proven
track records. As a prime contractor on three of the four largest
GWACs for information technology services based on overall
contract ceiling value, we have benefited from these changes. We
will continue to expand our role with current customers on
existing programs while also pursuing new opportunities only
available through these larger contracts.
o Capitalize on Increased Emphasis on Information Security,
Homeland Security and Intelligence. The Department of Defense
budget includes a 12% increase in projected spending for
government fiscal year 2003. The President's proposed Department
of Defense budget for the government's fiscal year 2004
represents a 4% increase over the government's fiscal year 2003
budget. We believe that many of the key operational goals of the
Administration correlate with our expertise, including developing
a national missile defense system, increasing homeland security,
protecting information systems from attack, conducting effective
intelligence operations and training for new approaches to
warfare through simulation.
o Cross-Sell our Full Range of Services to Existing Customers. We
plan to continue expanding the scope of existing customer
relationships by marketing and delivering the full range of our
capabilities to each customer. Having developed a high level of
customer satisfaction and critical domain knowledge as the
incumbent on many long-term contracts, we have a unique advantage
and opportunity to cross-sell our services and capture additional
contract opportunities. For example, the strong performance
record and detailed understanding of customer requirements we
developed on the U.S. Air Force Cargo Movement Operations System
led directly to our being awarded a contract for the Joint
Logistics Warfighting Initiative. We believe the ability to
deliver a broad range of technology services and solutions is an
essential element of our success.
o Continue our Disciplined Acquisition Strategy. We employ a
disciplined methodology to evaluate and select acquisition
candidates. We have completed and successfully integrated five
strategic acquisitions since 1997. Our industry remains highly
fragmented and we believe the changing government procurement
environment will continue to provide additional opportunities for
industry consolidation. We will continue to selectively review
acquisition candidates with complementary skills or market focus.
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History and Organization
In April 1996, we acquired all of the outstanding capital stock of our
predecessor corporation, Anteon International Corporation (then known as Ogden
Professional Services Corporation), a Virginia corporation, which we refer to in
this filing as "Anteon Virginia." In connection with the acquisition we changed
the name of Anteon Virginia to Anteon Corporation. Anteon Virginia then acquired
several companies and businesses, including Techmatics, Inc. On January 1, 2001,
Anteon Virginia was renamed Anteon International Corporation and transferred
most of its operations into Techmatics, which became its principal operating
subsidiary, and was in turn renamed Anteon Corporation. As a result, we then
owned approximately 99% of Anteon Virginia and Anteon Virginia owned 100% of
Anteon Corporation (formerly Techmatics).
On March 15, 2002, we entered into certain reorganization transactions in
connection with our initial public offering, including the merger of Anteon
Virginia into us, as more fully described in "Certain
Relationships--Reorganization Transactions." Following the merger, the name
"Anteon International Corporation" is borne solely by a single Delaware
corporation, which is the direct 100% parent company of Anteon Corporation
(formerly Techmatics). For a diagram illustrating these transactions, please see
"Certain Relationships-Reorganization Transactions."
Acquisitions
We employ a highly disciplined methodology to evaluate acquisitions. Since
1997 we have evaluated over 200 targets and have successfully completed and
integrated five strategic acquisitions. Each of these acquired businesses has
been accretive to earnings, exceeded our synergy expectations, added to our
technical capabilities and expanded our customer reach. The acquired businesses
and their roles within our service offerings are summarized in the table below.
<TABLE>
<CAPTION>
Revenues prior to
Year Target Business Description acquisition(1)
($ in millions)
<C> <C>
1997 Vector Data Intelligence collection, exploitation, and dissemination systems $ 35.6
1998 Techmatics Surface ship and combat systems and ballistic missile defense 56.7
program management
1999 Analysis & Undersea ship and combat systems, acoustical signal processing, 170.4
Technology modeling and simulation, information technology systems and
software design
2000 Sherikon Military healthcare services systems, networking and 62.7
communications systems
2001 SIGCOM Training Training simulation systems and services 12.5
- ------------------------------------
(1) Consolidated revenue of target for its most recently completed fiscal year
ended prior to the acquisition date.
</TABLE>
In August 1997, we purchased Vector Data Systems, Inc., a supplier of
specialized information systems and services for the collection, analysis and
distribution of military intelligence data. In May 1998, we acquired Techmatics,
Inc., an established provider of systems engineering and program management
services for large-scale military system development, including the Navy's
surface ship fleet, on-ship combat systems and missile defense programs. With
the acquisition of Analysis & Technology, Inc. in June 1999, we expanded our
customer base for systems engineering and program management services to the
Navy's undersea systems and added important technical expertise in
computer-based training, modeling, simulation and advanced signal processing. In
October 2000, we purchased Sherikon, Inc., extending the reach of our
information technology solutions to military healthcare delivery system. In July
2001 we acquired the training division of SIGCOM, Inc. and increased the range
of our information technology-enabled training solutions to include the
realistic simulation of urban environments for the planning and preparation of
overseas military operations.
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Existing Contract Profiles
We currently have a portfolio of more than 450 active contracts. Our
contract mix for the year ended December 31, 2002 was 35% cost-plus contracts,
37% time and materials contracts and 28% fixed price contracts (a substantial
majority of which were firm fixed price level of effort). Cost-plus contracts
provide for reimbursement of allowable costs and the payment of a fee, which is
the contractor's profit. Cost-plus fixed fee contracts specify the contract fee
in dollars or as a percentage of allowable costs. Cost-plus incentive fee and
cost-plus award fee contracts provide for increases or decreases in the contract
fee, within specified limits, based upon actual results as compared to
contractual targets for factors such as cost, quality, schedule and performance.
Under a time and materials contract, the contractor is paid a fixed hourly rate
for each direct labor hour expended and is reimbursed for direct costs. To the
extent that actual labor hour costs vary significantly from the negotiated rates
under a time and materials contract, we may generate more or less than the
targeted amount of profit. Under a fixed price contract, the contractor agrees
to perform the specified work for a firm fixed price. To the extent that actual
costs vary from the price negotiated we may generate more or less than the
targeted amount of profit or even incur a loss. In addition, we generally do not
pursue fixed price software development work that may create material financial
risk. We do, however, execute some fixed price labor hour and fixed price level
of effort contracts which represent similar levels of risk as time and materials
contracts. Fixed price percentages in the table below include predominantly
fixed price labor hour and fixed price level of effort contracts. Our historical
contract mix is summarized in the table below.
<TABLE>
<CAPTION>
Contract Mix
Year End
Contract Type 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
Cost-Plus................................. 34% 37% 41% 37% 35%
Time and Materials........................ 47% 38% 31% 34% 37%
Fixed Price............................... 19% 25% 28% 29% 28%
</TABLE>
Our contract mix changes from year to year depending on the contract mix of
companies we acquire, as well as our efforts to obtain more time and materials
and fixed price work.
In addition to a wide range of single award contracts with defense, civil,
state and local government customers, we also hold a number of multiple award
omnibus contracts and GWACs that currently support more than 3,000 separate task
orders. The broad distribution of contract work is demonstrated by the fact that
no single award contract or task order accounted for more than 5.5% of our total
2002 revenue.
Government Wide Acquisition Contracts. We are a leading supplier of
information technology services under GWACs, and a prime contractor for three of
the four largest GWACs for information technology services as measured by
overall contract ceiling value. These contract vehicles are available to any
government customer and provide a faster, more-effective means of procuring
contract services. For example, in December 1998, we were awarded ANSWER, a 10
year multiple award contract with the GSA to provide highly technical
information technology and systems engineering program support and
infrastructure management. We have been awarded over 365 task orders to date,
with an annualized revenue run rate as of the fourth quarter of fiscal 2002 of
approximately $118 million. We are the number one contractor among the 10 ANSWER
prime contractors in terms of revenue. Our total estimated contract value for
this contract is $1 billion over ten years. Listed below are the four largest
GWACs.
<TABLE>
<CAPTION>
Owning Period of Contract Ceiling
Contract Name Agency Performance Value Role
<S> <C> <C> <C>
ANSWER GSA 1998 - 2008 $25 billion Prime
Millenia GSA 1999 - 2009 $25 billion Subcontractor
Millenia Lite GSA 2000 - 2010 $20 billion Prime
CIO-SP II NIH 2000 - 2010 $20 billion Prime
18
<PAGE>
</TABLE>
Listed below are our top programs by 2002 revenue, including single award
and multiple award contracts. We are a prime contractor on each of these
programs.
<TABLE>
<CAPTION>
Top Programs by 2002 Revenue
($ in millions)
Estimated
Remaining Contract Contract
Contract Customer Period of Performance 2002 Revenue Value Type
<S> <C> <C> <C>
ANSWER GSA 1/1/99-12/31/08 $ 118.4 $ 758.0 T&M/FFP
GSA SCHEDULE & BPAs GSA 10/30/96-10/09/07 99.0 497.8 T&M/FFP
BICES Umbrella Department of Defense 6/01/99-5/31/03 38.8 13.1 CP
SAFTAS U.S. Air Force 1/01/01-12/31/16 37.4 478.9 CP
GSA-PES GSA 5/01/00-2/08/06 36.9 14.6 T&M/FFP
Carrier BPA U.S. Navy 3/10/97-12/31/03 26.3 23.4 FFP
MOUT-IS Army/STRICOM/Training 7/03/97-6/30/02 16.0 5.2 FFP
HM&E Combat Support U.S. Navy 12/15/97-6/30/03 15.4 4.9 CP
GSA PES Contract GSA 1/06/00-1/05/05 13.4 249.0 T&M/FFP
GSA IT TDPI BPA Department of Treasury
------------------------------
8/27/97-10/10/02 11.6 59.2 T&M/FFP
</TABLE>
Subcontractors
In fulfilling our contract obligations to customers, we may utilize the
services of one or more subcontractors. The use of subcontractors to support
bidding for and the subsequent performance of awarded contacts is a customary
aspect of federal government contracting. Subcontractors may be tasked by us
with performing work elements of the contract similar to or different from those
performed by us or other subcontractors. We estimate that approximately 24.6% of
our total direct costs result from work performed by subcontractors. As
discussed further in "Risk Factors," if our subcontractors fail to satisfy their
contractual obligations, our prime contract performance could be materially and
adversely affected.
Estimated Contract Value and New Business Development
On December 31, 2002, our total estimated contract value was $4.3 billion,
of which $418 million was funded backlog. In determining estimated contract
value, we do not include any provision for an increased level of work likely to
be awarded under our GWACs. Estimated contract value is calculated as current
revenue run rate over the remaining term of the contract. Our estimated contract
value consists of funded backlog which is based upon amounts actually
appropriated by a customer for payment of goods and services and unfunded
contract value which is based upon management's estimate of the future potential
of our existing contracts to generate revenues for us. These estimates are based
on our experience under such contracts and similar contracts, and we believe
such estimates to be reasonable. However, there can be no assurance that the
unfunded contract value will be realized as contract revenue or earnings. In
addition, almost all of the contracts included in estimated contract value are
subject to termination at the election of the customer.
19
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED CONTRACT VALUE
Unfunded Contract Total Estimated
As of December 31, Funded Backlog Value Contract Value
(in millions)
<C> <C> <C> <C>
2002 $ 418 $ 3,868 $ 4,286
2001 309 3,217 3,526
2000 308 2,560 2,868
1999 195 1,925 2,121
1998 128 438 566
1997 100 242 342
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
From December 31, 2000 to December 31, 2002, our estimated contract value
increased at a 49.4% cumulative annual growth rate. We believe this growth
demonstrates the effectiveness of our two-tiered business development process
that management has developed to respond to the strategic and tactical
opportunities arising from the evolving government procurement environment. New
task order contract vehicles and major high-profile programs are designated
strategic opportunities, and their pursuit and execution are managed centrally.
A core team comprised of senior management and our strategic business unit heads
makes all opportunity selection and resource allocation decisions. Work that can
be performed under our many existing task order contract vehicles is designated
a tactical opportunity, which is then managed and performed at the business unit
level with support as needed from other company resources. All managers and
senior technical personnel are encouraged to source new work, and incentives are
weighted to ensure corporate objectives are given primary consideration.
Customers
We provide information technology and systems engineering solutions to a
highly diverse group of federal, state, local and international government
organizations worldwide. Domestically, we service more than 60 agencies, bureaus
and divisions of the U.S. federal government, including nearly all cabinet-level
agencies and all branches of the military. For the twelve months ended December
31, 2002, the federal government accounted for approximately 96% of our total
revenues. International and state and local governments provided the remaining
4%. Our largest customer group is the U.S. Navy, which management believes
accounted for approximately 40% of revenues during the twelve months ended
December 31, 2002, through 30 different Navy organizations.
An account receivable from a federal government agency enjoys the overall
credit worthiness of the federal government, even though each such agency has
its own budget. Pursuant to the Prompt Payment Act, payments from government
agencies must be made within 30 days of final invoice or interest must be paid.
Competition
The federal information technology and systems engineering services
industries are comprised of a large number of enterprises ranging from small,
niche-oriented companies to multi-billion dollar corporations with a major
presence throughout the federal government. Because of the diverse requirements
of federal government clients and the highly competitive nature of large federal
contracting initiatives, corporations frequently form teams to pursue contract
opportunities. Prime contractors leading large proposal efforts select team
members on the basis of their relevant capabilities and experience particular to
each opportunity. As a result of these circumstances, companies that are
competitors for one opportunity may be team members for another opportunity.
20
<PAGE>
We frequently compete against well-known firms in our industry as a prime
contractor. Obtaining a position as either a prime contractor or subcontractor
on government-wide contracting vehicles is only the first step to ensuring a
secure competitive position. Competition then takes place at the task order
level, where knowledge of the client and its procurement requirements and
environment are key to winning the business. We have been successful in ensuring
our presence on GWACs and GSA Schedule contracts, and in competing for work
under those contracts. Through the variety of contractual vehicles at our
disposal, as either a prime contractor or subcontractor, we have the ability to
market our services to any federal agency. Because of our extensive experience
in providing services to a diverse array of federal departments and agencies, we
have first-hand knowledge of our clients and their goals, problems and
challenges. We believe this knowledge gives us a competitive advantage in
competing for tasks and positions us well for future growth.
Employees
As of December 31, 2002, we employed approximately 5,800 employees, 85% of
whom were billable and 82% of whom held security clearances. Our workforce is
well educated and experienced in the defense and intelligence sectors.
Functional areas of expertise include systems engineering, computer science,
business process reengineering, logistics, transportation, materials
technologies, avionics and finance and acquisition management. Nearly half of
our employees provide services in such areas as systems engineering, software
engineering, network/communications engineering, and program/project management.
None of our employees is represented by collective bargaining agreements.
Available Information
Our internet address is www.anteon.com. We make available free of charge
through our internet site, via a hyperlink to the 10KWizard.com web site, our
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form 8-K; and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, or the "Exchange Act," as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC.
Item 2. Properties
Our headquarters are located in leased facilities in Fairfax, Virginia. In
total, we lease approximately 1.2 million square feet of office, shop and
warehouse space in over 90 facilities across the United States, Canada, United
Kingdom and Australia. We own an office building in North Stonington,
Connecticut, which occupies 63,578 square feet of office space and which is
currently being held for sale.
Item 3. Legal Proceedings
We are involved in various legal proceedings in the ordinary course of
business. On March 8, 2002, we received a letter from one of our principal
competitors, which is the parent company of one of our subcontractors, claiming
that we had repudiated our obligation under a subcontract with the
subcontractor. The letter also alleged that we were soliciting employees of the
subcontractor in violation of the subcontract and stated that the subcontractor
would seek arbitration, injunctive relief and other available remedies. The
subcontractor filed a demand for arbitration to which we filed an answer and
counter demand.
The arbitration hearing concluded on September 16, 2002. On December 18,
2002, the arbitrator issued a decision requiring us to continue to issue task
orders to the subcontractor under the subcontract for so long as our customer
continues to issue task orders to us for these services and enjoining us from
interviewing, offering employment to, hiring or otherwise soliciting employees
of the subcontractor who work on this particular project. The arbitrator's
decision also denied the subcontractor's claim for monetary damages and our
counter-demand. We subsequently filed an action to vacate or modify that portion
of the arbitrator's decision enjoining us from hiring certain subcontractor
employees under any circumstances, since the prohibition conflicts with the
parties' contractual obligations as provided in the non-solicitation clause of
the parties' subcontract, and imposes additional obligations solely on us and to
which the parties never agreed. The subcontractor has filed an action to confirm
the arbitration award. On February 21, 2003, the court heard oral argument on
the parties' respective motions and a decision is pending.
21
<PAGE>
We cannot predict the ultimate outcome of these matters, but do not believe
that they will have a material impact on our financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2002, through the solicitation of
proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been publicly traded on the New York Stock Exchange,
or the "NYSE," since March 11, 2002.
The following table sets forth the high and low sale price per share of our
common stock during the twelve months ended December 31, 2002 as reported by the
NYSE.
2002
Quarter Ended High Low
--------------------- ---------- ------------
March 31 * $ 21.85 $ 19.25
June 30 $ 26.75 $ 20.10
September 30 $ 28.26 $ 18.90
December 31 $ 29.35 $ 19.40
*Trading commenced on March 11, 2002
We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
future earnings, if any, will be used in the operation and expansion of our
business, for working capital, and other general corporate purposes. Our board
will determine whether to pay dividends in the future based on conditions then
existing, including our earnings, financial condition and capital requirements,
as well as economic and other conditions as the board may deem relevant. In
addition, our ability to declare and pay dividends on our common stock is
restricted by the provisions of Delaware law and covenants in our Credit
Facility and the indenture governing our 12% Notes.
As of February 25, 2003, the number of stockholders of record of our common
stock was approximately 96.
Recent Sales of Unregistered Securities
Below is a summary of transactions by us during 2002 involving sales of our
securities that were not registered under the Securities Act.
a) Between January 1, 2002 and February 1, 2002, Anteon Virginia
issued 71,840 shares of common stock upon the exercise of options
to some of its then current and former employees at a weighted
average exercise price of $5.7193 per share. This share and price
data does not give effect to the 2,449.95-1 split of our
outstanding common stock effected on February 19, 2002.
b) On February 19, 2002, we issued approximately 23,786,565 shares
of common stock to our existing stockholders upon the split of
9,709 outstanding shares, on the basis of 2,449.95 shares for
each outstanding share.
c) Prior to the consummation of our initial public offering on March
15, 2002, we issued 174,152 shares of common stock to some of the
selling stockholders in that offering upon the exercise of
outstanding stock options at a weighted average exercise price of
$1.38 per share.
22
<PAGE>
d) Immediately prior to the consummation of our initial public
offering, we issued approximately 28,595,917 shares of common
stock and 28,595,917 rights to purchase shares of our Series A
Preferred Stock in connection with the merger of Anteon Virginia
with and into us.
The issuances listed above were exempt from registration under Section 4(2)
or Rule 701 of the Securities Act as transactions by an issuer not involving a
public offering, or because such issuances did not represent sales of
securities.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
<TABLE>
<CAPTION>
(a) (b) (c)
Number
of
securities
Number of securities remaining available for
to be issued upon Weighted-average exercise future issuance under equity
exercise of price of outstanding compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
<S> <C> <C> <C> <C>
Equity compensation plans
approved by security holders 4,123,208 $ 8.98 801,040
Equity compensation plans not
approved by security holders -- -- --
Total 4,123,208 $ 8.98 801,040
===================================================================================================================
</TABLE>
Use of Proceeds
We consummated an initial public offering of our common shares, or "IPO,"
on March 15, 2002. The use of proceeds from our IPO is described in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the notes to our consolidated financial statements appearing
elsewhere in this filing.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below have been derived
from our audited consolidated financial statements as of and for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998. These results are not necessarily
indicative of the results that may be expected for any future period and are not
comparable between prior periods as a result of business acquisitions
consummated in 1998, 1999, 2000 and 2001. Results of operations of these
acquired businesses are included in our consolidated financial statements for
the periods subsequent to the respective dates of acquisition.
You should read the selected consolidated financial data presented below in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 1. "Business" and our financial
statements and the related notes thereto appearing elsewhere in this filing.
23
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share data and percentage)
Statements of operations data:
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 249,776 $ 400,850 $ 542,807 $ 715,023 $ 825,826
Costs of revenues............................... 21,588 353,245 474,924 627,342 711,328
-------------- -------------- ------------ ------------- -------------
Gross profit.................................... 28,188 47,605 67,883 87,681 114,498
General and administrative expenses,
including acquisition related costs........... 15,401 27,926 28,592 51,442 48,197
Amortization of non-compete agreements.......... 530 909 866 349 --
Goodwill amortization........................... 1,814 3,440 4,714 6,704 1,907
Other intangibles amortization.................. -- -- 2,673 2,321 --
Operating income ............................... 10,443 15,330 21,038 26,865 64,394
Other Income.................................... -- -- -- -- 417
Gains on sales and closures of business......... -- -- -- 4,046 --
Gains on sales of investments and other,
net........................................... -- 2,585 -- -- --
Interest expense, net of interest
income........................................ 6,893 18,230 26,513 26,872 17,394
Minority interest in (earnings) losses of
subsidiaries.................................. (26) (39) 32 (38) (18)
-------------- -------------- ------------ ------------- -------------
Income (loss) before provision for (benefit
from) income taxes and extraordinary
loss.......................................... 3,524 (354) (5,443) 4,001 47,399
Provision for (benefit from) income
taxes......................................... 1,852 710 (153) 4,413 18,374
-------------- -------------- ------------ ------------- -------------
Income (loss) before extraordinary gain
(loss).................................... 1,672 (1,064) (5,290) (412) 29,025
Extraordinary gain (loss), net of.......... -- (463) -- 330 (2,581)
-------------- -------------- ------------ ------------- -------------
Net income (loss).......................... $ 1,672 $ (1,527) $ (5,290) $ (82) $ 26,444
============== ============== ============ ============= =============
Basic earnings (loss) per common share:
Income (loss) before extraordinary
gain (loss).............................. $ 0.07 $ (0.04) $ (0.22) $ (0.02) $ 0.90
Extraordinary gain (loss), net of
tax.............. -- (0.02) -- 0.01 (0.08)
-------------- --------------- ------------ ------------- -------------
Net income (loss).......................... $ 0.07 $ (0.06) $ (0.22) $ ( 0.01) $ 0.82
============== ============== ============ ============= ============
Weighted average shares outstanding....... 23,591 23,785 23,787 23,787 32,163
Diluted earnings (loss) per common share:
Income (loss) before extraordinary
gain (loss).............................. $ 0.07 $ (0.04) $ (0.22) $ (0.02) $ 0.85
Extraordinary gain (loss), net of -- (0.02) -- 0.01 (0.07)
tax.............. -------------- -------------- ------------ ------------- -------------
Net income (loss).......................... $ 0.07 $ (0.06) $ (0.22) $ (0.01) $ 0.78
============== ============== ============ ============= =============
Weighted average shares outstanding........ 23,591 23,785 23,787 23,787 34,022
Other data:
EBITDA (a)..................................... $ 15,869 $ 25,978 $ 36,349 47,357 $ 70,994
EBITDA margin (b)............................. 6.4% 6.5% 6.7% 6.6% 8.6%
Cash flow from (used in) operating
activities.......... $ (8,503) $ 11,767 $ 17,101 37,879 $ 1,278
Cash flow from (used in) investing
activities.......... (35,388) (111,672) (28,912) (1,707) (1,423)
Cash flow from (used in) financing 43,396 100,957 12,036 (35,676) 2,481
activities..........
Capital expenditures............................ 2,089 4,761 6,584 2,181 3,225
Balance sheet data (as of December 31):
Current assets.................................. 73,557 $ 118,583 $ 148,420 144,418 208,396
Working capital................................. 33,857 48,818 56,841 27,559 80,390
Total assets.................................... 136,544 278,691 324,423 306,651 364,692
Long-term debt, including current
portion............. 90,851 212,301 237,695 202,905 105,701
Net debt (c).................................... 84,721 211,092 236,261 200,975 101,435
Stockholders' equity (deficit).................. 5,603 3,672 (1,576) (3,442) 128,829
</TABLE>
24
<PAGE>
(a) "EBITDA", as defined, represents income before income taxes, plus
depreciation, amortization and net interest expense. EBITDA is a
supplemental financial measure but should not be construed as an
alternative to operating income or cash flows from operating
activities (as determined in accordance with accounting principles
generally accepted in the United States of America, "GAAP"). We
believe that EBITDA is a useful supplement to net income and other
income statement data because it is used by some investors in
understanding and measuring a company's cash flows generated from
operations that are available for taxes, debt service and capital
expenditures. However, all companies do not calculate EBITDA in the
same manner, and as a result, the EBITDA measures presented may not be
comparable to similarly titled measures of other companies. The
computations of EBITDA are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in thousands)
Income (loss) before provision for (benefit
from) income taxes and extraordinary gain
<S> <C> <C> <C> <C> <C>
(loss).............................................. $ 3,524 $ (354) $ (5,443) $ 4,001 $ 47,399
Interest expense.................................... 6,893 18,230 26,513 26,872 17,394
Depreciation and amortization....................... 5,452 8,102 15,279 16,484 6,201
---------- ----------- ---------- ----------- ----------
EBITDA.............................................. $ 15,869 $ 25,978 $ 36,349 $ 47,357 $ 70,994
========== =========== ========== =========== ==========
Income (loss) before extraordinary gain
(loss) margin 0.7% (0.3%) (1.0%) (0.1%) 3.5%
EBITDA margin (b) 6.4% 6.5% 6.7% 6.6% 8.6%
</TABLE>
(b) EBITDA margin represents EBITDA calculated as a percentage
of total revenues.
(c) Net debt represents total indebtedness less cash and
investments in marketable securities.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with Item 6.
"Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this filing. Some of the statements in
the following discussion are forward-looking statements. See "Forward-Looking
Statements."
General
We provide information technology solutions and systems engineering and
integration services to government clients. We design, integrate, maintain and
upgrade state-of-the-art information systems for national defense, intelligence,
emergency response and other high priority government missions. We also provide
many of our government clients with the systems analysis, integration and
program management skills necessary to manage their mission systems development
and operations.
We currently serve over 800 U.S federal government clients, as well as
state and foreign governments. For the year ended December 31, 2002, we estimate
that approximately 90% of our revenue was from contracts where we were the lead,
or "prime," contractor. We provide our services under long-term contracts that
have a weighted average term of eight years. We have obtained ISO 9001
registration for our quality management systems at key facilities and have
achieved Software Engineering Institute (SEI) Level 3 certification for our
software development facility's processes. Our contract base is well diversified
among government agencies. No single award contract or task order accounted for
more than 5.5% of revenues for the year ended December 31, 2002.
Description of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
uncollected accounts receivable and other contingent liabilities, revenue
recognition and goodwill and other intangible assets. Management bases its
estimates on historical experience and on various other factors that are
believed to be reasonable at the time the estimates are made. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes that our critical accounting policies which require more
significant judgments and estimates in the preparation of our consolidated
financial statements are revenue recognition, costs of revenues, goodwill
impairment, long-lived assets and identifiable intangible asset impairment and
business combinations.
Revenue Recognition
During the twelve months ended December 31, 2002, we estimate that
approximately 98% of our revenues were derived from services and approximately
2% from product sales. Services are performed under contracts that may be
categorized into three primary types: time and materials, cost-plus
reimbursement and firm fixed price. Revenue for time and materials contracts is
recognized as time is spent at hourly rates, which are negotiated with the
customer. Time and materials contracts are typically more profitable than
cost-plus contracts because of our ability to negotiate rates and manage costs
on those contracts. Revenue is recognized under cost-plus contracts on the basis
of direct and indirect costs incurred plus a negotiated profit calculated as a
percentage of costs or as performance-based award fee. Cost-plus type contracts
provide relatively less risk than other contract types because we are reimbursed
for all direct costs and certain indirect costs, such as overhead and general
and administrative expenses, and are paid a fee for work performed. For
cost-plus award fee type contracts, we recognize the expected fee to be awarded
by the customer at the time such fee can be reasonably estimated, based on
factors such as our prior award experience and communications with the customer
regarding our performance, including any interim performance evaluations
rendered by the customer. Revenues are recognized under substantially all fixed
price contracts based on the percentage-of-completion basis, using the
cost-to-cost method for all services provided. For non-service related fixed
price contracts, revenues are recognized as units are delivered (the
units-of-delivery method).
26
<PAGE>
We recognize revenues under our federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
federal government are subject to periodic funding by the respective contracting
agency. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are
provided. From time to time we may proceed with work based on customer direction
pending finalization and signing of contractual funding documents. We have an
internal process for approving any such work. All revenue recognition is
deferred during periods in which funding is not received. Costs incurred during
such periods are deferred if the receipt of funding is assessed as probable. In
evaluating the probability of funding being received, we consider our previous
experiences with the customer, communications with the customer regarding
funding status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed as they are
incurred.
We recognize revenues under our federal government contracts based on
allowable contract costs, as mandated by the federal government's cost
accounting standards. The costs we incur under federal government contracts are
subject to regulation and audit by certain agencies of the federal government.
Contract cost disallowances resulting from government audits have not
historically been significant. We may be exposed to variations in profitability,
including potential losses, if we encounter variances from estimated fees earned
under award fee contracts and estimated costs under fixed price contracts.
We generally do not pursue fixed price software development work that may
create material financial risk. We do, however, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 37% time and materials, 35% cost-plus and 28% fixed price (a
substantial majority of which are firm fixed price level of effort)