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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001163842-05-000023.txt : 20050310
<SEC-HEADER>0001163842-05-000023.hdr.sgml : 20050310
<ACCEPTANCE-DATETIME>20050310165616
ACCESSION NUMBER: 0001163842-05-000023
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20041231
FILED AS OF DATE: 20050310
DATE AS OF CHANGE: 20050310
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: 05672982
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>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>anteon10k.txt
<DESCRIPTION>ANTEON 2004 ANNUAL REPORT
<TEXT>
UNITED STATES
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, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
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 |X| No | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2004 was $895,852,976 (based on the closing price
of $32.62 per share on June 30, 2004, 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 36,279,355 shares of common stock outstanding as of March 2,
2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2005 Annual Meeting of
Shareholders Part III
<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. Forward-looking statements relate to future events or our future financial
performance. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
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 remaining contract value;
o our expectations regarding the U.S. 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 U.S. federal government procurement laws, regulations,
policies and budgets;
o the number and type of contracts and task orders awarded to us;
o the integration of acquisitions without disruption to our other
business activities;
o changes in general economic and business conditions;
o technological changes;
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
U.S. 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 and subcontracts under U.S. federal government prime
contracts, and we believe that the success and development of our business will
continue to depend on our successful participation in U.S. federal government
programs. Accordingly, changes in U.S. federal government contracting policies
could directly affect our financial performance. Among the factors that could
materially adversely affect our U.S. federal government contracting business
are:
o budgetary constraints affecting U.S. federal government spending
generally, or specific departments or agencies in particular, and
changes in fiscal policies or available funding;
o changes in U.S. federal government programs or requirements;
o curtailment of the U.S. federal government's use of technology
services firms;
o the adoption of new laws or regulations;
o technological developments;
o U.S. 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 U.S. 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
U.S. federal government customers are subject to stringent budgetary
constraints. We have substantial contracts in place with many U.S. 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.
Early Termination of Contracts-- Our U.S. 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 U.S. 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. U.S. federal government agencies
generally have the right not to exercise these option periods. In addition, our
contracts typically also contain provisions permitting a government customer 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.
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 U.S. federal government contract awards are subject to protest by
competitors. If specified legal requirements are satisfied, these protests
require the U.S. 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 U.S. 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 U.S. 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 U.S. federal
government: time and materials, cost-plus, and fixed price. For the year ended
December 31, 2004, approximately 39% were time and materials, 34% of our U.S.
federal contracts were cost-plus, and 27% were fixed price (a substantial
majority of which were fixed price level of effort contracts, which have lower
risk than other types of fixed price contracts). 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
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 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 Multiple Award Indefinite Delivery/Indefinite Quantity Contracts,
GSA Schedule contracts and GWACs--Many of our U.S. federal government
customers spend their procurement budgets through multiple award
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 multiple award 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 U.S. 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 certain
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 export 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 U.S. federal agencies that are designed to safeguard against unauthorized
persons', including foreigners', access to classified information. If we were to
come under foreign ownership, control or influence, our U.S. federal government
customers could terminate or decide not to renew our contracts, which 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 U.S. federal
government.
Risks Relating to Reductions or Changes in Military and Department of
Defense-related Intelligence Agency 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 sales
under subcontracts having the Department of Defense as the ultimate purchaser,
represented approximately 89% and 88% of our sales for the year ended December
31, 2004 and for the year ended December 31, 2003, 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 currently provide limited or no services. A change in
the U.S. Presidential Administration or in the composition of Congress could
also materially affect levels of support for military expenditures. 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
remaining contract value will result in actual revenues in any particular
fiscal period or that the actual revenues from such contracts will equal
our estimated remaining contract value.
There can be no assurance that any contracts included in our estimated
remaining 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 remaining contract value. Further, there can be no assurance
that any contract included in our estimated remaining contract value that
generates revenue will be profitable. Our estimated remaining 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 remaining contract value will be recognized as
revenue.
In addition, the U.S. 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 U.S. 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 U.S. federal government's discretion. In
addition, funding for orders from the U.S. 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. Further, there is a risk that a
subcontractor's technology solution on which certain of our contracts and task
orders are dependent could become obsolete or fall out of favor with customers.
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 customers 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
customers' needs and constrain our future growth. In addition, we must often
comply with provisions in U.S. 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 customer 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 customers 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 customers.
Customer Expectations--We could lose revenues and customers and expose our
company to liability if we fail to meet customer expectations.
We create, implement and maintain technology solutions that are often
critical to our customers' operations. If our technology solutions or other
applications have significant defects or errors or fail to meet our customers'
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 customers; and
o suffer claims for substantial damages against us, regardless of our
responsibility for the failure.
6
<PAGE>
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
customers, 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 integrated eight strategic acquisitions since 1997.
The U.S. 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 include the coordination of geographically
dispersed organizations, the integration of personnel with disparate business
backgrounds and the reconciliation of different corporate cultures. In addition,
in certain acquisitions, U.S. 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 of our acquisitions, 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 U.S.
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.
7
<PAGE>
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 U.S. 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 U.S. federal government, as
well as the imposition of fines and penalties, which would cause material harm
to our business.
Risks Associated with International Operations--Our international business
exposes us to additional risks including legal regulations and social,
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 compliance with the 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 or other hostile situations in foreign countries;
o fluctuation in currency conversion to the U.S. dollar;
o imposition or increase of investment and other restrictions or
requirements by foreign governments; and
o compliance with 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, 2004, our debt which includes capital lease obligations
was $185.0 million. 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 Over time, 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.
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 our Amended and Restated Credit Agreement, as amended, or
"Credit Facility," limit, but do not prohibit us or our subsidiaries from doing
so. As of December 31, 2004, our Credit Facility would have permitted additional
borrowings of up to $292.1 million. If new debt is added by us or our
subsidiaries, the related risks that we and they now face could increase.
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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 U.S. federal government spending, and
changes in fiscal policies or available funding;
o U.S. 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 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 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.
Our Credit Facility imposes significant operating and financial
restrictions on us and our subsidiaries and requires 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, loans and advances;
o making capital expenditures;
o creating liens on our assets;
o issuing or selling capital stock of our subsidiaries;
o transforming or selling assets currently held by us, including sale
and lease-back transactions;
o modifying certain agreements, including those related to indebtedness;
o engaging in transactions with affiliates; and
o engaging in mergers, consolidations or acquisitions.
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The failure to comply with any of these covenants would cause a default
under 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 customers 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 customers
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations. We have broad
service competencies that include strengths in intelligence systems, emergency
response management, logistics modernization, secure identification and access
management solutions, training, platform and weapons systems engineering
support, ballistic missile defense, healthcare services and government
enterprise solutions.
We currently serve over 1,000 U.S. federal government customers in more
than 50 government agencies, as well as state and foreign governments. For the
year ended December 31, 2004, approximately 89% of our revenues were derived
from the Department of Defense, or "DOD," and DOD-related intelligence agencies,
and approximately 10% from civilian agencies of the U.S. federal government, of
which approximately 37% is derived from the Department of Homeland Security, or
"DHS". For the year ended December 31, 2004, approximately 88% of our revenues
were 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 6 years, assuming the exercise of all potential contract
options. Additionally, we had contracts with an estimated remaining contract
value of $6.3 billion as of December 31, 2004, of which approximately $830.9
million is funded backlog.
From January 1996 to December 31, 2004, we increased revenues from $141.8
million to $1.268 billion, at a compound annual growth rate of approximately
32%. Our revenues grew organically by 14.2% from 2003 to 2004 and 16.2% from
2002 to 2003. We define organic growth as the increase in revenues excluding the
revenues associated with acquisitions, divestitures and closures of businesses
in comparable periods.
The U.S. 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. It
is anticipated that technology services spending will grow 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 $400.1 billion in government
fiscal year 2005, a 6.5% increase over government fiscal year 2004. The
President's proposed budget for government fiscal year 2006 includes defense
spending of $419.3 million, a 4.8% increase over government fiscal year 2005, if
adopted, would be the largest Department of Defense budget in history in actual
dollars. The 2006 Department of Defense spending plan submitted to Congress
includes a 25.5% increase over the next six years.
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. U.S. 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 U.S. 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 single and multiple award
ID/IQ contracts.
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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 U.S. 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 U.S. federal
government. In order for a company to provide services under a GSA Schedule
contract, the company must be pre-qualified and awarded a contract by GSA. When
an agency uses a GSA Schedule contract to meet its requirements, 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 is expected to provide the user agency with reduced
procurement time and lower procurement costs.
Single and multiple award ID/IQ contracts are contract forms through which
the U.S. 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 U.S. 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 U.S. federal technology services market and our business:
o Increased Outsourcing. The downsizing of the U.S. federal government
workforce, declining availability of information technology management
skills among government personnel, and a corresponding 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 U.S. federal government information
technology expenditures. In government fiscal year 2004, 82.5% of the
U.S. federal government's total information technology solutions
spending flowed to contractors. By government fiscal year 2009, this
rate of outsourcing is projected to increase to 85.2% of total
information technology spending.
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 U.S. 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 U.S. 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.
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o Increased Spending on National Defense. National defense spending is
projected to grow substantially over the next five years with the U.S.
federal government increasing its commitment to strengthen the
nation's security, defense and intelligence capabilities. The U.S.
federal government is investing in improved homeland security, greater
information systems security, more effective intelligence operations,
and new approaches to warfare simulation training. Defense spending is
projected to exceed $400.1 billion in government fiscal year 2005, an
increase of almost 6.5% over government fiscal year 2004. The
President's proposed budget for 2006 defense spending is $419.3
billion, a 4.8% increase over the government fiscal year 2005 budget
and, if adopted, would be the largest defense budget in history 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 U.S.
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. U.S. federal expenditures through GWACs has grown
significantly over the past three years, and the GSA projects growth
in Schedule contracts will average 13.4% annually over the next four
years.
Our Capabilities and Services
We are a leading provider of information technology solutions to government
customers. We design, integrate, maintain and upgrade state-of-the art
information systems for national defense, intelligence, emergency response and
other high priority government missions. As a total solutions provider, we
maintain the comprehensive information technology skills necessary to support
the entire lifecycle of our customers' 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 customer 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 customer's specific requirements. For example, we built, and
continuously maintain and upgrade, the National Emergency Management Information
System, or "NEMIS," an enterprise-wide management information system, for the
U.S. 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.
We also are a leading provider of systems engineering and integration
services to government customers, primarily within the defense community. We
provide these defense customers 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 customer'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.
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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 ten 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. An
example of our working in this area includes:
o Coalition Enterprise Regional Information Exchange System CENTRIXS and
CENTRIXS N.A.T.O. Since 1993, through a series of contracts, we have
provided services to the 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. CENTRIXS is one of the most widely-used command,
control, computers, communication and intelligence 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 additional system deployments to the coalition
countries in the war on terrorism and Operation Iraqi Freedom.
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. Our work in this area
includes:
o National Emergency Management Information System. Since early 1996, we
have supported the development of the NEMIS system for FEMA through a
series of contracts and task orders. We believe our support to FEMA
will continue to grow with FEMA's increased responsibility as a first
responder to disasters and terrorist attacks and as FEMA supports its
mission within DHS. NEMIS provides mission critical functionality for
FEMA's core mission of disaster response and recovery. This
enterprise-wide management information system connects several
thousand desktop and mobile terminals/handsets, providing FEMA with a
fully mobile, nationwide, rapid response disaster assessment and
mitigation system. We continue to provide enhancements to the current
system, and we are in the process of expanding our support to this
mission area to include an internet-based capability that will
integrate with the DHS technology infrastructure.
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. Our working logistics modernization
includes:
o Joint Logistics Warfighting Initiative or "JLWI." Since March 2000, we
have been providing process re-engineering system design, and database
integration as we conduct a variety of customer directed process and
technology experiments and demonstrations on the Joint Logistics
Warfighting Initiative contract. JLWI represents the DOD's efforts
focused on facilitating the military's logistics transformation and
improving military readiness through business process improvements and
the implementation of new and emerging technologies. 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, or 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.
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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 U.S. 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. We have been providing lifecycle
information technology services to the U.S. Postal Service since 1983.
We have developed and implemented an electronic commerce application to
serve an estimated 80,000 to 100,000 U.S. Postal Service employees who
purchase a wide range of products on the U.S. Postal Service intranet
web 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. Fulfilling the U.S. Postal Service's requirement to serve up
to 100,000 employees required the development of a very robust
transaction processing application.
o Joint and Service Enterprise Information Technology Support. We have
been providing Enterprise Information Technology support for numerous
Joint and Service Commands, or the "Commands," for the past decade,
both in the U.S. and in numerous locations abroad. Our support
comprises all functions of the Enterprise, including
telecommunications engineering, planning and operation, network
development, administration and management, software life-cycle
support, and business process engineering. Our employees deploy with
the Commands during both peacetime operations and war and are making
vital contributions to the Commands' capabilities to accomplish their
missions. The supported Commands include U.S. Central Command and its
Army, Third U.S. Army/ARCENT, and the U.S. Air Force, 9th U.S. Air
Force/CENTAF, component commands, U.S. Army Forces Command, the U.S.
Army Reserve Command, and the U.S. Army Network Engineering and
Technology Command.
o Coalition, Joint and Service Training Exercise Support Commands. We
have been providing mission Exercise Program Support from the
individual unit to multi-national coalition level. We plan events that
prepare commanders and their staff to measure training proficiency,
correct deficiencies, and prepare for wartime missions. We are adept
at planning, implementing, and critiquing all aspects of these events
to include augmentation with senior mentor and subject matter experts.
We have planned every facet of the events to include logistical
support, communications system planning and provisioning, and other
support functions. These exercises have played a major part in
preparation of United States and Coalition Forces to meet the global
war on terrorism, and Operation Iraqi Freedom and DHS missions.
Modeling, Simulation and Training. We provide a comprehensive set of
information technology solutions and services to our customers, including
computer-based training, web-based training, distance learning, interactive
electronic technical manuals, performance support systems and organizational
assessment methods. We provide service to the following programs:
o Program Executive Office Simulation Training and Instrumentation, or
"PEO STRI." Since January 2000, we have provided life cycle support
for constructive training at fourteen U.S. Army Simulation and
Training Command Simulation centers worldwide. We have more than 1,000
personnel supporting this program at more than 50 sites throughout the
United States, Germany, Italy and South Korea. We provide 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, providing highly qualified professionals who are
certified in all aspects of simulation support, to each of the U.S.
Army's Battle Simulation Centers.
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o Military Operations on Urban Terrain, or "MOUT." We have supported the
U.S. Army's MOUT program since July 1997. Our support to MOUT
primarily focuses on the design and instrumentation of the most
advanced MOUT site in the world located at the Joint Readiness
Training Center, Fort Polk, LA, as well as other sites worldwide. 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 high-speed local area network
to the control room. The system is also designed to control targetry
and multiple battlefield effects and has the flexibility to support
both simulated fire and live fire exercises. We have also developed a
mobile version of MOUT to facilitate training in the theater of
operation. For example, two Mobile MOUT sites were ordered and
delivered for use in Kuwait and Afghanistan in early 2003 to support
operations in the global war on terrorism. During 2004, we delivered a
Mobile MOUT site to the U.S. National Guard.
Secure Identification and Access Management Solutions. Our position in this
market provides us with capabilities in optical memory card technology, which is
used primarily for high-capacity portable secure data storage and authentication
through multiple biometrics. This capability, combined with our expertise in
integrated circuit card technology, which is used primarily for access control
and related transaction processing, positions us to capitalize on the growing
demand in this market. Both of the secure identification and access control
technologies are gaining significant and increased support with U.S. federal
agencies, including the DOD, DHS and foreign governments.
o Integrated Card Production System. We are the prime contractor for
secure identification and border control card solutions for the DHS's
Bureau of Citizenship and Immigration Services, or "BCIS." Through a
contract with the BCIS, we provide the Permanent Resident Card
solution, as well as the Department of State Border Crossing
"LaserVisa" Card solution. To date, the U.S. federal government has
procured over 23 million secure identification cards through this
contract. We are positioned to grow from the expanding budget of DHS,
as secure identification and credential card technologies proliferate
within DHS and other U.S. federal government agencies.
Healthcare Services. We deliver information technology solutions in
healthcare programs for the Department of Defense, U.S. Army, U.S. Navy, U.S.
Air Force and U.S. 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. We have been providing this support since 1989 under
several contracts. 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 U.S. Air Force weapon systems.
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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.
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 systems. We provide program, budgetary, policy and
legislative analysis, information technology services, systems
engineering and technical management services for all major U.S. 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.
o Shipbuilding Engineering Support. For over twenty years, we have
provided acquisition management and engineering support to the U.S.
Navy's shipbuilding program offices. Today, this includes the AEGIS
shipbuilding program, aircraft carrier program, all submarine programs
and developmental programs such as the new DDX destroyer and the
Littoral Combatant Ship. We also develop software serving the global
ship design industry. In addition to support for customer acquisition
offices and industry, we provide support for the ships during the
in-service phase of their life cycle through multiple contracts. This
includes installation support, refurbishment of equipment and
provision of new software.
o Research, Development, Test and Evaluation Support. We support various
DOD laboratories and field activities in the provision of technology,
testing, operation of facilities and general research and development,
or "R&D," support. Our technologies range from the provision of
advanced algorithms for the Virginia class submarines, software for
decision support systems, video compression algorithms, advanced sonar
concepts and unique software for technology assessment. We operate the
U.S. Air Force Research Laboratory's Laser Facilities and conduct
material testing on their behalf.
Ballistic Missile Defense. We have more than a decade of experience in
ballistic 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." Since January 1999,
we have supported the U.S. Navy by providing management, systems
engineering and technical support to the TBMD program. We provide a
broad range of support to develop, test, evaluate, and produce the
U.S. Navy's future ballistic missile defense systems. Due to our U.S.
Navy TBMD System experience, we were selected to provide similar
support to the National Missile Defense program. We believe ballistic
missile programs will experience near-and-long-term growth as the DOD
moves forward to meet the U.S. federal government's mandate for a
national missile defense system.
Our Growth Strategy
Our goal is to become the first pure-play technology services company to be
included in the top tier of government technology service providers. Our
strategy to achieve this objective includes the following:
o Continue to Increase Market Penetration. The U.S. federal government's
continued movement 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. Defense spending is projected to exceed
$400.1 billion in government fiscal year 2005, an increase of almost
6.5% over government fiscal year 2004, and is expected to reach $419.3
billion in government fiscal year 2006, a 4.8% increase over projected
government fiscal year 2005 spending. Defense budgets are expected to
grow by 25.5% over the next six years, based on the Department of
Defense spending plan submitted to Congress. We believe that many of
the key operational goals of the U.S. federal government correlate
with our expertise, including developing a national missile defense
system, increasing homeland security, protecting information systems
from attack, conducting effective intelligence homeland security,
protecting information systems from attack, conducting effective
intelligence operations, and training for new approaches to warfare
through simulation.
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o Capitalize on Growing Demand in the Secure Identification and Access
Management Solutions Market. The use of credential card technologies
for secure identification and access control solutions is rapidly
gaining momentum with U.S. federal agencies, the DOD and foreign
governments. These cards are used for cardholder authentication,
physical access control and logical access control. Our position in
this market provides us with a full range of capabilities to meet our
customers' requirements. We have extensive experience with optical
storage card technology, which is used primarily for authentication
using biometrics and physical access control. This capability,
combined with our expertise in integrated circuit card technology,
used primarily for logical access control, uniquely positions us to
capitalize on the growing demand in this market regardless of the
application or credential card technology selected by customers.
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, we believe our strong performance record and detailed
understanding of customer requirements developed on the U.S. Air Force
Cargo Movement Operations System led directly to our being awarded a
contract relating to the Joint Logistics Warfighting Initiative.
o Continue our Disciplined Acquisition Strategy. We employ a disciplined
methodology to evaluate and select acquisition candidates. We have
completed eight 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.
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. 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).
Acquisitions
We employ a highly disciplined methodology to evaluate acquisitions. Since
1997 we have evaluated several hundred targets and have successfully completed
and integrated eight strategic acquisitions. Each of these acquired businesses
has been accretive to earnings, 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.
17
<PAGE>
<TABLE>
<CAPTION>
Revenues prior to
Year Acquired Business Business Description acquisition(1)
------ ------------------- -------------------------------------------------------------- ---------------------
($ in millions)
<S> <C>
1997 Vector Data Intelligence collection, exploitation, and dissemination systems
Systems $ 35.6
1998 Techmatics Surface ship and combat systems and ballistic missile defense
program management 56.7
1999 Analysis & Undersea ship and combat systems, acoustical signal processing,
Technology modeling and simulation, information technology systems and
software design 170.4
2000 Sherikon Military healthcare services systems, networking and
communications systems 62.7
2001 SIGCOM Training Training simulation systems and services
12.5
2003 ISI Secure identification and access management solutions and military
logistics and training 130.5
2004 STI Modeling and simulation software solutions and services 20.7
2004 IMSI Information security and assurance, infrastructure security and
enterprise IT architecture 31.7
- --------------------------------------------------------
(1) Consolidated revenue of acquired business 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 U.S. Navy's
surface ship fleet, on-ship combat systems and missile defense programs. With
the acquisition of Analysis & Technology, Inc., or "A&T," in June 1999, we
expanded our customer base for systems engineering and program management
services to the U.S. 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., or "Sherikon,"
extending the reach of our information technology solutions to military
healthcare delivery systems. 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. In May 2003, we
purchased ISI, a provider of secure identification and access management
solutions and military logistics and training to primarily the Department of
Defense. In July 2004, we purchased Simulation Technologies, Inc., or "STI", a
provider of modeling and simulation software solutions and services. In August
2004, we purchased Integrated Management Services, Inc., or "IMSI", a provider
of information security and assurance services, infrastructure security and
enterprise IT architecture.
Existing Contract Profiles
We currently have a portfolio of more than 800 active contracts. Our
contract mix for the year ended December 31, 2004 was 39% time and materials
contracts, 34% cost-plus contracts and 27% fixed price contracts (a substantial
majority of which were firm fixed price level of effort).
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.
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.
18
<PAGE>
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. 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. The
substantial majority of these fixed price contracts involve a defined number of
hours or a defined category of personnel. We refer to such contracts as "level
of effort" 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.
Contract Mix
Year End
- ------------------------------------------ ------------------------------------
Contract Type 2000 2001 2002 2003 2004
- ------------------------------------------ ------ ----- ------ ------ -------
Cost-Plus (CP)............................ 41% 37% 35% 32% 34%
Time and Materials (T&M).................. 31% 34% 37% 38% 39%
Fixed Price (FFP)......................... 28% 29% 28% 30% 27%
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. As a result of recent acquisitions, our contract mix has
been more weighted towards cost-plus contracts.
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 4,000 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 8% of our total
2004 revenue.
Government Wide Acquisition Contracts. We are one of the leading suppliers
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 Applications
and Support for Widely-diverse End User Requirements, or "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 477 task orders to date under ANSWER, with
an annualized revenue run rate as of the fourth quarter of fiscal 2004 of
approximately $189.6 million. Currently, our total estimated remaining contract
value for this contract is approximately $1.1 billion through December 2008.
Listed below are the four largest GWACs.
Owning Period of Contract
Contract Name Agency Performance Ceiling Value Role
- --------------------- -------- --------------- ----------------- -------------
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 $20 billion Prime
19
<PAGE>
Listed below are our top programs by 2004 revenue, including single award
and multiple award contracts. We are a prime contractor on each of these
programs.
<TABLE>
<CAPTION>
Top Programs by 2004 Revenue
($ in millions)
Estimated
Period of Remaining
Programs Customer Performance 2004 Revenue Contract Value Contract Type
- -------------------- ------------------- -------------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
ANSWER
(Multiple
Award Contract) GSA 1/1/99-12/31/08 $ 189.6 $ 1,107.7 T&M/FFP
GSA SCHEDULE
& BPAs GSA 10/30/96-09/21/08 92.0 402.9 T&M/FFP
SAFTAS U.S. Air Force 01/01/01-12/31/15 48.0 388.1 CP
STOC U.S. Army 12/21/00-12/20/08 42.6 263.5 CP/FFP/T&M
GSA PES Contract GSA 01/06/00-01/26/08 40.9 315.3 T&M/FFP
GSA-MOBIS GSA 11/21/97-09/30/07 40.2 258.0 T&M/FFP
Engineering and
Technical Services U.S. Navy 07/16/02-01/15/08 28.6 77.0 CP
Naval Sea Systems
Command
(Multiple Award
Contract) U.S. Navy 04/02/01-03/31/16 28.3 478.2 CP
Foreign Military
Sales Logistic
Support U.S. Navy 03/25/98-03/24/08 27.3 21.8 CP
CENTRIX/LOCE Department of Defense 12/01/02-09/27/09 23.8 149.9 CP
</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 U.S. 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. For the year ended December 31,
2004, approximately 26% of our total direct costs resulted 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. To the extent subcontractor costs
increase or decrease in the future, our operating profit margin percentage on
contracts could be affected.
20
<PAGE>
Estimated Remaining Contract Value and New Business Development
On December 31, 2004, our estimated remaining contract value was $6.3
billion, of which $830.9 million was funded backlog. In determining estimated
remaining contract value, we do not include any provision for an increased level
of work likely to be awarded under our GWACs. The estimated remaining contract
value is calculated as current revenue run rate over the remaining term of the
contract. Our estimated remaining 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 remaining contract value are subject to termination at the election
of the customer.
ESTIMATED REMAINING CONTRACT VALUE
Estimated
As of December 31, Funded Unfunded Contract Remaining
Backlog Value Contract Value
- -------------------- -------------- -------------------- ------------------
(in millions)
2004 .............. $ 831 $ 5,466 $ 6,297
2003 .............. 661 4,948 5,609
2002 .............. 418 3,868 4,286
2001 .............. 309 3,217 3,526
2000 .............. 308 2,560 2,868
From December 31, 1999 to December 31, 2004, our estimated remaining
contract value, including IMSI and STI, increased at a 24% compound 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 U.S. federal, state, local and international government
organizations worldwide. Domestically, we service more than 50 agencies, bureaus
and divisions of the U.S. federal government, including nearly all cabinet-level
agencies and all branches of the military. For the year ended December 31, 2004,
the U.S. federal government accounted for approximately 98% of our total
revenues. International and state and local governments provided the remaining
2%. The DOD accounted for approximately 89% of our total revenues and services
to U.S. federal civilian organizations were approximately 10%. Our largest
customer group is the U.S. Navy, which accounted for approximately 45% of
revenues during the year ended December 31, 2004, through 84 different U.S. Navy
organizations.
An account receivable from a U.S. federal government agency enjoys the
overall credit worthiness of the U.S. 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 acceptance or
interest must be paid.
21
<PAGE>
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 U.S. federal government. Because of the diverse
requirements of U.S. federal government customers and the highly competitive
nature of large U.S. 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.
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 customer and its procurement requirements and
environment are keys 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 customers 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, 2004, we employed approximately 8,800 employees, 88% of
whom were billable and 66% 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. None of our
employees are 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 1.4 million square feet of office, shop and
warehouse space in over 100 facilities across the United States, Canada, the
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. We also have employees working at customer sites
throughout the United States and in other countries.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business.
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.
22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 2004, a special meeting of our stockholders was held. The sole
matter voted upon at the meeting was the approval and adoption of the Anteon
International Corporation Employee Stock Purchase Plan. The voting results were
as follows:
Votes For 29,384,892
Votes Against 230,050
Votes Abstaining 4,564
Part II
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 year ended December 31, 2004 and 2003 as reported by the
NYSE.
2004
Quarter Ended High Low
--------------------- ---------- ------------
March 31 $ 37.00 $ 27.01
June 30 $ 33.62 $ 28.75
September 30 $ 37.29 $ 28.25
December 31 $ 43.16 $ 35.70
2003
Quarter Ended High Low
--------------------- ---------- ------------
March 31 $ 25.85 $ 20.00
June 30 $ 29.50 $ 21.86
September 30 $ 35.10 $ 27.30
December 31 $ 38.95 $ 30.71
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.
The Company has filed a Registration Statement on Form S-8 with the SEC to
register 1.2 million shares of the Company's common stock under the Employee
Stock Purchase Plan ("ESPP"), which was implemented on April 1, 2004. The table
below details the shares purchased under the ESPP during certain periods:
<TABLE>
<CAPTION>
Total Number of
Shares Purchased as Maximum Number of
Average Part of Publicly Shared that May Yet Be
Total Number of Prices Paid Announced Purchased
Period Shares Purchased per Share Plan Under the Plan
- ---------------- --------------------------------- ---------------------- --------------------------
<S> <C> <C> <C> <C> <C>
July 1, 2004 14,668 $32.29 14,668 1,185,332
October 1, 2004 16,262 $37.20 16,262 1,169,070
----------- ----------- ---------------
2004 Total 30,930 30,930 1,169,070
=========== =========== ===============
</TABLE>
23
<PAGE>
As of March 2, 2005, the number of stockholders of record of our common
stock was approximately 371.
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, 2004, 2003, 2002, 2001 and 2000. 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 2000, 2001, 2003, and 2004. 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 consolidated
financial statements and the related notes thereto appearing elsewhere in this
filing.
24
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
(in thousands, except per share data and percentages)
Statements of operations data:
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 542,807 $ 715,023 $ 825,826 $ 1,042,474 $ 1,268,139
Costs of revenues......................... 474,924 627,342 711,328 897,264 1,093,470
-------------- -------------- ------------ ------------- --------------
Gross profit.............................. 67,883 87,681 114,498 145,210 174,669
General and administrative expenses,
including acquisition related costs..... 38,592 51,442 48,197 58,647 65,964
Amortization of non-compete agreements ... 866 349 -- 101 167
Goodwill amortization..................... 4,714 6,704 -- -- --
Other intangibles amortization............ 2,673 2,321 1,907 2,349 2,509
------------ ------------ ---------- ------------ -------------
Operating income ......................... 21,038 26,865 64,394 84,113 106,029
Other Income.............................. -- -- 417 -- 973
Gains on sales and closures of business... -- 4,046 -- -- --
Secondary offering expenses............... -- -- -- 852 240
Interest expense, net of interest
income.................................. 26,513 26,353 21,626 24,244 7,769
Minority interest in (earnings) losses of
subsidiaries.... ....................... 32 (38) (18) (54) (72)
-------------- -------------- ------------ ------------- --------------
Income (loss) before provision for (benefit
from) income taxes ..................... (5,443) 4,520 43,167 58,963 98,921
Provision for (benefit from) income
taxes................................... (153) 4,602 16,723 22,773 37,116
-------------- -------------- ------------ ------------- --------------
Net income (loss).................... $ (5,290) $ (82) $ 26,444 $ 36,190 $ 61,805
============== ============== ============ ============= ==============
Basic earnings (loss) per common share $ (0.22) $ (0.01) $ 0.82 $ 1.04 $ 1.73
============== ============== ============ ============= ==============
Weighted average shares outstanding.. 23,787 23,787 32,163 34,851 35,717
Diluted earnings (loss) per common share $ (0.22) $ (0.01) $ 0.78 $ 0.98 $ 1.66
============== ============== ============ ============= ==============
Weighted average shares outstanding.. 23,787 23,787 34,022 36,925 37,267
Other data:
EBITDA (a)................................ $ 36,347 $ 47,357 $ 70,994 $ 90,097 $ 113,382
EBITDA margin (b)......................... 6.7% 6.6% 8.6% 8.6% 8.9%
Cash flow from (used in) operating
activities.......... $ 17,101 $ 37,879 $ (1,722) $ 37,443 $ 18,244
Cash flow used in investing activities.... (28,912) (1,707) (1,423) (95,431) (47,878)
Cash flow from (used in) financing
activities.......... 12,036 (35,676) 5,481 55,810 31,649
Capital expenditures...................... 6,584 2,181 3,225 3,049 3,963
Balance sheet data (as of December 31):
Current assets............................ $ 148,420 $ 144,418 $ 208,396 $ 244,591 $ 338,604
Working capital (c)....................... 56,841 27,559 80,390 105,287 169,160
Total assets.............................. 324,423 306,651 364,692 479,280 613,426
Long-term debt, including current
portion............. 237,695 202,905 105,701 158,776 184,388
Stockholders' equity (deficit)............ (1,576) (3,442) 128,829 174,492 247,276
(a) "EBITDA", as defined, represents income before income taxes, 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 U. S. generally accepted accounting principles "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>
25
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss).......................... $ (5,290) $ (82) $ 26,444 $ 36,190 $ 61,805
Provision for (benefit from) income tax (153) 4,602 16,723 22,773 37,116
Interest expense, net of interest income... 26,513 26,353 21,626 24,244 7,769
Depreciation............................... 7,024 7,110 4,294 4,440 4,016
Amortization............................... 8,253 9,374 1,907 2,450 2,676
----------- ---------- ---------- ---------- ----------
EBITDA..................................... $ 36,347 $ 47,357 $ 70,994 $ 90,097 $ 113,382
=========== ========== =========== ========== ==========
Net income (loss) margin (d)............... (1.0%) (0.1%) 3.2% 3.5% 4.9%
EBITDA margin (b).......................... 6.7% 6.6% 8.6% 8.6% 8.9%
(b) EBITDA margin represents EBITDA calculated as a percentage of total revenues.
(c) Working Capital is equal to current assets minus current liabilities.
(d) Net income margin represents net income calculated as a percentage of total revenues.
</TABLE>
26
<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 are a leading provider of information technology solutions and systems
engineering and integration services to government customers 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 customers
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations.
We have a broad customer and contract base and a diverse contract mix. We
currently serve over 1,000 U.S. federal government customers in more than 50
government agencies, as well as state and foreign governments. For the year
ended December 31, 2004, approximately 89% of our revenue was derived from
contracts with the DOD and intelligence agencies, and approximately 10% from
civilian agencies of the U.S. federal government. For the year ended December
31, 2004, approximately 88% of our revenue was from contracts where we were the
lead, or "prime," contractor. Our diverse contract base has approximately 800
active contracts and more than 4,000 active task orders. For the year ended
December 31, 2004, our largest contract or task order accounted for
approximately 8% of our revenues. We have a diverse mix of contract types, with
approximately 39%, 34%, and 27% of our revenues for the year ended December 31,
2004 derived from time and materials, cost-plus and fixed price contracts,
respectively. We generally do not pursue fixed price software development
contracts that may create financial risk. Additionally, we have contracts with
an estimated remaining contract value of $6.3 billion as of December 31, 2004,
of which $830.9 million is funded backlog. Our contracts have a weighted-average
term of approximately 6 years. From December 31, 1999 to December 31, 2004, our
estimated remaining contract value increased at a 25.2% compounded annual growth
rate, including the effect of acquisitions.
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, contingent liabilities, revenue recognition,
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 year ended December 31, 2004, 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 plus the cost of any
allowable material costs and out-of-pocket expenses. 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 certain cost plus type
contracts, which are referred to as 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, communications with the customer regarding our performance,
including any interim performance evaluations rendered by the customer or our
average historical award fee rate for the company. For the years ended December
31, 2004 and 2003, revenue for award fees accrued under cost-plus award fee type
contracts was $5.6 million and $2.5 million, respectively. Under substantially
all fixed price contracts, which are predominantly level of effort contracts,
revenues are recognized 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). In addition, we evaluate our
contracts for multiple deliverables which may require the segmentation of each
deliverable into separate accounting units for proper revenue recognition.
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We recognize revenues under our U.S. 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
U.S. 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 on unfunded portions
of existing contracts 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 re