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<SEC-DOCUMENT>0001169232-06-001568.txt : 20060317
<SEC-HEADER>0001169232-06-001568.hdr.sgml : 20060317
<ACCEPTANCE-DATETIME>20060316204345
ACCESSION NUMBER: 0001169232-06-001568
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20051231
FILED AS OF DATE: 20060317
DATE AS OF CHANGE: 20060316
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: 06693769
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
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<SEQUENCE>1
<FILENAME>anteon2005.txt
<DESCRIPTION>ANTEON 2005 10K
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |X| No |_|
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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2005 was $1,547,655,535 (based on the
closing price of $45.62 per share on June 30, 2005, 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 37,447,611 shares of common stock outstanding as of March 10,
2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2006 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;
o our financial condition and liquidity, as well as future cash flows
and earnings, and
o our ability to close the proposed merger (the "Merger") with a subsidiary of
General Dynamics Corporation or ("General Dynamics.")
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 and contracting 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 inability to obtain government approval of the Merger;
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.
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, 2005, approximately 88% of our revenues were derived
from the Department of Defense, or "DOD," and intelligence agencies, and
approximately 11% from civilian agencies that includes the Department of
Homeland Security of the U.S. federal government. For the year ended December
31, 2005, approximately 86% 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 7 years, assuming the
exercise of all potential contract options. Additionally, we had contracts with
an estimated remaining contract value of $6.5 billion as of December 31, 2005,
of which approximately $910.6 million was funded backlog.
From 1996 through 2005, we increased annual revenues from $141.8 million to
$1.493 billion, at a compound annual growth rate of approximately 30%. Our
revenues grew organically by 15% during 2005 and 14% during 2004. We define
organic growth as the increase in revenues excluding the revenues associated
with acquisitions, divestitures and closures of businesses in comparable
periods.
On December 13, 2005, we entered into an agreement and plan of merger with
General Dynamics and a wholly owned subsidiary of General Dynamics, pursuant to
which General Dynamics agreed to acquire Anteon International Corporation for
approximately $2.2 billion, which includes the assumption of approximately $116
million in net debt as defined as debt less cash. Upon completion of the Merger,
Anteon International Corporation will become a wholly owned subsidiary of
General Dynamics.
On March 3, 2006, we held a special meeting of stockholders at which the
stockholders adopted the Merger agreement and approved the Merger. Completion of
the Merger is subject to the satisfaction or waiver of a number of conditions,
including the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). Other than
approval pursuant to the HSR Act, no other material federal or state regulatory
approvals are required to be obtained by us, General Dynamics or its wholly
owned subsidiary in connection with the Merger. We anticipate that the
transaction will close no later than the end of the second quarter of 2006. The
merger agreement may be terminated prior to the effective time of the Merger,
under certain circumstances discussed in the merger agreement.
In this document, unless otherwise indicated, "we" or the "Company" refers
to Anteon International Corporation, a Delaware corporation, and its
consolidated subsidiaries.
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, improvements of weapon systems design and military
personnel training. Defense spending is projected to exceed $410.8 billion in
government fiscal year 2006, a 3% increase over government fiscal year 2005. An
additional $125.8 billion in supplemental funding, that includes the Global War
on Terror, has been submitted to Congress for approval would bring the total
defense spending for fiscal year 2006 to over $536.6 billion. The President's
proposed budget for government fiscal year 2007 includes defense spending of
$439.3 billion, a 7% increase over government fiscal year 2006, if adopted,
would be the largest Department of Defense budget in history in actual dollars.
The 2007 spending plan submitted to Congress would include an estimated 2% to 4%
annual increase in the peacetime defense budget over the fiscal years 2008
through 2011.
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, General Service Administration, or "GSA," Schedule
contracts, and single and multiple awards Indefinite Delivery/Indefinite
Quantity, or "ID/IQ," contracts.
Traditional single award contracts specify the scope of services that will
be delivered and the contractor that will provide the specified services. 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
Government Wide Acquisition Contracts, or "GWAC." 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 Continued Trend Towards 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, 83% of the U.S. federal government's total information
technology solutions spending flowed to contractors. By government
fiscal year 2010, this rate of outsourcing is projected to increase to
86% 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.
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 $410.8 billion in government fiscal year 2006, an
increase of almost 3% over government fiscal year 2005. An additional
$125.8 billion in supplemental funding, that includes the Global War
on Terror, has been submitted to Congress for approval would bring the
total defense spending for fiscal year 2006 to over $536.6 billion.
The President's proposed budget for 2007 defense spending is $439.3
billion, a 7% increase over the government fiscal year 2006 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 have grown
significantly over the past three years, and the estimated growth in
Schedule contracts will average approximately 13% over the next three
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.
Our Service Competencies and Program 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 work in this area includes:
o Coalition Enterprise Regional Information Exchange System CENTRIXS and
CENTRIXS N.A.T.O. Since 1993, 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.
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, distant 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 1,300
personnel supporting this program at more than 80 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.
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. In 2005, we delivered 12
Mobile MOUT sites.
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
ordered over 26 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.
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.
<PAGE>
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. Excluding supplemental funding, defense
spending is projected to exceed $410.8 billion in government fiscal
year 2006, an increase of almost 3% over government fiscal year 2005,
and is expected to reach $439.3 billion in government fiscal year
2007, a 7% increase over projected government fiscal year 2006
spending. 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.
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 nine 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.
<PAGE>
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 nine 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.
<TABLE>
<CAPTION>
Revenues prior to
Year Acquired Business Business Description acquisition(1)
- ---------------------------------------------------------------------------------------------------------------------
($ in millions)
<S> <C>
1997 Vector Data Systems Intelligence collection, exploitation, and dissemination 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
2005 Milestone Enterprise architecture and systems, information assurance and
program and financial management 18.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consolidated revenue of acquired business for its most recently completed
fiscal year ended prior to the acquisition date.
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 Information Spectrum, Inc., or "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. In
October 2005, we purchased Milestone Group, LLC, or "Milestone," a provider of
enterprise architecture and systems, information assurance and program and
financial management.
Existing Contract Profiles
We currently have a portfolio of more than 800 active contracts. Our
contract mix for the year ended December 31, 2005 was 41% time and materials
contracts, 37% cost-plus contracts and 22% 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.
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 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 our 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.
<TABLE>
<CAPTION>
Contract Mix
Year End
----------------------------------------------------------------------------------------------
Contract Type 2001 2002 2003 2004 2005
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Cost-Plus (CP)............................ 37% 35% 32% 34% 37%
Time and Materials (T&M).................. 34% 37% 38% 39% 41%
Fixed Price (FFP)......................... 29% 28% 30% 27% 22%
-----------------------------------------------------------------------------------------------
</TABLE>
Our contract mix changes from year to year depending on the contract mix of
companies we acquire, as well as our efforts to obtain more time and materials
and fixed price work. 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 4,300 separate task
orders. Our Stricom task order under the ANSWER contract accounted for
approximately 11% of our revenues in 2005. No other individual task order
accounted for more than 10% of our revenues.
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 and a
subcontractor for the one that we are not the prime. 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 EndUser 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 500 task orders to date
under ANSWER, with revenues of approximately $240.7 million for the year ended
December 31, 2005. Currently, our total estimated remaining contract value for
this contract is approximately $1.4 billion through December 2010. Listed below
are the four largest GWACs for information technology services as measured by
overall contract ceiling value.
<TABLE>
<CAPTION>
Owning Period of Contract Ceiling
Contract Name Agency Performance Value Role
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ANSWER GSA 1998 - 2008 $25 billion Prime
Millenia GSA 1999 - 2009 $25 billion Subcontractor
Millenia Lite GSA 2000 - 2010 $20 billion Prime
CIO-SP II NIH 2000 - 2010 $20 billion Prime
</TABLE>
<PAGE>
Listed below are our top ten programs by 2005 revenue, including single
award and multiple award contracts. We are a prime contractor on each of these
programs.
<TABLE>
<CAPTION>
Top Programs by 2005 Revenue
($ in millions)
Estimated
Remaining
Programs Customer Period of Performance 2005 Revenue Contract Value Contract Type
- ---------------------------- ------------------ ------------------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
ANSWER (Multiple Award Contract) GSA 1/1/99-12/31/08 $ 240.7 $ 1,419.3 T&M/FFP
Naval Sea Systems Command
(Multiple Award Contract) U.S. Navy 04/02/01-03/31/16 64.2 639.5 CP
GSA SCHEDULE & Blanket Purchase
Agreements (BPA) GSA 10/30/96-11/04/09 62.1 268.1 T&M/FFP
Stricom Omnibus Contract U.S. Army 12/21/00-12/20/08 59.6 241.1 CP/FFP/T&M
GSA-MOBIS GSA 11/21/97-09/15/10 55.7 284.6 T&M/FFP
SAFTAS U.S. Air Force 01/01/01-12/31/15 53.1 335.0 CP
GSA - Millenia Lite - Area 3 GSA 04/21/00 - 08/31/10 48.1 197.9 CP
AEGIS BMD BPA U.S. Navy 05/27/04 - 03/31/06 32.1 11.2 FFP
GSA Professional Engineering
Services GSA 01/06/00-01/26/08 31.6 248.5 T&M/FFP
Foreign Military Sales Logistic
Support U.S. Navy 03/25/98-03/24/08 27.5 83.5 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,
2005, approximately 32% 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.
Estimated Remaining Contract Value and New Business Development
On December 31, 2005, our estimated remaining contract value was $6.5
billion, of which $910.6 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 based on our 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.
<TABLE>
<CAPTION>
ESTIMATED REMAINING CONTRACT VALUE
Unfunded Estimated Estimated Remaining
As of December 31, Funded Backlog Contract Value Contract Value
(in millions)
- ---------------------------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
2005 $ 911 $ 5,622 $ 6,533
2004 831 5,466 6,297
2003 661 4,948 5,609
2002 418 3,868 4,286
2001 309 3,217 3,526
</TABLE>
From December 31, 1999 to December 31, 2005, our estimated remaining
contract value increased at a 21% compound annual growth rate, including the
effect of acquisitions. We believe this growth demonstrates the effectiveness of
the 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, 2005,
the U.S. federal government accounted for approximately 99% of our total
revenues. International and state and local governments provided the remaining
1%. The DOD and intelligence agencies accounted for approximately 88% of our
total revenues and services to U.S. federal civilian organizations that includes
the Department of Homeland Security were approximately 11%. Our largest customer
group is the U.S. Navy, which accounted for approximately 38% of revenues during
the year ended December 31, 2005.
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 of 1982, payments
from government agencies must be made within 30 days of final invoice acceptance
or interest must be paid.
Competition
The federal information technology and systems engineering services
industries are comprised of a large number of enterprises ranging from small,
niche-oriented companies to multi-billion dollar corporations with a major
presence throughout the 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, 2005, we employed approximately 9,500 employees, 88% of
whom were directly billable and 67% 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.
<PAGE>
Item 1A. Risk Factors
Risks related to our business
Business Uncertainties and Contractual Restrictions While the Merger with
General Dynamics is Pending
Uncertainty about the effect of the Merger on employees, partners,
regulators and customers may have an adverse effect on our business. These
uncertainties may impair our ability to attract, retain and motivate key
personnel until the Merger is consummated, and could cause customers and others
that deal with us to defer purchases or other decisions concerning us, or seek
to change existing business relationships with us. In addition, the Merger
agreement restricts us from making certain acquisitions and taking other
specified actions without General Dynamics' approval. These restrictions could
prevent us from pursuing attractive business opportunities that may arise prior
to the completion of the Merger.
Failure to Complete the Merger Could Negatively Impact Stock Price, Future
Business and Financial Results--
Although our stockholders have voted to approve and adopt the Merger with
General Dynamics, there is no other assurance that the other conditions to the
completion of the Merger that remain will be satisfied. If the Merger is not
completed, we will be subject to several risks, including the following:
o we may be required to pay General Dynamics a termination fee of $42.5
million plus up to $500,000 in expenses if the Merger agreement is
terminated under certain circumstances;
o the current market price of our common stock may reflect a market
assumption that the Merger will occur, and a failure to complete the
Merger could result in a negative perception by the stock market of us
generally, resulting in a decline in the market price of our common
stock;
o certain costs relating to the Merger (such as legal, accounting and
financial advisory fees) are payable by us whether or not the Merger
is completed;
o there may be substantial disruption to our business and a distraction
to our management and employees from day-to-day operations, because of
matters related to the Merger (including integration planning) that
may require substantial commitments of time and resources, which could
otherwise have been devoted to other opportunities that could have
been beneficial to us;
o our business could be adversely affected if we are unable to retain
key employees or attract qualified replacements; and
o we would continue to face the risks that we currently face as an
independent company.
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.
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, 2005, approximately 41% were time and materials, 37% of our U.S.
federal contracts were cost-plus, and 22% 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.
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 ID/IQ contracts, GSA Schedule contracts and other
multiple award and/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 Regulation, and agency regulations
supplemental to the Federal Acquisition Regulation, 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 88% and 89% of our sales for the year ended December
31, 2005 and for the year ended December 31, 2004, 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.
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 on 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.
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.
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.
<PAGE>
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 nine 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.
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
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.
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, 2005, our Credit Facility
would have permitted additional borrowings of up to $488.1 million. If new
debt is added by us or our subsidiaries, the related risks that we and they
now face could increase.
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.
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 1B. Unresolved Staff Comments
None
Item 2. Properties
Our headquarters are located in leased facilities in Fairfax,
Virginia. In total, we lease approximately 1.5 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 contains 63,578 square feet of
office space and is currently on the market for sale. The Company believes
its facilities are adequate for its present needs and expects them to
remain adequate for the foreseeable future. We also have employees working
at customer sites throughout the United States and in other countries.
Item 3. Legal Proceedings
On November 4, 2005, we received a Customs Export Enforcement Subpoena
for documents from the United States Customs Service. The subpoena
requested the production of records and information in connection with two
of our programs, and a description of our export compliance program. We
produced documents responsive to the subpoena in November and December 2005
and the matter is on-going. Although we cannot predict the outcome of this
matter, we do not believe that it will have a material impact on our
financial position or results of operations.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter
of our fiscal year ended December 31, 2005, through the solicitation of proxies
or otherwise.
<PAGE>
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, 2005 and 2004 as reported by the
NYSE.
2005
Quarter Ended High Low
----------------- --------------- ----------------
March 31 $ 42.00 $ 33.54
June 30 $ 46.00 $ 35.99
September 30 $ 48.22 $ 41.40
December 31 $ 54.84 $ 40.75
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
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 Company has suspended the employee stock purchase plan, pending
the closing of the Merger with General Dynamics. The table below details
the shares purchased by the Company on the open market under the ESPP
during certain periods:
<TABLE>
<CAPTION>
Maximum Number of
Total Number of Shares Shares that May Yet
Total Number of Average Prices Purchased as Part of Be Purchased
Period Shares Purchased Paid per Share Publicly Announced Plan Under the Plan
------ ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
October 1-31, 2005 16,819 $43.05 16,819 1,110,888
November 1 - 30, 2005 -- -- -- 1,110,888
December 1-31, 2005 -- -- -- 1,110,888
---------------- --------------
Total 16,819 16,819
--------------- --------------
</TABLE>
<PAGE>
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, 2005, 2004, 2003, 2002 and 2001. 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 2001, 2003, 2004, and 2005. 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.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
- --------------------------------------------- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ----- ---- ----
(in thousands, except per share data)
Statements of operations data:
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $1,493,212 $ 1,268,139 $1,042,474 $ 825,826 $ 715,023
Costs of revenues................................. 1,276,627 1,093,470 897,264 711,328 627,342
---------- ------------ ---------- ----------- ----------
Gross profit...................................... 216,585 174,669 145,210 114,498 87,681
General and administrative expenses,
including acquisition related costs............. 76,691 65,964 58,647 48,197 51,442
Amortization of non-compete agreements ........... 165 167 101 -- 349
Goodwill amortization............................. -- -- -- -- 6,704
Other intangibles amortization.................... 2,850 2,509 2,349 1,907 2,321
---------- ------------ ---------- ----------- ----------
Operating income ................................. 136,879 106,029 84,113 64,394 26,865
Other income...................................... 1,049 973 -- 417 --
Merger related expenses........................... 2,432 -- -- -- --
Gains on sales and closures of business........... -- -- -- -- 4,046
Secondary offering expenses....................... -- 240 852 -- --
Interest expense, net of interest
income.......................................... 8,883 7,769 24,244 21,626 26,353
Minority interest in earnings of
subsidiaries.................................... (75) (72) (54) (18) (38)
---------- ------------ ---------- ----------- ----------
Income before provision for income taxes.......... 126,538 98,921 58,963 43,167 4,520
Provision for income taxes........................ 47,830 37,116 22,773 16,723 4,602
---------- ------------ ---------- ----------- ----------
Net income (loss)............................ $ 78,708 $ 61,805 $ 36,190 $ 26,444 $ (82)
========== ============ ========== ========== ==========
Basic earnings (loss) per common share $ 2.14 $ 1.73 $ 1.04 $ 0.82 $ (0.01)
========== ============ ========== ========== ==========
Weighted average shares outstanding.......... 36,811 35,717 34,851 32,163 23,787
Diluted earnings (loss) per common share $ 2.08 $ 1.66 $ 0.98 $ 0.78 $ (0.01)
========== ============ ========== ========== ==========
Weighted average shares outstanding.......... 37,810 37,267 36,925 34,022 23,787
Other data:
Cash flow from (used in)
operating activities.......... $ 90,004 $ 18,249 $ 37,446 $ (1,722) $ 37,879
Cash flow used in investing activities............ (74,714) (47,878) (95,431) (1,423) (1,707)
Cash flow from (used in) financing
activities...................................... (10,345) 31,644 55,807 5,481 (35,676)
Capital expenditures.............................. 6,414 3,963 3,049 3,225 2,181
Balance sheet data (as of December 31):
Current assets.................................... $ 395,570 $ 338,604 $ 244,591 $ 208,396 $ 144,418
Working capital (a)............................... 217,779 169,159 105,287 80,390 27,559
Total assets...................................... 697,945 613,426 479,280 364,692 306,651
Long-term debt, including current
portion......................................... 162,938 184,388 158,776 105,701 202,905
Stockholders' equity (deficit).................... 343,096 247,276 174,492 128,829 (3,442)
(a) Working Capital is equal to current assets minus current liabilities.
</TABLE>
<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, 2005, approximately 88% of our revenue was derived from
contracts with the DOD and intelligence agencies, and approximately 11% from
civilian agencies that includes the Department of Homeland Security of the U.S.
federal government. For the year ended December 31, 2005, approximately 86% 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
4,300 active task orders. For the year ended December 31, 2005, our Stricom task
order under the ANSWER contract accounted for approximately 11% of our revenues.
No other task order accounted for more than 10% of our revenues. We have a
diverse mix of contract types, with approximately 41%, 37%, and 22% of our
revenues for the year ended December 31, 2005 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. We
have contracts with an estimated remaining contract value of $6.5 billion as of
December 31, 2005, of which $910.6 million was funded backlog. Our contracts
have a weighted-average term of approximately 7 years, assuming the exercise of
all potential contract options. From December 31, 1999 to December 31, 2005, our
estimated remaining contract value increased at a 21% 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 U.S. generally accepted accounting principles. 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, 2005, we estimate that approximately 98%
of our revenues were derived from services and approxima