UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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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
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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
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.
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.
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.
Revenues prior to
Year Acquired Business Business Description acquisition(1)
- ---------------------------------------------------------------------------------------------------------------------
($ in millions)
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
- ---------------------------------------------------------------------------------------------------------------------
(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.
Contract Mix
Year End
----------------------------------------------------------------------------------------------
Contract Type 2001 2002 2003 2004 2005
------ ------ ----- ------ ------
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%
-----------------------------------------------------------------------------------------------
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.
Owning Period of Contract Ceiling
Contract Name Agency Performance Value Role
- ---------------------------------------------------------------------------------------------------------------------
ANSWER GSA 1998 - 2008 $25 billion Prime
Millenia GSA 1999 - 2009 $25 billion Subcontractor
Millenia Lite GSA 2000 - 2010 $20 billion Prime
CIO-SP II NIH 2000 - 2010 $20 billion Prime
Listed below are our top ten programs by 2005 revenue, including single
award and multiple award contracts. We are a prime contractor on each of these
programs.
Top Programs by 2005 Revenue
($ in millions)
Estimated
Remaining
Programs Customer Period of Performance 2005 Revenue Contract Value Contract Type
- ---------------------------- ------------------ ------------------------- -------------- ---------------- ----------------
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
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.
ESTIMATED REMAINING CONTRACT VALUE
Unfunded Estimated Estimated Remaining
As of December 31, Funded Backlog Contract Value Contract Value
(in millions)
- ---------------------------------------- ------------------ ------------------- ----------------------
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
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.
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.
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.
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:
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
------ ---------------- -------------- -------------- --------------
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
--------------- --------------
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.
Year ended December 31
- --------------------------------------------- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ----- ---- ----
(in thousands, except per share data)
Statements of operations data:
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.
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 approximately 2% from product
sales. Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenues for time and materials contracts are recognized as time is spent at
hourly rates, which are negotiated with the customer plus the cost of any
allowable material costs and out-of-pocket expenses. Time and materials
contracts are typically more profitable than cost-plus contracts because of our
ability to negotiate rates and manage costs on those contracts. Revenues are
recognized under cost-plus contracts on the basis of direct and indirect costs
incurred plus a negotiated profit calculated as a percentage of costs, a fixed
amount or as a performance-based award fee. Cost-plus type contracts provide
relatively less risk than other contract types because we are reimbursed for all
direct costs and certain indirect costs, such as overhead and general and
administrative expenses, and are paid a fee for work performed. For certain
cost-plus type contracts, which are referred to as cost-plus award fee or
incentive fee type contracts, we recognize the expected fee to be awarded by the
customer at the time such fee can be reasonably estimated, based on factors such
as our prior award experience, communications with the customer regarding our
performance, including any interim performance evaluations rendered by the
customer or our average historical award fee rate on similar type contracts.
Under substantially all fixed price contracts, which are predominantly level of
effort contracts, revenues are recognized using the cost-to-cost method for all
services provided. Fixed price contracts that involve a defined number of hours
or a defined category of personnel are referred to as "level of effort"
contracts. We believe the cost-to-cost method is the best estimate for
determining performance on these contracts. For product-related fixed price
contracts, revenues are recognized as units are delivered (the units-of-delivery
method). In addition, we evaluate the contracts for multiple deliverables which
may require the segmentation of each deliverable into a separate accounting unit
for proper revenue recognition as defined by EITF 00-21. The appropriate revenue
recognition method based on applicable accounting guidance is then applied for
each separate unit.
We recognize revenues under our U.S. federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
U.S. federal government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full at inception
of the contract or periodically throughout the term of the contract as the
services are provided. From time to time, we may proceed with work on unfunded
portions of existing contracts based on customer direction pending finalization
and signing of contractual funding documents. We have an internal process for
approving any such work. All revenue recognition is deferred during periods in
which funding is not received. Costs incurred during such periods are deferred
if the receipt of funding is assessed as probable. In evaluating the probability
of funding being received, we consider our previous experiences with the
customer, communications with the customer regarding funding status, and our
knowledge of available funding for the contract or program. If funding is not
assessed as probable, costs are expensed as they are incurred. Historically, we
have not recorded any significant write-offs because funding was not ultimately
received.
For cost based contracts, we recognize revenues under our U.S. federal
government contracts based on allowable contract costs, as mandated by the U.S.
federal government's cost accounting standards. The costs we incur under U.S.
federal government contracts are subject to regulation and audit by certain
agencies of the federal government. Historically, contract cost disallowances
resulting from government audits have not been significant. We may be exposed to
variations in profitability, including potential losses, if we encounter
variances from estimated fees earned under award fee contracts and estimated
costs under fixed price contracts. Our incurred costs have been audited through
2003.
Contract revenue recognition inherently involves estimation. Examples of
such estimates include the level of effort needed to accomplish the tasks under
the contract, the cost of those efforts, and a continual assessment of our
progress toward the completion of the contract. From time to time, circumstances
may arise which require us to revise our estimated total revenue or costs.
Typically, these revisions relate to contractual changes. To the extent that a
revised estimate affects contract revenue or profit previously recognized, we
record the cumulative effect of the revision in the period in which it becomes
known. In addition, the full amount of an anticipated loss on any type of
contract is recognized in the period in which it becomes known.
We generally do not pursue fixed price software development work that may
create material financial risk. We do, however, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 41% time and materials, 37% cost-plus and 22% fixed price (a
substantial majority of which are firm fixed price level of effort) during the
year ended December 31, 2005. The contract mix can change over time depending on
contract awards and acquisitions. Under cost-plus contracts with the U.S.
federal government, operating profits typically range from 5% to 7% but are
statutorily limited to 10% on cost-plus-fixed-fee contracts. Under fixed price
and time and materials contracts, margins are not subject to statutory limits.
However, the U.S. federal government's objective in negotiating such contracts
is to seldom allow for operating profits in excess of 15% and our overall
operating profits on such contracts is less than 15%.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders, where on occasion issues may arise, which would
lead to accounts receivable not being fully collected.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and assigned to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead, material handling or
general and administrative expenses. Indirect costs cannot be identified with
specific contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulation, or "FAR," cannot be assigned or allocated to projects. Our principal
unallowable costs are interest expense, amortization expense for separately
identified intangibles from acquisitions, bad debt expense and certain general
and administrative expenses. The Company plans to adopt Statement of Financial
Accounting Standards or "SFAS," No. 123R in the first quarter of 2006. Under
FAR, compensation expense as related to stock options is considered unallowable
cost and not recoverable though our contracts. However, compensation expense as
related to restricted shares is allowable and can be allocated to the contracts
and tasks. A key element to our success has been our ability to control indirect
and unallowable costs, enabling us to profitably execute our existing contracts
and successfully bid for new contracts. In addition, with the acquisition of new
companies, we have been able to control our indirect costs and improve operating
margins by integrating the indirect cost structures and realizing opportunities
for cost synergies. Costs of revenues are considered to be a critical accounting
policy because of the direct relationship to revenue recognized.
Goodwill Impairment
Goodwill relating to our acquisitions represents the excess of cost over
the fair value of net tangible and separately identifiable intangible assets
acquired, and has a carrying amount of approximately $260.8 million and $242.1
million as of December 31, 2005 and 2004, respectively. The increase in goodwill
in 2005 was primarily related to the acquisition of Milestone in October 2005.
We completed our annual impairment analyses as of September 30, 2005 and
2004, noting no indications of impairment for any of our reporting units. As of
December 31, 2005, there have been no events or circumstances that would
indicate an impairment test should be performed sooner than our planned annual
test as of September 30, 2006.
Long-Lived Assets and Identifiable Intangible Asset Impairment
The net carrying amount of long-lived assets and identifiable intangible
assets was approximately $33.9 million and $24.1 million at December 31, 2005
and 2004, respectively. Of the $33.9 million at December 31, 2005, approximately
$10.4 million of the intangible assets, net of amortization, are related to our
recent acquisition of Milestone. Long-lived assets and identifiable intangible
assets, excluding goodwill, are evaluated for impairment when events occur that
suggest that such assets may be impaired. Such events could include, but are not
limited to, the loss of a significant customer or contract, decreases in U.S.
federal government appropriations or funding of certain programs, or other
similar events. None of these events occurred for the year ended December 31,
2005. We determine if an impairment has occurred based on a comparison of the
carrying amount of such assets to the future undiscounted net cash flows,
excluding charges for interest. If considered impaired, the impairment is
measured as the amount by which the carrying value of the assets exceeds their
estimated fair value, as determined by an analysis of discounted cash flows
using a discounted interest rate based on our cost of capital and the related
risks of recoverability. During the year ended December 31, 2003, we recognized
an impairment charge of approximately $135,000, included in general and
administrative expenses in the accompanying consolidated statement of
operations, to write-down the carrying value of a building that is currently on
the market for sale to its estimated fair market value.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on our ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Over the past four years, we have
been able to win the majority of our contracts that have been recompeted. In
addition, we have been able to sustain financial performance through indirect
cost savings from our acquisitions, which have generally resulted in either
maintaining or improving margins on our contracts and tasks. If we are required
to record an impairment charge in the future, it would have an adverse impact on
our results of operations.
Business Combinations
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to probable business combinations are deferred.
Statements of Operations
The following is a description of certain line items from our audited
consolidated statements of operations, which include the acquisition of
Milestone since the date of the acquisition.
Costs of revenues include direct labor and fringe costs for program
personnel and direct expenses incurred to complete contracts and task orders.
Costs of revenues also include depreciation, overhead, and other direct contract
costs, which include subcontract work, consultant fees, and materials. Overhead
consists of indirect costs relating to operational managers, rent/facilities,
administration, travel and other expenses.
General and administrative expenses are primarily for corporate functions
such as management, legal, finance and accounting, contracts and administration,
human resources, company management information systems and depreciation, and
also include other unallowable costs such as marketing, certain legal fees and
reserves.
Amortization expenses relate to the costs associated with intangible assets
from our acquisitions. These intangible assets represent the fair value assigned
to contract backlog and customer relationships as part of our acquisitions.
Amortization expenses also include costs associated with certain non-compete
agreements related to the ISI acquisition.
Other income is from non-core business items such as a gain on the reversal
of a reserve created from a prior acquisition, a settlement agreement in 2004
with the former shareholders of Sherikon, Inc., a write-off of deferred shelf
registration costs and the fair market value adjustments related to marketable
equity securities that are classified as trading securities.
Merger related expenses relate to legal and financial advisory costs
associated with the planned merger with General Dynamics and a wholly owned
subsidiary of General Dynamics.
Secondary offering expenses relate to costs associated with the selling of
our common stock in underwritten offerings during the year ended December 31,
2004. The Company sold no shares and received no proceeds in these offerings.
Therefore, we were required to classify the related costs as expenses.
Interest expense is primarily related to our Term Loan B and revolving
facility, our Senior Subordinated Notes due 2009, or the "12% Notes" and
amortization of deferred financing costs. None of our 12% Notes remained
outstanding after June 2004. Interest expense is reported net of interest
income. Interest income primarily relates to the interest earned on short term
investments and cash-on-hand.
Funded Backlog and Estimated Remaining Contract Value
Each year a significant portion of our revenue is derived from existing
contracts with our government customers, and a portion of the revenue represents
work related to maintenance, upgrade or replacement of systems under contracts
or projects for which we are the incumbent provider. Proper management of
contracts is critical to our overall financial success and we believe that
effective management of costs makes us competitive on price. Historically, we
believe that our demonstrated performance record and service excellence have
enabled us to maintain our position as an incumbent service provider on more
than 87% of our contracts that have been recompeted. We have increased our
estimated remaining contract value by approximately $236.1 million, from $6.3
billion as of December 31, 2004, to $6.5 billion at December 31, 2005, of which
approximately $910.6 million was funded backlog as of December 31, 2005. Funded
backlog increased approximately $79.7 million to $910.6 million at December 31,
2005, from $830.9 million as of December 31, 2004.
Our estimated remaining contract value represents the aggregate contract
revenue we estimate will be earned over the remaining life of our contracts.
When more than one company is awarded a contract for a given work requirement,
we include in estimated remaining contract value only our estimate of the
contract revenue we expect to earn over the remaining term of the contract.
Funded backlog is based upon amounts actually appropriated by a customer for
payment for goods and services. Because the U.S. federal government operates
under annual appropriations, agencies of the U.S. federal government typically
fund contracts on an incremental basis. Accordingly, the majority of the
estimated remaining contract value is not funded backlog. Our estimated
remaining contract value is based on our experience under contracts and we
believe our estimates are reasonable. However, there can be no assurance that
our existing contracts will result in actual revenues in any particular period
or at all. These amounts could vary depending upon government budgets and
appropriations.
Acquisitions
The following table summarizes our acquisitions since January 2004.
Revenues for the most
recently completed twelve
month period ended prior
Name Acquisition Date to acquisition
------------------- ------------------ ------------------------
(in thousands)
STI.......................... July 2004 $ 20,686
IMSI......................... August 2004 $ 31,715
MILESTONE.................... October 2005 $ 18,689
Acquisitions
We have completed and integrated nine strategic acquisitions since 1997.
Since January 2004, we have acquired three businesses: Simulation Technologies
Inc., Integrated Management Services, Inc., and Milestone Group, LLC.
Simulation Technologies, Inc. - On July 27, 2004, we purchased all of the
outstanding stock of Simulation Technologies Inc., or "STI," a provider of
modeling and simulation software solutions and services, based in San Antonio,
Texas, for a total purchase price of $15.1 million (net of cash acquired),
including transaction costs. We financed the acquisition through borrowings
under our existing Credit Facility. The transaction was accounted for in
accordance with SFAS No. 141, Business Combinations, whereby the net tangible
and identifiable intangible assets acquired and liabilities assumed were
recognized at their estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $2.6 million of contracts and
related customer relationships with an expected weighted average useful life of
5 years. The value of the contracts and customer relationships is based, in
part, on an independent appraisal and other studies performed by us. Goodwill
recognized from this acquisition was approximately $9.5 million and is not
deductible for tax purposes. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill arising from the transaction is not being amortized.
Pursuant to the requirements of SFAS No. 141, the effect of the acquisition did
not meet the criteria of a significant acquisition, and therefore, pro forma
disclosures are not presented in the audited consolidated financial statements.
Integrated Management Services, Inc. - On August 11, 2004, we purchased all
of the outstanding stock of Integrated Management Services, Inc., or "IMSI," a
provider of high end, mission critical information and securities solutions,
based in Arlington, Virginia, for a total purchase price of $29.0, million
including transaction costs. We financed the acquisition through borrowings
under our existing Credit Facility. Under the terms of the stock purchase
agreement, we may be obligated to pay up to $2.0 million of additional
consideration if follow on work related to a certain government contract was
awarded in the time frame set forth under the stock purchase agreement. We have
communicated to the seller of IMSI our determination of the additional
consideration we believe is due, have received the seller's response and intend
to further discuss the matter with the seller. The transaction was accounted for
in accordance with SFAS No. 141, Business Combinations, whereby the net tangible
and identifiable intangible assets acquired and liabilities assumed were
recognized at their estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $5.9 million of contracts and
related customer relationships with an expected weighted average useful life of
5 years. The value of the contracts and customer relationships is based, in
part, on an independent appraisal and other studies performed by us. Goodwill
recognized from this acquisition was approximately $20.6 million and is
deductible for tax purposes due to a tax code election made at the time of the
acquisition. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill arising from the transaction is not being amortized. Pursuant
to the requirements of SFAS No. 141, the effect of the acquisition did not meet
the criteria of a significant acquisition, and therefore, pro forma disclosures
are not presented in the audited consolidated financial statements.
Milestone Group, LLC. - On October 14, 2005, we purchased all of the
outstanding limited liability membership interests of Milestone Group, LLC, or
"Milestone," a provider of IT professional services, based in Arlington,
Virginia, for a total purchase price of $30.9 million, including transaction
costs. We financed the acquisition through cash-on-hand and proceeds from the
sales of short term investments. The transaction was accounted for in accordance
with SFAS No. 141, Business Combinations, whereby the net tangible and
identifiable intangible assets acquired and liabilities assumed were recognized
at their estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $10.5 million of contracts and
related customer relationships with an expected weighted average useful life of
8 years. The value of the contracts and customer relationships is based on an
independent appraisal and other studies performed by us. Goodwill recognized
from this acquisition was approximately $18.9 million and is deductible for tax
purposes. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill arising from the transaction is not being amortized. Pursuant to the
requirements of SFAS No. 141, the effect of the acquisition did not meet the
criteria of a significant acquisition, and therefore, pro forma disclosures are
not presented in the audited consolidated financial statements.
Results of Operations
Our historical consolidated financial statements do not reflect the
full-year impact of the operating results of a number of our acquisitions, since
their operating results are only included or excluded from our results from the
date of acquisition, as applicable.
The following table sets forth our consolidated results of operations based
on the amounts and percentage relationship of the items listed to revenues
during the period shown:
Years Ended
---------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
(in thousands, except percentages)
Revenues $ 1,493,212 100.0% $1,268,139 100.0% $ 1,042,474 100.0%
Costs of revenues............. 1,276,627 85.5 1,093,470 86.2 897,264 86.1
------------- ---------- ---------- --------- ----------- -------
Gross profit............... 216,585 14.5 174,669 13.8 145,210 13.9
Costs and expenses:..........
General and administrative. 76,691 5.1 65,964 5.2 58,647 5.6
Amortization............... 3,015 0.2 2,676 0.2 2,450 0.2
------------- ---------- ---------- --------- ----------- -------
Total operating expenses....... 79,706 5.3 68,640 5.4 61,097 5.8
------------- ---------- ---------- --------- ----------- -------
Operating income.............. 136,879 9.2 106,029 8.4 84,113 8.1
Other income, net............. 1,049 0.1 973 -- -- --
Merger related expenses....... 2,432 0.2 -- -- -- --
Secondary offering expenses -- -- 240 -- 852 0.1
Interest expense, net......... 8,883 0.6 7,769 0.7 24,244 2.3
Minority interest............. (75) -- (72) -- (54) --
------------- ---------- ---------- --------- ----------- -------
Income before provision for
income taxes............. 126,538 8.5 98,921 7.8 58,963 5.7
Provision for income taxes.... 47,830 3.2 37,116 2.9 22,773 2.2
------------- ---------- ---------- --------- ----------- -------
Net income ................... $ 78,708 5.3% $ 61,805 4.9% $ 36,190 3.5%
============= ========== ========== ========= =========== =======
2005 compared with 2004
Revenues
For the year ended December 31, 2005, revenues increased by $225.1 million,
or 17.7%, to $1.493 billion from $1.268 billion for the year ended December 31,
2004. The increase in revenues was attributable primarily to organic growth. We
define organic growth as the increase in revenues excluding the revenues
associated with acquisitions, divestitures and closures of businesses in
comparable periods. We believe organic growth is a useful supplemental measure
to revenues. Management uses organic growth as part of its evaluation of core
operating results and underlying trends. For the year ended December 31, 2005,
our organic growth was 14.9%, or $188.4 million. The increase in revenues
attributable to organic growth was primarily driven by growth in the following
business areas: task orders in support of a wide range of federal government
agencies under our GSA ANSWER, Millenia Lite - Area 3, and Logistic Worldwide
contracts; Aegis Ballistic Missile Defense (BMD) Program; Stricom Omnibus
Contract (STOC) including Military Operations on Urban Terrain (MOUT); and task
orders under our Naval Sea Systems Command (NAVSEA) Multiple Award Contract.
Costs of Revenues
For the year ended December 31, 2005, costs of revenues increased by $183.2
million, or 16.8%, to $1.277 billion from $1.093 billion for year ended December
31, 2004. The increase in costs of revenues was due in part to the corresponding
growth in revenues resulting from organic growth and the increase in employee
headcount. The majority of the increase in costs of revenues for the year ended
December 31, 2005 was due to increases of $68.4 million and $82.9 million in
direct labor and other direct contract costs, respectively.
Gross Profit
For the year ended December 31, 2005, gross profit increased by $41.9
million, or 24.0%, to $216.6 million from $174.7 million for the year ended
December 31, 2004. Gross profit as a percentage of revenues increased to 14.5%
from 13.8% as a result of improvements to profit rates on certain contracts.
General and Administrative Expenses
For the year ended December 31, 2005, general and administrative expenses
increased $10.7 million, or 16.3%, to $76.7million from $66.0 million for the
year ended December 31, 2004. General and administrative expenses for the year
ended December 31, 2004, as a percentage of revenues decreased to 5.1% from
5.2%. The dollar increase was primarily attributable to the corresponding growth
in revenues and additions to the allowance for uncollectible receivables. The
decrease in general and administrative as a percentage of revenues was primarily
related to controlling our indirect costs.
Amortization
For the year ended December 31, 2005, amortization expenses increased
$339,000, or 12.7%, to $3.0 million from $2.7 million for the year ended
December 31, 2004. The increase in amortization expense was a result of
additional amortization related to intangible assets acquired in connection with
the purchase of Milestone. Amortization as a percentage of revenues remained
constant at 0.2%.
Operating Income
For the year ended December 31, 2005, operating income increased $30.9
million, or 29.1%, to $136.9 million from $106.0 million for the year ended
December 31, 2004. The increase in operating income was primarily a result of
the corresponding increase in revenues. Operating income as a percentage of
revenues increased to 9.2% for the year ended December 31, 2005 from 8.4% for
the year ended December 31, 2004. The increase in operating income as a
percentage of revenues was primarily a result of controlling our indirect costs
and an improvement to profit rates on certain contracts
Other Income
For the year ended December 31, 2005, other income was $1.0 million as
compared to $973,000 for the year ended December 31, 2004. The 2005 other income
was primarily related to a $900,000 gain on a reversal of an acquisition
reserve. The 2004 other income was primarily related to a $899,000 gain on a
settlement agreement with the former shareholders of Sherikon.
Merger Related Expenses
For the year ended December 31, 2005, merger related expenses were $2.4
million compared to zero for the year ended December 31, 2004. The increase in
merger related expenses was a result of legal and financial advisory costs
incurred with the planned merger with General Dynamics and a wholly owned
subsidiary of General Dynamics
Interest Expense, Net
For the year ended December 31, 2005, interest expense, net of interest
income, increased $1.1 million, or 14.3%, to $8.9 million from $7.8 million for
the year ended December 31, 2004. The net increase in interest expense was
primarily due to the higher interest rates on the Term Loan B during the year
ended December 31, 2005. During the year ended December 31, 2005, the interest
rate on the Term Loan B borrowings ranged from 4.31% to 6.14% compared to a
range of 3.11% to 4.31% on the term loan outstanding for the same period in the
prior year. For the year ended December 31, 2005 and 2004, interest income
earned on short term investments and cash-on-hand was $1.0 million and $31,000,
respectively.
Provision For Income Taxes
Our effective tax rate for the year ended December 31, 2005 was 37.8%,
compared with 37.5% for the year ended December 31, 2004. The 2005 effective tax
rate reflects a benefit for tax exempt interest, a benefit for current and prior
year state and local tax credits, and an expense for nondeductible transaction
costs. The 2004 effective tax rate reflects a benefit for federal research and
experimentation credits from amending prior years tax returns, state legislative
changes and a non-recurring benefit from nontaxable other income resulting from
the settlement with the former owners of Sherikon.
2004 compared with 2003
Revenues
For the year ended December 31, 2004, revenues increased by $225.7 million,
or 21.6%, to $1.268 billion from $1.042 billion for the year ended December 31,
2003. The increase in revenues was attributable to organic growth and the
acquisitions of STI and IMSI. We define organic growth as the increase in
revenues excluding the revenues associated with acquisitions, divestitures and
closures of businesses in comparable periods. We believe organic growth is a
useful supplemental measure to revenue. Management uses organic growth as part
of its evaluation of core operating results and underlying trends. For the year
ended December 31, 2004, our organic growth was 14.2%, or $146.3 million. The
acquisitions of STI and IMSI accounted for approximately $20.8 million of the
revenue growth for the year ended December 31, 2004. The increase in revenues
attributable to organic growth was primarily driven by growth in the following
business areas: task orders in support of a wide range of federal government
agencies under our GSA ANSWER and Management and Business Services (MOBIS)
contracts; Engineering and Technical Services for Deploying Enabling
Technologies with the U.S. Navy; engineering and technical support to the U.S.
Army's "Program Executive Office for Simulation, Training and Instrumentation";
Foreign Military Sales Logistics support; and task orders under our NAVSEA
Multiple Award Contract.
Costs of Revenues
For the year ended December 31, 2004, costs of revenues increased by $196.2
million, or 21.9%, to $1.093 billion from $897.3 million for year ended December
31, 2003. The increase in costs of revenues was due in part to the corresponding
growth in revenues resulting from organic growth and the acquisition of STI and
IMSI and the increase in employee headcount. The majority of the increase in
costs of revenues for the year ended December 31, 2004 was due to increases of
$78.1 million and $76.5 million in direct labor and other direct contract costs,
respectively.
Gross Profit
For the year ended December 31, 2004, gross profit increased by $29.5
million, or 20.3%, to $174.7 million from $145.2 million for the year ended
December 31, 2003. Gross profit for the year ended December 31, 2004, as a
percentage of revenues remained relatively consistent.
General and Administrative Expenses
For the year ended December 31, 2004, general and administrative expenses
increased $7.3 million, or 12.5%, to $66.0 million from $58.6 million for the
year ended December 31, 2003. General and administrative expenses for the year
ended December 31, 2004, as a percentage of revenues, decreased to 5.2% from
5.6%. This decline in the percentage of revenues was driven primarily by
operational cost efficiencies achieved in connection with acquisitions and their
successful integration. The dollar increase was primarily attributable to the
corresponding growth in revenues and additional expenses related to compliance
with provisions of, and rules promulgated in connection with, Section 404 of the
Sarbanes-Oxley Act of 2002.
Amortization
For the year ended December 31, 2004, amortization expenses increased
$226,000, or 9.2%, to $2.7 million from $2.5 million for the year ended December
31, 2003. The increase in amortization expense was a result of additional
amortization related to intangible assets acquired in connection with the
purchase of STI and IMSI.
Operating Income
For the year ended December 31, 2004, operating income increased $21.9
million, or 26.1%, to $106.0 million from $84.1 million for the year ended
December 31, 2003. The increase in operating income was primarily a result of
the corresponding increase in revenues. Operating income as a percentage of
revenues increased to 8.4% for the year ended December 31, 2004 from 8.1% for
the year ended December 31, 2003. The increase in the percentage of revenues was
driven by the decline in the general and administrative expenses as a percentage
of revenues.
Other Income
For the year ended December 31, 2004, other income was $973,000 as compared
to zero for the year ended December 31, 2003. The increase in other income was
primarily related to a settlement agreement we entered into in July 2004 with
the former owners of Sherikon, a company we acquired in October 2000. Under the
provisions of the settlement agreement, the principal amount of the subordinated
note payable was reduced from $2.5 million to $1.35 million, and we paid the
reduced note amount, without interest. This resulted in other income of
approximately $899,000, net of legal expenses.
Interest Expense, Net
For the year ended December 31, 2004, interest expense, net of interest
income, decreased $16.5 million, or 68.0%, to $7.7 million from $24.2 million
for the year ended December 31, 2003. The decrease in interest expense was
primarily due to the repurchase of our 12% Notes and the refinancing of our
Credit Facility. In December 2003, we reduced the balance on our 12% Notes to
approximately $1.9 million from $75.0 million by utilizing the proceeds from the
$150.0 million in Term Loan B borrowings made under the Credit Facility. In June
2004, we repurchased the remaining $1.9 million principal amount outstanding of
our 12% Notes. In conjunction with the repurchase in 2004, we paid a tender
premium of $113,000 which was included in interest for 2004. In 2003, we
incurred a $7.2 million bond premium and consent payment, $300,000 of fees and
wrote off $2.6 million of deferred financing fees to interest expense.
Secondary Offering Expenses
On October 29, 2004, affiliates of and companies managed by Caxton-Iseman
Capital, Inc., including Azimuth Technologies, L.P., Azimuth Tech II LLC and
Frederick J. Iseman, which we refer to collectively as the "Caxton-Iseman
Stockholders," sold 3,600,000 shares of our common stock in an underwritten
offering pursuant to a shelf registration statement on Form S-3 filed with the
SEC (Commission File No. 333-111249). Neither we nor any of our executive
officers participated in the sale of shares in this offering. In connection with
this offering, we incurred $240,000 of expenses for the year ended December 31,
2004, for which we were not reimbursed in accordance with the terms of our
registration rights agreement with certain of our stockholders, as amended.
On September 22, 2003, certain of our stockholders, including Caxton-Iseman
stockholders, sold 6,600,000 shares of our common stock in an underwritten
offering pursuant to a registration statement on Form S-3 filed with the SEC
(Commission File Nos. 333-108147 and 333-108858). In the fourth quarter of 2003,
the underwriters of this offering partially exercised their over-allotment
option with respect to additional shares held by the selling stockholders. As a
result, on October 16, 2003, certain of the selling stockholders sold an
additional 297,229 shares of our common stock in a second closing pursuant to
the same underwritten offering. In connection with this offering, we incurred
approximately $852,000 of expenses for the year ended December 31, 2003, which
amounts were reimbursed by certain of the selling stockholders and recorded by
us as an expense and a contribution to additional paid-in capital.
Provision For Income Taxes
Our effective tax rate for the year ended December 31, 2004 was 37.5%,
compared with 38.6% for the year ended December 31, 2003. The 2004 effective tax
rate reflects a benefit for federal research and experimentation credits from
amending prior years tax returns, state legislative changes and a non-recurring
benefit from nontaxable other income resulting from the settlement with the
former owners of Sherikon, which resulted in a stock basis difference, for which
a deferred tax liability was not required to be recorded.
Liquidity and Capital Resources
Cash Flow for the Years Ended December 31, 2005 and 2004
We generated $90.0 million in cash from operations for the year ended
December 31, 2005. By comparison, we generated $18.2 million in cash from
operations for the year ended December 31, 2004. Accounts receivable Days Sales
Outstanding, or "DSO," decreased to 76 days for the year ended December 31, 2005
from 82 days for the year ended December 31, 2004. The 6 day decrease in DSO is
largely attributable to our improved billing and collection process. Contract
receivables increased $14.5 million to $331.8 million for the year ended
December 31, 2005 as compared to $317.3 million for the year ended December 31,
2004. Accounts receivable at December 31, 2005 represented 47.5% of total assets
at that date. As a result of our acquisition of Milestone, accounts receivable
increased by approximately $4.2 million. The remaining increase was attributable
to the overall growth of our business. For the year ended December 31, 2005, net
cash used in investing activities was $74.7 million, which was attributable to
our acquisition of Milestone and the purchases of short term investments. Net
cash used by financing activities was $10.3 million for the year ended December
31, 2005. Cash used by financing activities was primarily related to the $19.8
million paydown of the revolver balance under our existing Credit Facility,
offset in part by $11.3 million in cash received from financing activities from
the issuance of common stock during 2005.
On September 30, 2004, we entered into a second amendment to our Credit
Facility. This amendment provided an additional $16.1 million of borrowing by
increasing our Term Loan B to $165.0 million, and lowered the interest rates on
Term Loan B borrowings by 0.25%. The additional $16.1 million in borrowings did
not reduce the $200.0 million in potential additional borrowings described
below. As of December 31, 2005, total debt outstanding was $162.9 million,
consisting of $162.9 million of Term Loan B, and zero outstanding under the
revolving loan portion of our Credit Facility. The total funds available to us
under the revolving loan portion of our Credit Facility as of December 31, 2005
were $194.8 million. Under certain conditions related to excess annual cash
flow, as defined in our Credit Facility, and the receipt of proceeds from
certain asset sales and debt or equity issuances, we are required to prepay, in
amounts specified in our Credit Facility, borrowings under the Term Loan B. For
the years ended December 31, 2005 and 2004, we did not have to prepay amounts
specified in our Credit Facility as related to annual excess cash flow.
Prior to September 30, 2004, our Credit Facility provided, among other
things, a Term Loan B in the amount of $150.0 million with a maturity date of
December 31, 2010, and the extension of the maturity date of the revolving loan
portion of our Credit Facility to December 31, 2008. In addition, the Credit
Facility permitted us to raise up to $200.0 million of additional debt in the
form of additional term loans, subordinated debt or revolving loans with certain
restrictions on the amount of revolving loans. All borrowings under our Credit
Facility are subject to financial covenants customary for such financings,
including, but not limited to: maximum ratio of net debt to EBITDA and maximum
ratio of senior debt to EBITDA, as defined in the Credit Facility. For the year
ended December 31, 2005, we complied with all of the financial covenants.
Additionally, as a result of changes made in the second amendment and
restatement, revolving loans are now based upon an asset test or maximum ratio
of net eligible accounts receivable to revolving loans. Historically, our
primary liquidity requirements have been for debt service under our Credit
Facility and 12% Notes and for acquisitions and working capital requirements. We
have funded these requirements primarily through internally generated operating
cash flow and funds borrowed under our existing Credit Facility.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth of our business. For the year ended December
31, 2005, working capital increased by $48.6 million to $217.8 million from
$169.2 million for the year ended December 31, 2004. The increase in working
capital was primarily the result of growth of our business that generated cash
that was held on hand and in short term investments. Our principal sources of
cash to fund our working capital needs are cash generated from operations and
borrowings under our Credit Facility. In addition, we are scheduled to pay
quarterly installments of $412,500 under the Term Loan B until the Credit
Facility matures on December 31, 2010. As of December 31, 2005, we did not have
any capital commitments greater than $1.0 million.
We have relatively low capital investment requirements. Capital
expenditures were $6.4 million and $4.0 million for the years ended December 31,
2005 and 2004, respectively, primarily for leasehold improvements and office
equipment.
Our business acquisition expenditures relating to Milestone were $30.9
million in 2005. The acquisition was financed through cash-on-hand and proceeds
from the sales of short term investments. In the past, we have engaged in
acquisition activity, and we intend to do so in the future. Historically, we
have financed our acquisitions through a combination of bank debt, subordinated
debt, subordinated public and private debt and equity investments. We expect to
be able to finance any future acquisitions either with cash provided from
operations, borrowings under our Credit Facility, bank loans, equity offerings,
or some combination of the foregoing.
We intend to, and expect over the next twelve months to be able to, fund
our operating cash, capital expenditure and debt service requirements through
cash flow from operations and borrowings under our Credit Facility. Over the
longer term, our ability to generate sufficient cash flow from operations to
make scheduled payments on our debt obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside our control.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligation
We use off-balance sheet financing, primarily to finance the lease of
operating facilities and certain capital items. Operating leases are used
primarily to finance computers, servers, phone systems, and to a lesser extent,
other fixed assets, such as furnishings. As of December 31, 2005, we financed
equipment with an original cost of approximately $19.4 million through operating
leases. Had we not used operating leases, we would have used our existing Credit
Facility to purchase these assets. In addition, our offices, warehouse and shop
facilities are obtained through operating leases. Other than the operating
leases described above, we do not have any other off-balance sheet financing.
The following table provides information (in thousands) as of December 31, 2005
regarding our off-balance sheet arrangements and contractual obligations.
Payments due by period (in thousands)
-------------------------------------------------------------------------------
Less than More than 5
Contractual Obligations Total 1 year 1-3 year 3-5 years years
----- ------ -------- --------- -------------
Long-term debt $ 162,938 $ 1,650 $ 3,300 $ 3,300 $ 154,688
Capital lease obligations 362 140 207 15 --
Operating leases 155,879 29,540 43,834 28,423 54,082
Other long-term liabilities 6,529 -- 262 1,595 4,672
------------- ---------- ---------- ----------- ------------
Total $ 325,708 $ 31,330 $ 47,603 $ 33,333 $ 213,442
============= ========== ========== =========== ============
Inflation
We do not believe that inflation has had a material effect on our business
in 2005, 2004, or 2003 as our contract billing rates typically have taken
inflation into account.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, "Accounting Changes" and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary
changes in an accounting principle and changes the requirements for accounting
for and reporting a change in an accounting principle. SFAS No. 154 requires the
retrospective application to prior periods' financial statements of the direct
effect of a voluntary change in an accounting principle unless it is
impracticable. APB No. 20 required that most voluntary changes in an accounting
principle be recognized by including the cumulative effect of changing to the
new accounting principle in net income for the first quarter of the year for
which the change occurred. FASB stated that SFAS No. 154 improves financial
reporting because its requirements enhance the consistency of financial
information between periods. Unless early adoption is elected, SFAS No. 154 is
effective for fiscal years beginning after December 15, 2005. Early adoption is
permitted for fiscal years beginning after June 1, 2005. SFAS No. 154 does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
statement. The Company believes the adoption of SFAS No. 154 will not have a
significant impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets. This statement amends Accounting Principles Board (APB) Opinion No. 29
to improve financial reporting by eliminating certain narrow differences between
the FASB's and the International Accounting Standards Board's (IASB) existing
accounting standards for nonmonetary exchanges of similar productive assets. The
provisions of this statement shall be prospectively applied and are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company believes the adoption of this statement will have no
impact on the Company's financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share Based
Payment. (SFAS No. 123R), which amends SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 95, Statement of Cash Flows. SFAS No. 123R requires
all companies to measure compensation cost for all share-based payments at fair
value, and will be effective for public companies with fiscal years beginning
after July 1, 2005. This new standard may be adopted in one of three ways: a)
the modified prospective transition method, b) the modified retrospective
transition method - the beginning of the annual period of adoption or c) the
modified retrospective transition method by restating all periods presented. The
Company intends to adopt SFAS No. 123R using the modified retrospective
transition method in the first quarter of 2006.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate exposure relating to certain of our long-term
obligations. The interest rates on both the Term Loan B and the revolving loan
portion of our Credit Facility are affected by changes in market interest rates.
We manage these fluctuations by reducing the amount of outstanding debt through
cash flow by focusing on billing and collecting our accounts receivable.
During the year ended December 31, 2004, the last of our interest rate swap
agreements, with a notional value of $10.0 million, matured. We are not
currently contemplating any future interest rate swap agreements. However, as
market conditions change, we will reevaluate our position.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by $1.7 million and $1.6 million for the year
ended December 31, 2005 and 2004, respectively.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements are provided in Part IV, Item 15 of
this filing.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We had no disagreements with our independent registered public accounting
firm on accounting principles, practices or financial statement disclosure
during the two years prior to the date of our most recent consolidated financial
statements included elsewhere in this report.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer (our principal executive officer and principal financial
officer, respectively), evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2005. Based on this evaluation, our chief executive
officer and chief financial officer concluded that, as of December 31, 2005, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the U.S. Securities and Exchange Commission's
rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) of the
Exchange. Our management, with the participation of our chief executive officer
and chief financial officer (our principal executive officer and principal
financial officer, respectively), assessed the effectiveness of our internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO Framework"). Management excluded from its assessment
of the effectiveness of the Company's internal control over financial reporting
as of December 31, 2005, Milestone's internal control over financial reporting
associated with total assets of $3.9 million and total revenues of $4.6 million
included in the consolidated financial statements of the Company as of and for
the year ended December 31, 2005. Based on our assessment under the COSO
Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2005.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of certain
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their goals under all potential future conditions.
Our independent registered public accounting firm, KPMG LLP, issued an
attestation report on our management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2005, which appears
below.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anteon International Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting that Anteon
International Corporation and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)". The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
The Company acquired Milestone Group, LLC. ("Milestone") in October 2005,
and management excluded from its assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
Milestone's internal control over financial reporting associated with total
assets of $3.9 million and total revenues of $4.6 million included in the
consolidated financial statements of the Company as of and for the year ended
December 31, 2005. Our audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over financial
reporting of Milestone.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2005, and our report dated March 16, 2006 expressed an unqualified
opinion on those consolidated financial statements.
KPMG LLP
McLean, Virginia
March 16, 2006
PART III
MANAGEMENT
Item 9B. Other Information
None
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 14. Principal Accountants Fees and Services
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Page Number
in 2005
Annual Report
------------------------------------------------------------------------------------------ ------------------------
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended December 31, 2005 F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for Each of the Years in the Three-Year
Period Ended December 31, 2005 F-4
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 2005 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-29
(a) 2. Financial Statement Schedule
Valuation and Qualifying Accounts S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: March 16, 2006 By: /s/: Joseph M. Kampf
- -------------------- ----------------------
Joseph M. Kampf
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title Date
/s/: JOSEPH M. KAMPF March 16, 2006
------------------------------------ --------------
Joseph M. Kampf President and Chief Executive Officer
and Director (Principal Executive Officer)
/s/: CHARLES S. REAM March 16, 2006
------------------------------------ --------------
Charles S. Ream Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
------------------------------------
Frederick J. Iseman Chairman of the Board and Director
/s/: GILBERT F. DECKER March 16, 2006
------------------------------------ --------------
Gilbert F. Decker Director
/s/: ROBERT A. FERRIS March 16, 2006
------------------------------------ --------------
Robert A. Ferris Director
/s/: PAUL G. KAMINSKI March 16, 2006
------------------------------------ --------------
Paul G. Kaminski Director
/s/: STEVEN M. LEFKOWITZ March 16, 2006
------------------------------------ --------------
Steven M. Lefkowitz Director
/s/: HENRY HUGH SHELTON March 16, 2006
------------------------ --------------
Henry Hugh Shelton Director
------------------------------------
William J. Perry Director
/s/: PAUL DAVID MILLER March 16, 2006
------------------------------------ --------------
Paul David Miller Director
/s/: PAUL J. KERN March 16, 2006
------------------------------------ --------------
Paul J. Kern Director
/s/: MICHAEL T. SMITH March 16, 2006
------------------------------------ --------------
Michael T. Smith Director
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of March 7, 1999, by
and among Anteon Corporation, Buffalo Acquisition
Corporation and Analysis & Technology, Inc. (incorporated by
reference to Exhibit Z to Analysis & Technologies, Inc.'s
Current Report on Form 8-K filed on March 9, 1999).
2.2 Agreement and Plan of Merger between Anteon International
Corporation, a Virginia corporation, and the Registrant
(incorporated by reference to Exhibit 2.2 to Anteon
International Corporation's Amendment No. 1 to Form S-1
Registration Statement, filed on February 5, 2002
(Commission File No. 333-75884)).
2.3 Agreement and Plan of Merger, dated as of December 13, 2005,
by and among Anteon International Corporation, Avenger
Acquisition Corporation and General Dynamics (incorporated
by reference to Exhibit 10.1 to Anteon International
Corporation's Current Report on Form 8-K filed on December
14, 2005
3.1 Amended and Restated Certificate of Incorporation of Anteon
International Corporation (incorporated by reference to
Exhibit 3.1 of Anteon International Corporation's Quarterly
Report on Form 10-Q filed on May 14, 2002).
3.2 Certificate of Designations of Series A Preferred Stock of
Anteon International Corporation (incorporated by reference
to Exhibit 3.2 of Anteon International Corporation's
Quarterly Report on Form 10-Q filed on May 14, 2002).
3.3 Amended and Restated By-laws of Anteon International
Corporation (incorporated by reference to Exhibit 3.3 of
Anteon International Corporation's Quarterly Report on Form
10-Q filed on May 14, 2002).
4.1 Indenture, dated as of May 11, 1999, by and among Anteon
Corporation, Vector Data Systems, Inc., Techmatics, Inc. and
IBJ Whitehall Bank & Trust Company, as trustee (incorporated
by reference to Exhibit 4.1 to Anteon International
Corporation's Registration Statement on Form S-4 filed on
August 9, 1999 (Commission File No. 333-84835)).
4.2 First Supplemental Indenture, effective as of June 23, 1999,
among Anteon Corporation, Analysis & Technology, Inc.,
Interactive Media Corp. and IBJ Whitehall Bank & Trust
Company, as trustee (incorporated by reference to Exhibit
4.2 to Anteon International Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000).
4.3 Second Supplemental Indenture, effective as of October 14,
1999, among Anteon Corporation, Anteon-CITI LLC and IBJ
Whitehall Bank & Trust Company, as trustee (incorporated by
reference to Exhibit 4.3 to Anteon International
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000).
4.4 Third Supplemental Indenture, dated as of October 20, 2000,
among Anteon Corporation, Sherikon, Inc. and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.4
to Anteon International Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2000).
4.5 Fourth Supplemental Indenture, dated January 1, 2001, among
Anteon International Corporation (formerly Anteon
Corporation), Anteon Corporation (formerly Techmatics, Inc.)
and The Bank of New York, as successor trustee of IBJ
Whitehall Bank & Trust Company (incorporated by reference to
Exhibit 4.5 to Anteon International Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
2000).
4.6 Fifth Supplemental Indenture between the Registrant and The
Bank of New York, as trustee (incorporated by reference to
Exhibit 4.1 of Anteon International Corporation's Quarterly
Report on Form 10-Q filed on May 14, 2002).
4.7 Sixth Supplemental Indenture, dated as of March 15, 2002,
among Anteon International Corporation (formerly Azimuth
Technologies, Inc.), a Delaware corporation, Anteon
International Corporation (formerly Anteon Corporation), a
Virginia corporation, and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.2 of Anteon
International Corporation's Quarterly Report on Form 10-Q
filed on May 14, 2002).
4.8 Seventh Supplemental Indenture, dated as of May 23, 2003,
among Anteon International Corporation (formerly Azimuth
Technologies, Inc.) and The Bank of New York, as trustee.
(incorporated by reference to Exhibit 4.8 to Anteon
International Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003 filed on March 8,
2004).
4.9 Eighth Supplemental Indenture, dated as of December 5, 2003,
among Anteon International Corporation, Anteon Corporation,
Information Spectrum, Inc. and The Bank of New York, as
trustee. (incorporated by reference to Exhibit 4.9 to Anteon
International Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003 filed on March 8,
2004).
4.10 Registration Rights Agreement dated March 11, 2002, among
the Registrant, Azimuth Technologies, L.P., Azimuth Tech. II
LLC, Frederick J. Iseman, Joseph M. Kampf and the other
parties named therein (incorporated by reference to Exhibit
4.8 to Anteon International Corporation's Amendment No. 1 to
Form S-1 Registration Statement filed on February 5, 2002
(Commission File No. 333-75884)).
4.11 Amendment No. 1, dated as of September 3, 2003, to the
Registration Rights Agreement, dated March 11, 2002, among
the Registrant, Azimuth Technologies, L.P., Azimuth Tech. II
LLC, Frederick J. Iseman, Joseph M. Kampf and the other
parties named therein (incorporated by reference to Exhibit
4.5 to Anteon International Corporation's Form S-3
Registration Statement filed on December 17, 2003
(Commission File No. 333-111249)).
4.12 Rights Agreement, dated March 15, 2002 (incorporated by
reference to Exhibit 4.1 to Anteon International
Corporation's Current Report on Form 8-K, filed on April 5,
2002).
10.1 Second Amendment, dated as of September 30, 2004, to the
Amended and Restated Credit Agreement, dated as of December
19, 2003 among Anteon International Corporation, Bank of
America, N.A., and Citizens Bank of Pennsylvania
(incorporated by reference to Exhibit 10.1 to Anteon
International Corporation's Quarterly Report on Form 10-Q
filed on November 3, 2004).
10.11Amended and Restated Credit Agreement, dated as of October
21, 2002, to the Credit Agreement, dated as of June 23,
1999, among Anteon International Corporation, Credit Suisse
First Boston, Mellon Bank, N.A., Duetsche Bank AG and the
lenders named therein (incorporated by reference to Exhibit
10.11 to Anteon International Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 filed
on March 11, 2003).
10.12Amendment Agreement, dated as of December 19, 2003 to the
Amended and Restated Credit Agreement, dated as of October
21, 2002, among Anteon International Corporation, Anteon
Corporation, Credit Suisse First Boston and Citizens Bank of
Pennsylvania. (incorporated by reference to Exhibit 10.12 to
Anteon International Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2003 filed on
March 8, 2004).
10.15Security Agreement, dated as of June 23, 1999, among Anteon
Corporation, Analysis & Technology, Inc., Interactive Media
Corp., Techmatics, Inc., Vector Data Systems, Inc. and
Mellon Bank, N.A. (incorporated by reference to Exhibit 10.8
to Anteon International Corporation's Registration Statement
on Form S-4 filed on August 9, 1999 (Commission File No.
333-84835)).
10.16Amended and Restated Omnibus Stock Plan (incorporated by
reference to Exhibit 10.2 to Anteon International
Corporation's Quarterly Report on Form 10-Q filed May 14,
2002).
10.17Stock Option Agreement (incorporated by reference to
Exhibit 10.17 to Anteon International Corporation's
Amendment No. 2 to Form S-1 Registration Statement filed on
February 19, 2002 (Commission File No. 333-75884)).
10.22Form of Amended and Restated Executive Agreement
(incorporated by reference to Exhibit 10.1 to Anteon
International Corporation's Current Report on Form 8-K filed
on January 25, 2006).
10.24Amendment No. 1 to the Rights Agreement dated as of
December 31, 2005 by and between Anteon International
Corporation and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 10.2 to Anteon
International Corporation's Current Report on Form 8-K filed
on December 14, 2005).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14 of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
31.2 Certification of the Chief Financial Officer pursuant to
Rule 13a-14 of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification of the Chief Financial Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anteon International Corporation:
We have audited the accompanying consolidated balance sheets of Anteon
International Corporation and subsidiaries (the "Company") as of December 31,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 16, 2006, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
McLean, Virginia
March 16, 2006
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands, except share and per share data)
Assets 2005 2004
================= ===============
Current assets:
Cash and cash equivalents $ 9,048 $ 4,103
Short term investments 37,460 --
Accounts receivable, net 331,809 317,296
Prepaid expenses and other current assets 17,182 17,205
Deferred tax assets, net 71 --
----------------- ---------------
Total current assets 395,570 338,604
Property and equipment, net 15,107 12,920
Goodwill 260,834 242,066
Intangible and other assets, net of accumulated amortization of $13,818 and
$10,902, respectively 26,434 19,836
----------------- ---------------
Total assets $ 697,945 $ 613,426
================= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Term Loan B, current portion 1,650 1,650
Obligations under capital leases, current portion 121 196
Accounts payable 28,319 46,430
Accrued expenses 110,638 102,593
Income tax payable 9,973 1,556
Deferred compensation 2,009 808
Deferred tax liability -- 2,448
Deferred revenue 25,080 13,764
----------------- ---------------
Total current liabilities 177,790 169,445
Term Loan B, less current portion 161,288 162,938
Revolving credit facility -- 19,800
Obligations under capital leases, less current portion 210 310
Noncurrent deferred tax liabilities, net 8,675 8,460
Other long term liabilities 6,529 4,915
----------------- ---------------
Total liabilities 354,492 365,868
Minority interest in subsidiaries 357 282
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, zero issued and
outstanding as of December 31, 2005 and 2004 -- --
Common stock, $0.01 par value, 175,000,000 shares authorized and 37,238,974 and
36,218,476 shares issued and outstanding as of December 31, 2005 and 2004,
respectively 372 362
Additional paid-in capital 143,851 126,508
Accumulated other comprehensive income 13 254
Retained earnings 198,860 120,152
----------------- ---------------
Total stockholders' equity 343,096 247,276
----------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 697,945 $ 613,426
================= ===============
See accompanying notes to consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
(in thousands, except share and per share data)
2005 2004 2003
----------------- --------------- --------------
Revenues $ 1,493,212 $ 1,268,139 $ 1,042,474
Costs of revenues 1,276,627 1,093,470 897,264
----------------- --------------- --------------
Gross profit 216,585 174,669 145,210
----------------- --------------- --------------
Operating Expenses:
General and administrative expenses 76,691 65,964 58,647
Amortization of noncompete agreements 165 167 101
Other intangibles amortization 2,850 2,509 2,349
----------------- --------------- --------------
Total operating expenses 79,706 68,640 61,097
----------------- --------------- --------------
Operating income 136,879 106,029 84,113
Other income 1,049 973 --
Merger related expenses 2,432 -- --
Secondary offering expenses -- 240 852
Interest expense, net of interest income of
$1,271, $277, and $239, respectively 8,883 7,769 24,244
Minority interest in earnings of subsidiaries (75) (72) (54)
----------------- --------------- --------------
Income before provision for income taxes 126,538 98,921 58,963
Provision for income taxes 47,830 37,116 22,773
----------------- --------------- --------------
Net income $ 78,708 $ 61,805 $ 36,190
================= =============== =============
Basic earnings per common share $ 2.14 $ 1.73 $ 1.04
================= =============== =============
Basic weighted average shares outstanding 36,810,863 35,716,669 34,851,281
Diluted earnings per common share $ 2.08 $ 1.66 $ 0.98
================= =============== =============
Diluted weighted average shares outstanding 37,810,144 37,267,375 36,925,488
See accompanying notes to consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2005, 2004 and 2003
(in thousands, except share data)
Stock Additional Accumulated Retained Total
All series Subscription Paid-In Other Earnings Stockholders'
Common stock Receivable Capital Comprehensive Equity
Income (Loss)
- ------------------------------------------- --------------------- -------------- ------------ ------------- ------------- --------
Shares Amount
--------- --------
Balance, December 31, 2002 34,419,049 344 (12) 106,849 (509) 22,157 128,829
Exercise of stock options 935,947 10 -- 4,878 -- -- 4,888
Tax benefit from exercise of stock options -- -- -- 3,281 -- -- 3,281
Stock based compensation expense 3 3
Proceeds from certain stockholders 852 852
related to secondary offering
Write-off uncollectible stock subscription 12 12
Comprehensive income (loss):
Interest rate swaps (net of tax of -- -- -- -- 324 -- 324
$209)
Foreign currency translation -- -- -- -- 113 -- 113
Net income -- -- -- -- -- 36,190 36,190
----------- -------- --------- ----------- ----------- --------- ----------
Comprehensive income -- -- -- -- 437 36,190 36,627
Balance, December 31, 2003 35,354,996 $ 354 $ -- $115,863 $ (72) $ 58,347 $ 174,492
----------- -------- --------- ----------- ----------- --------- ----------
Exercise of stock options 863,480 8 -- 5,571 -- -- 5,579
Tax benefit from exercise of stock options -- -- -- 5,127 -- -- 5,127
Stock based compensation expense -- -- -- 5 -- -- 5
Purchase of treasury stock under ESPP -- -- -- (1,079) -- -- (1,079)
Reissuance of treasury stock under ESPP -- -- -- 1,021 -- -- 1,021
Comprehensive income :
Interest rate swaps (net of tax of $89) -- -- -- -- 141 -- 141
Foreign currency translation -- -- -- -- 185 -- 185
Net income -- -- -- -- -- 61,805 61,805
----------- -------- --------- ----------- ----------- --------- ----------
Comprehensive income -- -- -- -- 326 61,805 62,131
----------- -------- --------- ----------- ----------- --------- ----------
Balance, December 31, 2004 36,218,476 $ 362 $ -- $126,508 $ 254 $ 120,152 $ 247,276
----------- -------- --------- ----------- ----------- --------- ----------
Exercise of stock options 1,013,498 10 -- 11,425 -- -- 11,435
Issuance of restricted shares 7,000 -- -- -- -- -- --
Tax benefit from exercise of stock options -- -- -- 5,978 -- -- 5,978
Stock based compensation expense -- -- -- 72 -- -- 72
Purchase of treasury stock under ESPP -- -- -- (2,465) -- -- (2,465)
Reissuance of treasury stock under ESPP -- -- -- 2,333 -- -- 2,333
Comprehensive income :
Foreign currency translation -- -- -- -- (241) -- (241)
Net income -- -- -- -- -- 78,708 78,708
----------- -------- --------- ----------- ----------- --------- ----------
Comprehensive income -- -- -- -- (241) 78,708 95,820
----------- -------- --------- ----------- ----------- --------- ----------
Balance, December 31, 2005 37,238,974 $ 372 $ -- $143,851 $ 13 $ 198,860 $ 343,096
----------- -------- --------- ----------- ----------- --------- ----------
See accompanying notes to consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
(in thousands)
F-31
2005 2004 2003
Cash flows from operating activities:
Net income $ 78,708 $ 61,805 $ 36,190
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on settlement of subordinated notes payable -- (1,327) --
Gain on the reversal of an acquisition reserve (900) --
Depreciation and amortization of property and equipment 4,417 4,016 4,440
Amortization of noncompete agreements 165 167 101
Other intangibles amortization 2,850 2,509 2,349
Amortization of deferred financing costs 651 685 4,014
Stock compensation 72 5 3
Loss on disposals of property and equipment 1 8 190
Deferred income taxes (2,304) 3,102 (1,742)
Minority interest in earnings of subsidiaries 75 72 54
Changes in assets and liabilities, net of acquired assets
and liabilities:
Increase in accounts receivable (11,151) (84,343) (12,477)
(Increase) decrease in prepaid expenses and other 20 1,014 (1,245)
current assets
Decrease in other assets 335 254 142
Increase (decrease) in accounts payable and accrued (10,255) 23,745 5,592
expenses
Increase (decrease) in income tax payable 14,394 4,650 (2,998)
Increase in deferred revenue 11,316 1,916 3,306
Increase (decrease) in other liabilities 1,614 (29) (473)
--------- --------- -----------
Net cash provided by operating activities 90,008 18,249 37,446
--------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment and other assets (6,414) (3,963) (3,049)
Acquisition of Information Spectrum, Inc., net of cash acquired -- -- (92,382)
Acquisition of Simulated Technologies Inc., net of cash acquired (6) (15,063) --
Acquisition of Integrated Management Services Inc., net of cash 108 (29,119) --
acquired
Acquisition of Milestone Group, LLC., net of cash acquired (30,942) -- --
Purchases of short term investments (98,210) -- --
Proceeds from sales of short term investments 60,750 -- --
Other, net -- 267 --
--------- --------- -----------
Net cash used in investing activities (74,714) (47,878) (95,431)
--------- --------- -----------
Cash flows from financing activities:
Principal payments on bank and other notes payable -- -- (43)
Payment on subordinated notes payable -- (1,350) --
Deferred financing costs -- (297) (2,728)
Principal payments on Term Loan A -- -- (21,202)
Proceeds from Term Loan B -- 16,125 150,000
Principal payments on Term Loan B (1,650) (1,538) --
Proceeds from certain stockholders related to secondary offering -- -- 852
Proceeds from revolving credit facility 1,455,500 1,224,000 1,009,500
Principal payments on revolving credit facility (1,475,300) (1,208,600) (1,012,100)
Redemption of senior subordinated notes payable -- (1,876) (73,124)
Proceeds from issuance of common stock, net of expenses 11,304 5,521 4,899
Principal payments under capital lease obligations (203) (341) (247)
Payment of subordinated notes payable-related party -- -- --
--------- --------- -----------
Net cash provided by financing activities (10,349) 31,644 55,807
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents 4,945 2,015 (2,178)
Cash and cash equivalents, beginning of year 4,103 2,088 4,266
--------- --------- -----------
Cash and cash equivalents, end of year $ 9,048 $ 4,103 $ 2,088
--------- --------- -----------
Supplemental disclosure of cash flow information (in thousands): Interest paid:
Tender offer of senior subordinated notes payable $ -- $ -- $ 7,177
Credit Facility, 12% Notes and other 9,468 7,488 14,199
--------- --------- -----------
Total interest paid $ 9,468 $ 7,448 $ 21,376
--------- --------- -----------
Income taxes paid, net $ 35,706 $ 28,515 $ 27,410
========= ========= ===========
Supplemental disclosure of noncash investing and financing activities:
The changes in the fair value of the interest rate swaps are reported,
net of tax, in accumulated other comprehensive income. During the year
ended December 31, 2004, the last of the Company's interest rate swap
agreements, with a notional value of $10.0 million, matured.
For the years ended December 31, 2005 and 2004, the Company recorded
approximately $27,000 and $134,000 of equipment utilizing capitalized
leases, respectively.
See accompanying notes to consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(1) Organization and Business
Anteon International Corporation, a Delaware Corporation ("Anteon" or
the "Company") (formerly Azimuth Technologies, Inc.), was incorporated
on March 15, 1996 for the purpose of acquiring all of the outstanding
stock of Ogden Professional Services Corporation, a wholly owned
subsidiary of Ogden Technology Services Corporation and an indirectly
wholly owned subsidiary of Ogden Corporation (collectively "Ogden").
Upon completion of the acquisition effective April 22, 1996, Ogden
Professional Services Corporation was renamed Anteon Corporation, a
Virginia corporation, and later renamed Anteon International
Corporation, a Virginia corporation.
The Company provides professional information technology solutions and
systems engineering and integration services primarily to government
customers. The Company designs, integrates, maintains and upgrades
information systems for national defense, intelligence, emergency
response and other government missions. The Company also provides many
of its government customers with the systems analysis, integration and
program management skills necessary to manage their mission systems
development and operations. The Company is subject to all of the risks
associated with conducting business with the U.S. federal government,
including the risk of contract termination for the convenience of the
government. In addition, government funding continues to be dependent
on congressional approval of program level funding and on contracting
agency approval for the Company's work. The extent to which the
Company's existing contracts will be funded in the future cannot be
determined.
On December 13, 2005, the Company entered into an agreement and plan
of merger with General Dynamics Corporation, or "General Dynamics,"
and a wholly owned subsidiary of General Dynamics, pursuant to which
General Dynamics agreed to acquire Anteon for approximately $2.2
billion, which includes the assumption of approximately $116 million
in net debt. Pursuant to the terms of the Merger agreement, General
Dynamics will acquire all of the Company's outstanding common stock in
a cash merger at a price of $55.50 per share and the Company's net
debt. Upon completion of the Merger, Anteon will become a wholly owned
subsidiary of General Dynamics.
On March 3, 2006, the Company 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.
The Company anticipates 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, under certain circumstances
discussed in the merger agreement.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its directly and indirectly, majority-owned
subsidiaries. All material intercompany transactions and accounts
have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments that have original maturities of three months
or less.
(c) Short Term Investments
The Company accounts for investments in debt and marketable
equity securities depending upon the purpose of the investment.
As of December 31, 2005, the Company held $37.5 million of
investments in state and municipal variable rate deposit notes
with maturities greater than 10 years. The Company carries the
investments as current assets on the balance sheet at fair value.
The Company does not intend to hold these investments for a
period greater than 12 months and may liquidate these investments
to fund working capital requirements or potential acquisitions.
With variable rate notes, the Company does not record unrealized
gains or losses on the investments as the fair value and the cost
basis will always be the same. Interest income on the investments
is recognized when earned
(d) Property and Equipment
Property and equipment is stated at cost, or fair value at the
date of acquisition if acquired through a purchase business
combination. Property and equipment under capital leases are
stated at the present value of minimum lease payments. For
financial reporting purposes, depreciation and amortization is
recorded using the straight-line method over the estimated useful
lives of the assets as follows:
Computer hardware and software 3 to 7 years
Furniture and equipment 5 to 12 years
Leasehold and building improvements shorter of estimated useful life or lease term
Building 31.5 years
Property and equipment under capital leases shorter of estimated useful life or lease term
(e) Deferred Financing Costs
Costs associated with obtaining the Company's financing
arrangements are deferred and amortized over the term of the
financing arrangements using a method that approximates the
effective interest method, and are included in intangible and
other assets in the accompanying Consolidated Balance Sheets.
(f) Impairment or Disposal of Long Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable from its undiscounted
cash flows and measure an impairment loss as the difference
between the carrying amount and fair value of the asset.
During 2003, the Company recognized an impairment charge of
approximately $135,000 included in general and administrative
expenses in the accompanying Consolidated Statement of
Operations, to write down the carrying value of a building, that
is currently on the market for sale, to its fair market value.
(g) Goodwill
The Company uses the purchase method of accounting for all
business combinations. Intangible assets acquired in a business
combination are recognized and reported separately from goodwill.
Goodwill and intangible assets with indefinite useful lives are
not amortized, but instead tested for impairment at least
annually. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
In connection with the Company's goodwill impairment evaluation,
the Company identifies its reporting units and determines the
carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible
assets, to these reporting units. The Company determines the
estimated fair value of each reporting unit and compares it to
the carrying amount of the reporting unit. As a result of this
comparison, no indication that the reporting units' fair values
were less than their carrying values was noted. In the future, to
the extent the carrying amount of a reporting unit exceeds the
fair value of a reporting unit, an indication would exist that a
reporting unit's goodwill may be impaired, and the Company would
be required to perform the second step of the impairment test. In
the second step, the Company must compare the implied fair value
of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to
all of the assets (recognized and unrecognized) and liabilities
of the reporting unit in a manner similar to a purchase price
allocation, in accordance with Statement of Financial Accounting
Standards, or "SFAS," No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit
goodwill.
The Company performed its annual goodwill impairment analysis as
of September 30, 2005 and 2004, using the methodology described
above and did not identify any indication of goodwill impairment
for any reporting unit for either period. The Company will
perform the annual impairment test as of September 30 each year
unless circumstances or events indicate that an impairment test
should be performed sooner. No such events were noted subsequent
to the annual impairment tests in either year.
(h) Other Intangible Assets
The Company amortizes the allocated cost of noncompete agreements
entered into in connection with business combinations on a
straight-line basis over the terms of the agreements
Intangible assets acquired in a business combination are
recognized only if such assets arise from a contractual or other
legal right and are separable, that is, capable of being sold,
transferred, licensed, rented, or exchanged. Intangible assets
acquired in a business combination that do not meet this criteria
are considered a component of goodwill. As of December 31, 2005,
the Company has approximately $18.8 million of intangible assets,
net of accumulated amortization, related to contracts and related
customer relationships, which are being amortized straight-line
over periods of up to 8 years
Amortization expense on the other intangible assets was
approximately $3.0 million, $2.7 million and $2.5 million for the
ended December 31, 2005, 2004 and 2003, respectively. The Company
expects to record annual amortization expense over the next five
years as follows (in thousands):
Year Ending December 31,
2006 $ 3,955
2007 3,887
2008 3,634
2009 2,390
2010 1,310
Thereafter 3,664
------------
Total $ 18,840
============
(i) Revenue Recognition
For each of the years ended December 31, 2005, 2004 and 2003, in
excess of 98% of the Company's revenues were derived from
services performed under contracts with the U.S. federal
government that may be categorized into three primary types: time
and materials, cost-plus reimbursement and firm fixed price. For
the year ended December 31, 2005, approximately 41% of the
Company's contracts were time and material, 37% cost-plus and 22%
fixed price (a substantial majority of which are fixed price
level of effort contracts). Revenues for time and materials
contracts are recognized as time is spent at hourly rates, which
are negotiated with the customer plus the cost of any allowable
material costs and out-of-pocket expenses. Time and materials
contracts are typically more profitable than cost-plus contracts
because of the Company's ability to negotiate rates and manage
costs on those contracts. Revenues are recognized under cost-plus
contracts on the basis of direct and indirect costs incurred plus
a negotiated profit calculated as a percentage of costs, a fixed
amount or as a performance-based award fee. Cost-plus type
contracts provide relatively less risk than other contract types
because the Company is reimbursed for all direct costs and
certain indirect costs, such as overhead and general and
administrative expenses, and are paid a fee for work performed.
For certain cost-plus contracts, which are referred to as
cost-plus award fee or incentive fee type contracts, the Company
recognizes the expected fee to be awarded by the customer at the
time such fee can be reasonably estimated, based on factors such
as the Company's prior award experience and communications with
the customer regarding the Company's performance, including any
interim performance evaluations rendered by the customer or the
Company's average historical award fee rate on similar type
contracts. Under substantially all fixed price contracts, which
are predominantly level of effort contracts, revenues are
recognized using the cost-to-cost method for all services
provided. Fixed price contracts that involve a defined number of
hours or a defined category of personnel are referred to as
"level of effort" contracts. The Company believes the
cost-to-cost method is the best estimate for determining
performance on these contracts. For product-related fixed price
contracts, revenues are recognized as units are delivered (the
units-of-delivery method). In addition, the Company evaluates its
contracts for multiple deliverables which may require the
segmentation of each deliverable into separate accounting units
for proper revenue recognition as defined by EITF 00-21. The
appropriate revenue recognition method based on applicable
accounting guidance is then applied for each separate unit.
The Company recognizes revenues under the U.S. federal government
contracts when a contract is executed, the contract price is
fixed and determinable, delivery of the services or products has
occurred, the contract is funded and collectibility of the
contract price is considered probable. The Company's contracts
with agencies of the federal government are subject to periodic
funding by the respective contracting agency. Funding for a
contract may be provided in full at inception of the contract or
periodically throughout the term of the contract as the services
are provided. From time to time the Company may proceed with work
on unfunded portions of existing contracts based on customer
direction pending finalization and signing of contractual funding
documents. The Company has an internal process for approving any
such work. All revenue recognition is deferred during periods in
which funding is not received. Allowable contract costs incurred
during such periods are deferred if the receipt of funding is
assessed as probable. In evaluating the probability of funding
being received, the Company considers its previous experience
with the customer, communications with the customer regarding
funding status, and the Company's knowledge of available funding
for the contract or program. If funding is not assessed as
probable, costs are expensed as incurred. Historically, the
Company has not recorded any significant write-offs because
funding was not ultimately received.
The Company recognizes revenues under its cost based U.S. federal
government contracts based on allowable contract costs, as
mandated by the U.S. federal government's cost accounting
standards. The costs the Company incurs under federal government
contracts are subject to regulation and audit by certain agencies
of the federal government. Contract cost disallowances, resulting
from government audits, have not historically been significant.
Contract revenue recognition inherently involves estimation.
Examples of such estimates include the level of effort needed to
accomplish the tasks under the contract, the cost of those
efforts, and a continual assessment of the Company's progress
toward the completion of the contract. From time to time,
circumstances may arise which require the Company to revise its
estimated total revenue or costs. Typically, these revisions
relate to contractual changes. To the extent that a revised
estimate affects contract revenue or profit previously
recognized, the Company records the cumulative effect of the
revision in the period in which it becomes known. In addition,
the full amount of an anticipated loss on any type of contract is
recognized in the period in which it becomes known. The Company
may be exposed to variations in profitability if the Company
encounters variances from estimated fees earned under award fee
contracts and estimated costs under fixed price contracts.
Software revenue is generated from licensing software and
providing services, including maintenance and technical support,
and consulting. The Company recognizes the revenue when the
license agreement is signed, the license fee is fixed and
determinable, delivery of the software has occurred, and
collectibility of the fee is considered probable. The Company's
software license sales including maintenance and consulting
services are recognized at their fair values when all other
recognition criteria are met. Service revenues consist of
maintenance and technical support and are recognized ratably over
the service period. Other service revenues are recognized as the
related services are provided. Revenues from sales of products
are generally recognized upon acceptance by the customer, which
is typically within thirty days of shipment. Software and related
services revenues for each of the years in the three year period
ended December 31, 2005 were not significant.
Amounts collected in advance of being earned are recognized as
deferred revenues.
(j) Costs of Acquisitions
Costs incurred on probable acquisitions are deferred. Costs
incurred on successful acquisitions are capitalized as a cost of
the acquisition, while costs incurred by the Company for
unsuccessful or terminated acquisition opportunities are expensed
when the Company determines that the opportunity will no longer
be pursued.
(k) Income Taxes
The Company calculates its income tax provision using the asset
and liability method. Under the asset and liability method,
deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred taxes of a change in
tax rates are recognized in income in the period that includes
the enactment date.
The Company has not recognized a deferred tax liability of
approximately $470,000 for undistributed earnings of its foreign
operations that arose in 2005 and prior years because the Company
does not expect those unremitted earnings to reverse and become
taxable to the Company in the foreseeable future. A deferred tax
liability will be recognized when the Company is no longer able
to demonstrate that it plans to permanently reinvest
undistributed earnings. For the years ended December 31, 2005 and
2004 the undistributed earnings of these subsidiaries was
approximately $1.2 million and $1.1million, respectively.
(l) Foreign Currency Translation and Transactions
The balance sheets of the Company's foreign subsidiaries are
translated to U.S. dollars for consolidated financial statement
purposes using the current exchange rates in effect as of the
balance sheet date. The revenue and expense accounts of foreign
subsidiaries are converted using the weighted average exchange
rate during the period. Gains or losses resulting from such
translations are included in accumulated comprehensive income in
stockholders' equity. Gains and losses from transactions
denominated in foreign currencies are included in current period
income. Foreign currency transaction gains and losses were not
significant for the years ended December 31, 2005, 2004 and 2003.
(m) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans
using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, ("APB No. 25"), Accounting for Stock
Issued to Employees, and Related Interpretations. The Company has
an employee stock option plan. Compensation expense for stock
options granted to employees is recognized based on the
difference, if any, between the fair value of the Company's
common stock and the exercise price of the option at the date of
grant. The compensation expense is calculated on a straight line
basis over the vesting period of the options. No stock-based
compensation expense for options granted to employees has been
recorded in the accompanying condensed consolidated financial
statements. The Company discloses the pro forma effect on net
income as if the fair value based method of accounting as defined
in Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), Accounting for Stock Based Compensation had been applied.
The Company accounts for stock options granted to non-employees
using the fair value method of accounting as prescribed by SFAS
No. 123. Compensation expense related to stock options granted to
non-employees is not significant.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee
compensation:
2005 2004 2003
--------- --------- ----------
(in thousands, except per share data)
Net income, as reported $ 78,708 $ 61,805 $ 36,190
Add: Stock based compensation recorded, net of tax 3 3 2
Deduct: Total stock-based compensation expense
determined under fair value method, net of tax (3,560) (3,776) (3,240)
--------- --------- ----------
Pro forma net income $ 75,151 $ 58,032 $ 32,952
========= ========= =========
Earnings per share:
Basic-as reported $ 2.14 $ 1.73 $ 1.04
========= ========= =========
Basic-pro forma $ 2.04 $ 1.62 $ 0.95
========= ========= =========
Diluted-as reported $ 2.08 $ 1.66 $ 0.98
========= ========= =========
Diluted-pro forma $ 1.99 $ 1.56 $ 0.89
========= ========= =========
(n) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, short term
investments, accounts payable, accrued liabilities and
indebtedness approximate their fair values as of December 31,
2005 and 2004, due to the relatively short duration of these
financial instruments.
(o) Derivative Instruments and Hedging Activities
Derivative instruments, which are comprised of interest rate
swaps, are recognized at fair value in the balance sheet. Changes
in the fair value of derivative instruments that qualify as
effective hedges of cash flows are recognized as a component of
other comprehensive income (loss). Changes in the fair value of
derivative instruments for all other hedging activities,
including the ineffective portion of cash flow hedges, are
recognized in current period earnings. During the year ended
December 31, 2004, the last of the Company's interest swap
agreements matured.
(p) Earnings Per Common Share
Basic earnings per common share is computed by dividing the net
earnings available to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing
net earnings for the period by the weighted average number of
common and dilutive common equivalent shares outstanding during
the period. Potentially dilutive common equivalent shares are
comprised of the Company's employee stock options and restricted
shares.
(q) Use of Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect
the carrying amounts of reported assets and liabilities,
including the recoverability of property and equipment,
intangible assets and goodwill, valuation allowances for income
taxes and accounts receivable, the valuation of derivative
instruments and 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. Actual results could differ from those estimates.
(r) Recently Issued Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB)
issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, "Accounting Changes" and FASB
Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 applies to all voluntary
changes in an accounting principle and changes the requirements
for accounting for and reporting a change in an accounting
principle. SFAS No. 154 requires the retrospective application to
prior periods' financial statements of the direct effect of a
voluntary change in an accounting principle unless it is
impracticable. APB No. 20 required that most voluntary changes in
an accounting principle be recognized by including the cumulative
effect of changing to the new accounting principle in net income
for the first quarter of the year for which the change occurred.
FASB stated that SFAS No. 154 improves financial reporting
because its requirements enhance the consistency of financial
information between periods. Unless early adoption is elected,
SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. Early adoption is permitted for fiscal years
beginning after June 1, 2005. SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the
effective date of this statement. The Company does not believe
that the adoption of this statement will have a significant
impact on our consolidated financial statements.
In December 2004, FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets. This statement amends Accounting Principles
Board (APB) Opinion No. 29 to improve financial reporting by
eliminating certain narrow differences between the FASB's and the
International Accounting Standards Board's (IASB) existing
accounting standards for nonmonetary exchanges of similar
productive assets. The provisions of this statement shall be
prospectively applied and are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15,
2005. The Company believes the adoption of this statement will
have no impact on the Company's financial condition or results of
operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
Share Based Payment. (SFAS No. 123R), which amends SFAS No. 123,
Accounting for Stock-Based Compensation and SFAS No. 95,
Statement of Cash Flows. SFAS No. 123R requires all companies to
measure compensation cost for all share-based payments at fair
value, and will be effective for public companies with fiscal
years beginning after July 1, 2005. This new standard may be
adopted in one of three ways: a) the modified prospective
transition method, b) the modified retrospective transition
method - the beginning of the annual period of adoption or c) the
modified retrospective transition method by restating all periods
presented. The Company intends to adopt SFAS No. 123R using the
modified retrospective transition method in the first quarter of
2006.
(s) Reclassifications
Certain reclassifications have been made to the 2004 and 2003
Consolidated Statements of Cash Flows to conform to the 2005
Consolidated Statement of Cash Flows.
(t) Customer Concentration
Revenues recognized under the one of the Company's task orders
under a larger General Service Administration contract accounted
for approximately 11% of the Company's revenues in 2005. No other
individual task order accounted for more than 10% of the
Company's revenues for the three years ended December 31, 2005.
(u) Accounting for Leases
The Company leases its office facilities under operating leases
that expire through various dates through 2019, along with
options that permit renewals for additional periods. Rent
abatements and escalations are considered in the determination of
the straight-line rent expense for operating leases. Leasehold
improvements are amortized over the shorter of the asset life or
the lease term. The Company receives incentives to lease office
facilities in certain areas. These incentives are recorded as a
deferred credit and recognized as a reduction to rent expense on
a straight-line basis over the term of the lease.
(4) Acquisitions
(a) Simulation Technologies, Inc
On July 27, 2004, the Company purchased all of the outstanding
stock of Simulation Technology Inc., or "STI," a provider of
modeling and simulation software solutions and services, based in
San Antonio, Texas, for a total purchase price of $15.1 million
(net of cash acquired), including transaction costs. The Company
financed the acquisition through borrowings under its existing
Credit Facility. The net tangible and identifiable intangible
assets acquired and liabilities assumed were recognized at their
estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $2.6 million of
contracts and related customer relationships with an expected
weighted average useful life of 5 years. The value of the
contracts and customer relationships is based, in part, on an
independent appraisal and other studies performed by the Company.
Goodwill recognized from this acquisition was approximately $9.5
million and is not deductible for tax purposes. The acquisition
did not meet the criteria of a material and significant
acquisition, and therefore, pro forma disclosures have not been
presented.
(b) Integrated Management Services, Inc.
On August 11, 2004, the Company purchased all of the outstanding
stock of Integrated Management Services, Inc., or "IMSI," a
provider of high end, mission critical information and securities
solutions, based in Arlington, Virginia, for a total purchase
price of $29.0 million, including transaction costs. The Company
financed the acquisition through borrowings under its existing
Credit Facility. Under the terms of the stock purchase agreement,
the Company may be obligated to pay up to $2.0 million of
additional consideration if follow on work related to a certain
government contract was awarded in the time frame set forth under
the stock purchase agreement. The Company has communicated to the
seller of IMSI the Company's determination of the additional
consideration the Company believes is due, have received the
seller's response and intend to further discuss the matter with
the seller. The net tangible and identifiable intangible assets
acquired and liabilities assumed were recognized at their
estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $5.9 million of
contracts and related customer relationships with an expected
weighted average useful life of 5 years. The value of the
contracts and customer relationships is based, in part, on an
independent appraisal and other studies performed by the Company.
Goodwill recognized from this acquisition was approximately $20.6
million and is deductible for tax purposes due to the tax code
election made at the time of the acquisition. The acquisition did
not meet the criteria of a material and significant acquisition,
and therefore, pro forma disclosures have not been presented.
(c) Milestone Group, LLC.
On October 14, 2005, the Company purchased all of the outstanding
limited liability membership interests of Milestone Group, LLC,
or "Milestone," a provider of IT professional services, based in
Arlington, Virginia, for a total purchase price of $30.9 million,
including transaction costs. The Company financed the acquisition
through cash-on-hand and proceeds from the sales of short term
investments. The transaction was accounted for in accordance with
SFAS No. 141, Business Combinations, whereby the net tangible and
identifiable intangible assets acquired and liabilities assumed
were recognized at their estimated fair market values at the date
of acquisition. The identifiable intangible assets consisted of
$10.5 million of contracts and related customer relationships
with an expected weighted average useful life of 8 years. The
value of the contracts and customer relationships is based, in
part, on an independent appraisal and other studies performed by
the Company. Goodwill recognized from this acquisition was
approximately $18.9 million and is deductible for tax purposes.
In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill arising from the transaction is not being
amortized. Pursuant to the requirements of SFAS No. 141, Business
Combinations, the effect of the acquisition did not meet the
criteria of a significant acquisition, and therefore, pro forma
disclosures have not been presented.
(5) Accounts Receivable
The components of accounts receivable as of December 31, 2005 and 2004,
are as follows (in thousands):
2005 2004
------------ ------------
Billed and billable $ 275,015 $ 265,359
Unbilled 54,539 48,103
Retainages due upon contract completion 7,040 8,369
------------ ------------
Allowance for doubtful accounts (4,785) (4,535)
------------ ------------
Total $ 331,809 $ 317,296
============= ============
In excess of 98% of the Company's revenues for each of 2005, 2004 and 2003
have been earned, and accounts receivable as of December 31, 2005 and 2004
are due, from agencies of the U.S. federal government. Unbilled costs and
fees and retainages billable upon completion of contracts are amounts due
generally within one year and will be billed on the basis of contract terms
and delivery schedules.
The accuracy and appropriateness of the Company's direct and indirect costs
and expenses under its government contracts and, therefore, its accounts
receivable recorded pursuant to such contracts, are subject to extensive
regulation and audit, including by the U.S. Defense Contract Audit Agency
("DCAA") or by other appropriate agencies of the U.S. government. Such
agencies have the right to challenge the Company's cost estimates or
allocations with respect to any government contract. Additionally, a
substantial portion of the payments to the Company under government
contracts are provisional payments that are subject to potential adjustment
upon audit by such agencies. Incurred cost audits have been completed by
DCAA through 2003. Historically, such audits have not resulted in any
significant disallowed costs. Although the Company can give no assurances,
in the opinion of management, any adjustments likely to result from
inquiries or audits of its contracts will not have a material adverse
impact on the Company's financial condition or results of operations.
(6) Property and Equipment
Property and equipment consists of the following as of December 31,
2005 and 2004 (in thousands):
2005 2004
------------- -----------
Land $ 393 $ 393
Buildings 1,581 1,581
Computer hardware and software 21,299 20,605
Furniture and equipment 9,932 8,487
Leasehold improvements 10,815 8,384
------------- -----------
Subtotal 44,020 39,450
Less -accumulated depreciation and amortization (28,913) (26,530)
------------- -----------
Total $ 15,107 $ 12,920
============= ===========
(7) Accrued Expenses
The components of accrued expenses as of December 31, 2005 and 2004 are
as follows (in thousands):
2005 2004
------------- -----------
Accrued payroll and related benefits $ 56,040 $ 48,791
Accrued subcontractor costs 46,180 47,446
Accrued interest 58 22
Other accrued expenses 8,360 6,334
------------- -----------
Total $ 110,638 $ 102,593
============= ===========
(8) Indebtedness
(a) Credit Agreement
On June 23, 1999, the Company entered into a Credit Agreement ("Credit
Facility") with a syndicate of nine commercial banks. Under the terms
of the Credit Facility, the Company entered into promissory notes with
aggregate available financing facilities of $180.0 million. The Credit
Facility was comprised of a revolving credit facility for aggregate
borrowings of up to $120.0 million ("Revolving Facility"), as
determined based on a portion of eligible billed accounts receivable
and a portion of eligible unbilled accounts receivable and the ratio
of net debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined in the Credit Facility, and
maturing on June 23, 2005; and a $60.0 million note ("Term Loan A")
with principal payments due quarterly commencing June 30, 2001, and
$15.0 million at maturity on June 23, 2005. Effective October 21,
2002, this Credit Facility was replaced by an Amended and Restated
Credit Agreement, as discussed below.
Under the Credit Facility, the interest rate on both the Revolving
Facility and the Term Loan was at a floating rate based upon, at the
Company's option, LIBOR, or the Alternate Base Rate ("ABR"), which was
the higher of Credit Suisse First Boston's ("CSFB") prime rate (less
one quarter of one percent) and the Federal Funds Effective Rate, plus
one half of one percent, in each case plus a margin determined based
on the Company's ratio of net debt to EBITDA.
(b) Amended and Restated Credit Agreement of October 21, 2002
On October 21, 2002, the Company entered into an amendment and
restatement of its existing Credit Agreement (the "2002 Amended and
Restated Credit Agreement"). Pursuant to the terms of the Amended and
Restated Credit Agreement, the Credit Facility was amended to allow
for the following: (1) a $200.0 million senior secured revolving
credit facility (the "Revolving Credit Facility"); and (2) a $22.3
million three-year senior secured term loan facility (the "Term Loan
Facility"). The aggregate amount available for borrowing under the
Revolving Credit Facility was determined based on a portion of
eligible accounts receivable. In general, the Company's borrowing
availability under the Revolving Credit Facility was subject to its
borrowing base (defined as portions of eligible billed and unbilled
accounts receivable) and the Company's ratio of net debt to EBITDA and
net senior debt to EBITDA, as defined in the Amended and Restated
Credit Agreement.
Borrowings under the Term Loan Facility and the Revolving Credit
Facility would have matured on June 30, 2005. Borrowings under the
Revolving Credit Facility and Term Loan Facility bore interest at a
floating rate based upon, at the Company's option, LIBOR, or the ABR,
which is the higher of CSFB prime rate (less one quarter of one
percent) and the Federal Funds Effective Rate, plus one half of one
percent, in each case plus a margin determined based upon the
Company's ratio of net debt to EBITDA (as defined in the Amended and
Restated Credit Agreement). Effective December 19, 2003, this credit
facility was replaced by a further Amended and Restated Credit
Agreement, as discussed below.
(c) Amended and Restated Credit Agreement of December 19, 2003
On December 19, 2003, the Company entered into an amended and restated
credit agreement (the "2003 Amended and Restated Credit Agreement")
related to its Credit Facility. This amendment and restatement, among
other things, provided for the following: (1) a new Term Loan B under
the Term Loan Facility in the amount of $150.0 million with a maturity
date of December 31, 2010; (2) the extension of the Revolving Credit
Facility's maturity date to December 31, 2008; (3) the repayment of
the outstanding balance of approximately $18.4 million of the Term
Loan A; and (4) the financing of the tender offer and consent
solicitation made on November 23, 2003, related to the outstanding
Senior Subordinated Notes (see below). In addition, the 2003 Amended
and Restated Credit Agreement permitted the Company to raise up to
$200.0 million of additional debt in the form of additional term
loans, subordinated debt or revolving loans, with certain restrictions
on the amount of revolving loans. All borrowings under the 2003
Amended and Restated Credit Agreement were subject to financial
covenants customary for such financings, including, but not limited
to: maximum ratio of net debt to EBITDA (as defined in the 2003
Amended and Restated Credit Agreement) and maximum ratio of senior
debt to EBITDA. For the year ended December 31, 2003, the aggregate
fees the Company paid to non-officer directors exceeded the ceiling
limitation set forth in its 2003 Amended and Restated Credit Agreement
by approximately $20,000, principally because of the timing of such
payments. The Company's lenders determined that this limit on
aggregate annual non-officer director fees, which originated several
years before the Company completed its initial public offering of
common stock in March 2002, was not typical for a publicly traded
company. Consequently, the Company's lenders granted a waiver for its
compliance with this covenant provision for the year ended December
31, 2003 and eliminated this limitation for the remaining term of the
2003 Amended and Restated Credit Agreement. For the year ended
December 31, 2003, the Company was in compliance with all other
covenants required by its 2003 Amended and Restated Credit Agreement.
Additionally, as a result of the changes made in this amendment and
restatement, revolving loans were based upon an asset test or maximum
ratio of net eligible accounts receivable to revolving loans. From the
date of the amendment through December 31, 2003, the interest rates
for the Term Loan Facility and the Revolving Credit Facility ranged
from 3.16 percent to 5.00 percent.
In connection with the repayment of the Term A Loan, the Company wrote
off the related unamortized deferred financing fees. The write-off of
$485,000 is reflected as interest expense in the accompanying
Consolidated Statement of Operations for the year ended December 31,
2003.
All of the Company's existing and future domestic subsidiaries
unconditionally guaranteed the repayment of amounts borrowed under the
2003 Amended and Restated Credit Agreement. The 2003 Amended and
Restated Credit Agreement was secured by substantially all of the
Company's and its domestic subsidiaries' tangible and intangible
assets, including substantially all of the capital stock of the
Company's subsidiaries.
The 2003 Amended and Restated Credit Agreement also permitted the
Company to elect from time to time to (i) repurchase certain amounts
of its subordinated debt and outstanding common stock from its share
of excess cash flow (as defined in the 2003 Amended and Restated
Credit Agreement); and (ii) repurchase certain amounts of its
subordinated debt from its share of net cash proceeds of issuances of
equity securities.
The 2003 Amended and Restated Credit Agreement contained customary
events of default, certain of which allow for grace periods. Effective
September 30, 2004, this credit facility was amended, as discussed
below.
(d) Amended Credit Agreement of September 30, 2004
On September 30, 2004, the Company entered into a second amendment to
the 2003 Amended and Restated Credit Agreement. This amendment
provided an additional $16.1 million of borrowings by increasing the
Term Loan B to $165.0 million, and lowered the interest rates on Term
B borrowings by 0.25%. Under certain conditions related to excess
annual cash flow, as defined in its Credit Facility, and the receipt
of proceeds from certain asset sales and debt or equity issuances, the
Company is required to prepay, in amounts specified in the Credit
Facility, borrowings under the Term Loan B. For the years ended
December 31, 2005 and 2004, the Company did not have to prepay amounts
specified in the Credit Facility as related to excess annual cash
flow. In addition, the Company is scheduled to pay quarterly
installments of $412,500 under the Term Loan B until the Credit
Facility matures on December 31, 2010. From January 1, 2005 through
December 31, 2005, the interest rates for the Term Loan B Facility and
the Revolving Credit Facility ranged from 4.31 percent to 6.14 percent
and 6.00 percent to 8.00 percent, respectively. For the years ended
December 31, 2005, 2004 and 2003, interest expense on the unused
portion of the commitments of the lenders under the Credit Facility
was not significant.
As of December 31, 2005 and 2004, the outstanding amounts under the
Credit Facility were as follows (in thousands):
2005 2004
------------- -----------
Revolving Credit Facility $ -- $ 19,800
Term Loan B 162,938 164,588
------------- -----------
Total debt 162,938 184,388
Less current installments (1,650) (1,650)
------------- -----------
Long-term debt, excluding current installments $ 161,288 $ 182,738
============= ===========
The remaining available borrowings under the Revolving Credit Facility
as of December 31, 2005 were $194.8 million. As of December 31, 2005,
the Credit Facility would have permitted additional borrowings of up
to $488.1 million.
For the years ended December 31, 2005, 2004 and 2003, total interest
expense incurred on the Revolving Credit Facility was approximately
$800,000, $1.1 million, and $1.9 million, respectively. For the year
ended December 31, 2003, total interest expense incurred on the Term
Loan A was approximately $700,000. For the years ended December 31,
2005 and 2004, total interest expense incurred on the Term Loan B was
approximately $8.4 million and $5.3 million, respectively.
(e) Senior Subordinated Notes Payable
On May 11, 1999, the Company sold $100.0 million in aggregate
principal amount of 12% senior subordinated notes due 2009, or "12%
Notes." The proceeds of the issuance of the 12% Notes were principally
used to finance certain acquisitions. The 12% Notes were subordinate
to the Company's Credit Facility but ranked senior to any other
subordinated indebtedness. The 12% Notes were scheduled to mature May
15, 2009 and interest was payable semi-annually on May 15 and November
15. The Company used net proceeds from its initial public offering
("IPO") in March 2002 to redeem $25.0 million principal amount of its
12% Notes on April 15, 2002. In addition, as a result of the
redemption of the $25.0 million principal amount of the Company's 12%
Notes, the Company incurred a $3.0 million prepayment premium and
wrote-off a proportionate amount of approximately $928,000 of the
unamortized deferred financing fees related to the portion of the 12%
Notes that were repaid. The prepayment premium and write-off of
deferred financing fees for both the term loan and the 12% Notes
totaling $4.2 million, has been reflected as interest expense for the
year ended December 31, 2002.
On December 23, 2003, the Company repurchased $73.1 million in
aggregate principal amount, or approximately 97% of the then
outstanding 12% Notes. As of the expiration date of the tender offer
and December 31, 2003, approximately $1.9 million in aggregate
principal amount remained outstanding, which was callable on May 15,
2004. The repurchase price for the 12% Notes was $1,110.95 per $1,000
principal amount of Notes tendered prior to December 5, 2003, the
Consent Date. The repurchase price for those Notes tendered after
December 5, 2003 was $1,090.95 per $1,000 principal amount of the 12%
Notes, which excludes the consent payment of $20.0 per $1,000
principal amount. The aggregate repurchase price for all of the 12%
Notes validly surrendered for repurchase and not withdrawn was
approximately $81.2 million. In addition, as a result of the tender
offer, the Company incurred a $7.2 million bond premium and consent
payment and wrote-off approximately $2.1 million of the unamortized
deferred financing fees related to the portion of the 12% Notes that
were repurchased. The tender premium, consent payment and write-off of
deferred financing fees has been reflected as interest expense in the
accompanying Consolidated Statement of Operations for the year ended
December 31, 2003.
In June 2004, the Company repurchased the remaining $1.9 million
principal amount of the outstanding 12% Notes. In conjunction with the
repurchase, the Company paid a tender premium of approximately
$113,000 which was included in interest expense.
Total interest expense for the 12% Notes incurred during 2004 and 2003
was approximately $113,000, and $8.8 million, respectively.
(f) Subordinated Notes Payable
In connection with the purchase of Sherikon, Inc. in 2000, the Company
entered into subordinated promissory notes with the Sherikon, Inc.
shareholders as of the date of acquisition in the aggregate principal
amount of $7.5 million, discounted to approximately $6.5 million.
During 2001, $5.0 million of the subordinated promissory notes were
repaid. The remaining $2.5 million of subordinated promissory notes
were due on October 20, 2002. On October 18, 2002, the Company
asserted an indemnification claim against the former owners of
Sherikon, Inc. in an aggregate amount exceeding the $2.5 million
promissory note. The Company had not made this $2.5 million scheduled
payment pending resolution of the indemnification claim; however,
$124,000 of interest was accrued and outstanding as of December 31,
2003. On July 26, 2004, the Company entered into a settlement
agreement with the former owners of Sherikon, Inc. resolving, among
other items, the Company's indemnification claim submitted in October
2002. Under the provisions of the settlement agreement, the principal
amount of the note was reduced from $2.5 million to $1.35 million, and
the Company paid the reduced note amount, without interest. The
Company recognized $899,000 in other income consisting of the $1.15
million reduction in the promissory note amount plus previously
accrued interest net of legal expenses. For the year ended December
31, 2004 and 2003, total interest expense on the subordinated
promissory notes with the Sherikon, Inc. shareholders was
approximately zero and $124,000, respectively.
(g) Future Maturities
Scheduled future maturities under the Company's indebtedness
are as follows (in thousands):
Year Ending December
31,
2006 $ 1,650
2007 1,650
2008 1,650
2009 1,650
2010 156,338
------------
$ 162,938
============
(h) Interest Rate Swap Agreements
Prior to 2005, the Company hedged a portion of its longer-term
variable interest payments under its Credit Facility to manage cash
flow fluctuations. To do so, the Company entered into interest rate
swap contracts to change the variable-rate cash flow exposure to
fixed-rate cash flows.
During the year ended December 31, 2004, the last of the Company's
interest rate swap agreements, with a notional value of $10.0 million,
matured. The Company recognized $230,000 of losses related to interest
rate swaps which was reflected in interest expense for the year ended
December 31, 2004.
(9) Capital Stock
The Company's authorized capital stock currently consists of
175,000,000 shares of common stock and 15,000,000 shares of preferred
stock.
The holders of the Company's common stock are entitled to one vote per
share on all matters submitted to a vote of stockholders, including
the election of directors. The common stock does not have cumulative
voting rights, which means that the holders of a majority of the
outstanding common stock voting for the election of directors can
elect all directors then being elected. The holders of the Company's
common stock are entitled to receive dividends, when, and if declared
by the Company's board out of legally available funds. Upon the
Company's liquidation or dissolution, the holders of common stock will
be entitled to share ratably in the Company's assets legally available
for distribution to stockholders after payment of liabilities and
subject to the prior rights of any holders of preferred stock then
outstanding. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of shares of any
series of preferred stock, which may be issued in the future.
On September 9, 2004, the Company filed a Registration Statement on
Form S-8 with the SEC to register an additional 1.5 million shares of
the Company's common stock available for issuance under its Amended
and Restated Anteon International Corporation Omnibus Stock Plan
("Omnibus Stock Plan"), as amended. This increase in the number of
shares available for issuance under the Omnibus Stock Plan was
approved by the Company's stockholders on May 27, 2004.
On August 11, 2005, the Company awarded 1,000 restricted shares of its
common stock to each of eight non-employee members of its Board of
Directors pursuant to the Omnibus Stock Plan. On October 17, 2005, one
of the directors resigned and forfeited his 1,000 shares of the
Company's restricted stock that he held at the time. The shares vest
over a twenty-one month period based on continued service as a
Director.
Preferred Stock
The Company's preferred stock may be issued from time to time in one
or more series. The Company's board is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange,
any voting rights, rights and terms of redemption, the redemption
price or prices, the payments in the event of liquidation, and any
other rights, preferences, privileges, and restrictions of any series
of preferred stock and the number of shares constituting such series
and their designation. The Company has no present plans to issue any
shares of preferred stock.
Rights Agreement
In connection with the Company's IPO, the Company distributed one
preferred share purchase right for each outstanding share of common
stock to the stockholders of record on that date (the "Rights
Agreement"). Under the Company's Rights Agreement, each right entitles
the registered holder to purchase from the Company one one-thousandth
of a share of Series A Preferred Stock, par value $0.01 per share, at
a price of $76.50 per one one-thousandth of a share, under certain
circumstances provided for in the Rights Agreement.
Until a "separation date" (as defined in the Rights Agreement) occurs,
the rights will:
o Not be exercisable;
o Be evidenced by certificates that represent shares of
the Company's common stock; and
o Trade with the Company's common stock.
The rights will expire at the close of business on the ten-year
anniversary of the Rights Agreement, unless earlier redeemed or
exchanged by the Company.
(10) Income Taxes
The provisions for income taxes for the years ended December 31, 2005,
2004 and 2003, consist of the following (in thousands), respectively:
Years ended December 31,
------------------------------------------
2005 2004 2003
----------- ------------ -----------
Current provision:
Federal $ 44,054 $ 29,320 $ 21,718
State 5,956 4,653 2,305
Foreign 124 66 121
----------- ------------ -----------
Total current provision 50,134 34,039 24,144
----------- ------------ -----------
Deferred provision:
Federal (56) 2,823 (1,145)
State (2,248) 254 (226)
Foreign -- -- --
----------- ------------ -----------
Total deferred provision (2,304) 3,077 (1,371)
----------- ------------ -----------
Total income tax provision $ 47,830 $ 37,116 $ 22,773
=========== ============ ===========
The income tax provisions for the years ended December 31, 2005, 2004
and 2003, respectively, are different from those computed using the
statutory U.S. federal income tax rate of 35% as set forth below (in
thousands):
Years ended December 31,
--------------------------------------------
2005 2004 2003
----------- ----------- -----------
Expected tax expense, computed at statutory rate $ 44,288 $ 34,623 $ 20,637
State taxes, net of federal expense 2,959 3,190 1,501
Non-deductible expenses 1,541 595 597
Sherikon settlement -- (403) --
Federal and state credits (711) (855) --
Tax exempt interest (134) -- --
Valuation allowance (69) -- --
Foreign rate differences (24) (34) (15)
Other ----------- ----------- -----------
(20) -- 53
----------- ----------- -----------
$ 47,830 $ 37,116 $ 22,773
========== =========== ===========
The tax effect of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities as of December 31, 2005 and
2004 is presented below (in thousands):
2005 2004
----------- -----------
Deferred tax assets:
Accrued expenses $ 10,828 $ 9,702
Intangible assets, due to differences in amortization 2,151 2,346
Accounts receivable allowances 1,981 1,786
Property and equipment, due to differences in depreciation 1,511 1,313
Deferred rent 543 26
Net operating loss and credit carryforwards 1,848 641
----------- -----------
Total gross deferred tax assets 18,862 15,814
----------- -----------
Less: valuation allowance (226) (295)
----------- -----------
Net deferred tax assets 18,636 15,519
----------- -----------
Deferred tax liabilities:
Deductible goodwill, due to differences in amortization (11,714) (10,690)
Revenue recognition differences (10,330) (10,140)
Prepaid expenses (2,308) (4,044)
Property and equipment, due to differences in depreciation (2,888) (1,553)
----------- -----------
Total deferred tax liabilities (27,240) (26,427)
----------- -----------
Deferred tax liabilities, net $ (8,604) $ (10,908)
=========== ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax asset will be realized. The ultimate realization
of the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences
become deductible. Management considers scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by the Company in making
this assessment. Management presently believes that it is more likely
than not that the Company will realize the portion of the benefits of
these deductible differences related to federal income taxes. The
Company has established a valuation allowance as of December 31, 2005
and 2004 of $226,000 and $295,000, respectively, against certain state
net operating loss carryforwards which was reduced by $69,000 during
2005. At December 31, 2005, the Company had federal and state net
operating loss carryforwards of approximately $21,000 and $5.5
million, respectively. Carryforwards have various expiration dates
beginning in 2006. The Company also has various state tax credit
carryforwards of approximately $1.6 million and $300,000 as of
December 31, 2005 and 2004, respectively, which are available to
reduce future state income taxes through 2015.
(11) Employee Benefit Plans
Employees of the Company may participate in a 401(k) retirement
savings plan, whereby employees may elect to make contributions
pursuant to a salary reduction agreement upon meeting eligibility
requirements. Participants may contribute up to 100% percent of salary
in any calendar year to this plan, provided that amounts in total do
not exceed certain statutory limits. The Company matches up to 50
percent of the first 6 percent of a participant's contributions,
subject to certain limitations, and participants immediately vest in
the Company's contributions. The Company made contributions to this
plan of approximately $13.6 million, $11.7 million, and $8.3 million
for the years ended December 31, 2005, 2004, and 2003 respectively.
(12) Stock Option and Other Compensation Plans
(a) Stock Option Plan
In January 1997, the Company's Board of Directors approved the
adoption of the Anteon Virginia Corporation Omnibus Stock Plan (the
"Stock Option Plan"). At the discretion of the Board of Directors, the
stock option plan permits the granting of stock options, stock
appreciation rights, restricted or unrestricted stock awards, and/or
phantom stock to employees or directors of the Company. As of December
31, 2005, an aggregate of 1,649,141 shares of the Company's common
stock were reserved for issuance under the stock option plan.
The exercise price of stock options granted is the market value of the
common stock at the grant date. Prior to the Company's IPO, the
exercise price of stock options granted was determined by the
Company's Board of Directors but was not to be less than the fair
value of the underlying shares of common stock at the grant date.
For stock options granted to employees, 20% of the shares subject to
the options vest on the first anniversary of the grant date and an
additional 20% vest on each succeeding anniversary of the grant date.
For options granted from the date of the adoption of the Company's
stock option plan until September 21, 2000, employees have a period of
three years from the vesting date to exercise the option to purchase
shares of the Company's common stock. In 1997, the Company's Board of
Directors approved that 20 percent of the options issued on the August
1, 1997 grant date vested immediately. On September 21, 2000, the
Company's Board of Directors approved that, with respect to stock
options granted from that date forward, each grantee has a period of 8
years from the date of grant in which to exercise options which vest.
On March 11, 2002, the Company's Board of Directors approved that,
with respect to stock options granted from that date forward, each
grantee has a period of 10 years from the date of grant in which to
exercise options which vest.
The following tables summarize information regarding options
under the Company's stock option plan:
Weighted
Average Outstanding
Number Option Price Exercise and
of Shares Per Share Price Exercisable
----------- ------------- ------------- --------------
Outstanding at December 31, 2002 4,123,208 $ 0.84-27.25 $ 8.98 1,647,368
Granted 641,500 23.30-33.75 28.53
Exercised (935,947) 0.84-27.25 5.23
Cancelled or expired (221,600) 4.66-27.25 14.39
----------- ------------- ------------- --------------
Outstanding at December 31, 2003 3,607,161 $ 0.84-33.75 $ 13.59 1,520,301
Granted 554,000 29.25-41.42 35.74
Exercised (863,480) 0.84-32.80 6.46
Cancelled or expired (212,999) 4.66-31.88 18.41
----------- ------------- ------------- --------------
Outstanding at December 31, 2004 3,084,682 $ 0.84-41.42 $ 19.22 1,337,282
Granted 63,000 37.71-44.07 40.64
Exercised (1,013,498) 0.84-33.75 11.28
Cancelled or expired (182,801) 4.66-41.26 28.82
----------- ------------- ------------- --------------
Outstanding as of December 31, 2005 1,951,383 $ 3.36-44.07 $ 23.13 882,683
=========== ============== ============== ==============
Option and weighted average price information by price group is as follows:
Shares Outstanding Exercisable Shares
Number Weighted Weighted Number of Weighted
of Shares Average Average Shares Average
Exercise Remaining Exercise price
Price Life
December 31, 2005:
$3.36 to $8.10 391,310 $ 5.83 1.5 386,310 $ 5.81
$18.00 to $25.25 738,224 $ 19.70 7.6 315,324 $ 19.27
$27.25 to $33.75 530,849 $ 30.79 7.6 135,449 $ 30.56
$41.26 to $44.07 291,000 $ 41.13 8.9 45,600 $ 41.27
--------- ---------
1,951,383 882,683
========= =========
(b) Employee Stock Purchase Plan
Effective April 1, 2004, the Company implemented an Employee Stock
Purchase Plan ("ESPP") to offer eligible employees the opportunity to
purchase the Company's common stock at a discount from the market
price as reported on the New York Stock Exchange. Eligible employees
may authorize the Company to deduct a specified portion of their
compensation each payroll period for each quarterly offering period.
The accumulated payroll deductions will be used by the Company to
provide for the purchase by the ESPP administrator of Company common
stock for delivery to ESPP participants. These shares may be newly
issued shares, treasury shares or shares purchased on the open market
or otherwise. The ESPP provides that the per share purchase price
discount established by the Compensation Committee of the Board may be
no greater than 15% of the fair market value of a share of Company
common stock on the last day of each quarterly offering period. The
Compensation Committee has set the purchase price discount at 5% of
the Company stock's fair market value. Under the ESPP, employees are
limited to the purchase of shares of the Company's common stock having
a fair market value no greater than $25,000 during any calendar year,
as determined on the date of purchase. 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 ESPP. The
Company has suspended the ESPP, pending the closing of the Merger with
General Dynamics.
Total Number of
Total Shares Purchased as Maximum Number of
Number of Average Part of Publicly Shares that May Yet -
Shares Prices Paid Announced Plans for Be Purchased
Period Purchased per Share Programs Under the Plans
--------------- ---------- ----------- -------------------- -----------------------
July 1-31, 2004 14,668 $32.29 14,668 1,185,332
October 1-31, 2004 16,262 $37.20 16,262 1,169,070
--------- ------------
Total 2004 30,930 30,930
======== ============
January 1-31,2005 14,669 $41.77 14,669 1,154,401
April 1 - 31, 2005 14,201 $39.13 14,201 1,140,200
July 1 - 30, 2005 12,493 $45.83 12,493 1,127,707
October 1 - 31, 2005 16,819 $43.05 16,819 1,110,888
--------- ------------
Total 2005 58,182 58,182
======== ============
(c) Supplemental Retirement Savings Plan
Effective January 1, 2004, the Company implemented a Supplemental
Retirement Savings Plan (the "Plan") that permits eligible employees
and directors to defer all or a portion of their annual cash
compensation. The Company also filed a Registration Statement on Form
S-8 with the Securities and Exchange Commission ("SEC") to register
the participation interests under the Plan. The assets of the Plan are
held in a trust to which contributions are made by the Company based
on amounts elected to be deferred by the Plan participants. The Plan
is treated as unfunded for tax purposes and its assets are subject to
the general claims of the Company's creditors. In order to provide for
an accumulation of assets comparable to the contractual liabilities
accruing under the Plan, the Company may direct the trustee of the
Plan to invest the assets to correspond to the hypothetical investment
choices made by the Plan participants.
The Company records both the assets and obligations related to amounts
deferred under the Plan. Each reporting period, the assets, which have
been classified as trading securities and have been included in
Prepaid Expenses and Other Current Assets on the Consolidated Balance
Sheet, and obligations, are adjusted to fair market value, with gains
(losses) on the assets included in other income (expense) and
corresponding adjustments to the obligations recorded as compensation
expense. As of December 31, 2005 and 2004, the deferred compensation
obligation was approximately $2.0 million and $808,000, respectively.
For the years ended December 31, 2005 and 2004, the adjustments to
fair market value were not significant.
(d) Pro Forma Disclosure
The Company applies APB No. 25 and related interpretations in
accounting for the Company stock option plan. Adoption of the fair
market value provisions prescribed in SFAS No. 123 is optional with
respect to stock-based compensation to employees; however, pro forma
disclosures are required as if the Company adopted the fair value
recognition requirements under SFAS No. 123.
Had compensation cost for the grants under the Company stock option
plan been determined consistent with the fair market value provisions
prescribed in SFAS No. 123, the Company's pro forma net income (loss)
for the years ended December 31, 2005, 2004 and 2003 would approximate
$75.2 million, $58.0 million, and $32.9 million, respectively, using
an expected option life of 5, 5, and 5 years, respectively, dividend
yield rate of 0% and weighted average volatility rates of 32.8%,
33.8%, and 45.8%, respectively, and weighted average risk-free
interest rates of 3.85%, 3.33%, and 3.03% for 2005, 2004 and 2003,
respectively (see note 2(m)). The Company believes that the effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts.
(13) Comprehensive Income
Comprehensive income includes the accumulated foreign currency
translation adjustment and changes in the fair values of interest rate
swaps. The Company presents comprehensive income as a component of the
accompanying Consolidated Statements of Stockholders' Equity and
Comprehensive Income. The amount of accumulated foreign currency
translation adjustment was approximately $13,000 and $254,000 as of
December 31, 2005, 2004, respectively.
(14) Earnings Per Common Share
The computations of basic and diluted income per common share are as
follows:
For the Year Ended
December 31, 2005
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share $ 78,708 36,810,863 $ 2.14
=========== ==========
Stock options 999,281
Diluted earnings per share $ 78,708 37,810,144 $ 2.08
=========== ==========
For the year ended
December 31, 2004
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share $ 61,805 35,716,669 $ 1.73
=========== ==========
Stock options 1,550,706
Diluted earnings per share $ 61,805 37,267,375 $ 1.66
=========== ==========
For the year ended
December 31, 2003
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share $ 36,190 34,851,281 $ 1.04
=========== ==========
Stock options 2,074,207
Diluted earnings per share $ 36,190 36,925,488 $ 0.98
=========== ==========
Commitments and Contingencies
(a) Leases
The Company is obligated under capital leases covering certain
property and equipment that expire at various dates during the next
five years. At December 31, 2005 and 2004, the gross amount of
property and equipment and related accumulated amortization recorded
under capital leases were as follows (in thousands):
2005 2004
----------- --------------
Property and equipment $ 643 $ 1,044
Less Accumulated amortization (333) (580)
----------- --------------
$ 310 $ 464
============= ==============
Amortization of assets held under capital leases is included in
general and administrative expenses in the accompanying Consolidated
Statements of Operations.
The Company also leases facilities and certain equipment under
operating lease agreements expiring at various dates through 2019.
These leases generally contain renewal options for periods ranging
from 3 to 5 years, and require the Company to pay all executory costs
such as maintenance, taxes, and insurance. As of December 31, 2005,
the aggregate minimum annual rental commitments under noncancelable
operating leases are as follows (in thousands):
Capital Operating
Year ending December 31 Leases Leases
- ------------------------ ---------------- ------------
2006 $ 146 $ 29,540
2007 130 24,240
2008 89 19,594
2009 15 15,505
2010 -- 12,918
Thereafter -- 54,082
---------------- ------------
Total minimum lease payments $ 380 $ 155,879
Less estimated executory costs (at 7.25%) 18 ============
---------------
Net minimum lease payments 362
Less amount representing interest
(at rates ranging from 1.79% to 10.50%) 31
---------------
Present value of net minimum capital lease payments 331
Less current installments of obligations under capital
leases 121
---------------
Obligations under capital leases, excluding current
installments $ 210
===============
Rent expense under all operating leases for the years ended December
31, 2005, 2004 and 2003 was approximately $35.3 million, $33.1
million, and $25.4 million, respectively.
(b) Legal Proceedings
On November 4, 2005, the Company received a Customs Export Enforcement
Subpoena for documents from United States Customs Service. The
subpoena requested the production of records and information in
connection with two of the Company's programs, and a description of
the Company's export compliance program. The Company produced
documents responsive to the subpoena in November and December 2005 and
the matter is on-going. Although the Company cannot predict the
outcome of this matter, the Company does not believe that it will have
a material impact on the Company's financial position or results of
operations.
The Company is involved in various legal proceedings in the ordinary
course of business. Management of the Company and its legal counsel
cannot currently predict the ultimate outcome of these matters, but do
not believe that they will have a material impact on the Company's
financial position or results of operations.
(16) Secondary Offering Expenses
On October 29, 2004, affiliates of and companies managed by
Caxton-Iseman Capital, Inc. including Azimuth Technologies, L.P.
Azimuth Tech. II LLC and Frederick J. Iseman, which we refer to
collectively as the "Caxton-Iseman Stockholders", sold 3,600,000
shares of the Company's common stock in an underwritten offering
pursuant to a shelf registration statement on Form S-3 filed with the
SEC (Commission File No. 333-111249). Neither the Company nor any of
its executive officers participated in the sale of shares in this
offering. In connection with this offering, the Company incurred
$240,000 of expenses for the year ended December 31, 2004, for which
the Company was not reimbursed in accordance with the terms of the
registrations rights agreement with certain of its stockholders, as
amended.
On December 17, 2003, the Company registered approximately 11.1
million shares of its common stock for sale in an underwritten
offering pursuant to a shelf registration statement on Form S-3 filed
with the SEC which was declared effective. These securities may be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended.
On September 22, 2003, certain of the Company's stockholders,
including Caxton-Iseman stockholders, sold 6,600,000 shares of the
Company's common stock in an underwritten offering pursuant to a
registration statement on Form S-3 filed with the SEC (Commission File
No.s 333-108147 and 333-108858). In the fourth quarter of 2003, the
underwriters of this offering partially exercised their over-allotment
option with respect to additional shares held by the selling
stockholders. As a result, on October 16, 2003, certain of the selling
stockholders sold an additional 297,229 shares of the Company's common
stock in a second closing pursuant to the same underwritten offering.
In connection with this offering, the Company incurred approximately
$852,000 of expenses for the year ended December 31, 2003. These
expenses were reimbursed by certain of the selling stockholders and
the reimbursement was recorded by the Company as an expense and as a
contribution to additional paid-in-capital.
(17) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations
for the years ended December 31, 2005 and 2004 (in thousands, except
per share data):
Quarter ended: March 31 June 30 September 30 December 31 Total
-------------- ---------- ------------- ------------- ---------
2005
- -----
Revenues $ 349,982 368,595 382,050 392,585 1,493,212
Operating income 30,800 34,458 35,369 36,252 136,879
Net income 18,024 19,974 20,962 19,748 78,708
Basic earnings per common share 0.50 0.55 0.56 0.53 2.14
Diluted earnings per common 0.48 0.53 0.55 0.52 2.08
share
2004
Revenues $ 288,150 304,161 325,581 350,247 1,268,139
Operating income 23,537 24,914 27,668 29,910 106,029
Net income 13,334 14,665 16,849 16,957 61,805
Basic earnings per common share 0.38 0.41 0.47 0.47 1.73
Diluted earnings per common
share 0. 36 0.39 0.45 0.45 1.66
(18) Segment Reporting
Although the Company is organized by strategic business units, the
Company considers each of its government contracting units to have
similar economic characteristics, provide similar types of services,
and have a similar customer base. Accordingly, the Company's
government contracting segment aggregates the operations of all of the
Company's government contracting units.