| ANTEON INTERNATIONAL CORP 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 &apos 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 dlra42dtta5 million plus up to dlra500cmam000 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 |
| US Federal Government Contracting Risks--Our business could be adversely affected by significant changes in the contracting or fiscal policies of the US federal government |
| We derive substantially all of our revenues from contracts with the US federal government and subcontracts under US federal government prime contracts, and we believe that the success and development of our business will continue to depend on our successful participation in US federal government programs |
| Accordingly, changes in US federal government contracting policies could directly affect our financial performance |
| Among the factors that could materially adversely affect our US federal government contracting business are: o budgetary constraints affecting US federal government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or available funding; o changes in US federal government programs or requirements; o curtailment of the US federal governmentapstas use of technology services firms; o the adoption of new laws or regulations; o technological developments; o US 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 US 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 US federal government customers are subject to stringent budgetary constraints |
| We have substantial contracts in place with many US 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 US 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 US federal government contracts and subcontracts under US 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 contractapstas potential duration |
| US 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 US federal government contract awards are subject to protest by competitors |
| If specified legal requirements are satisfied, these protests require the US federal agency to suspend the contractorapstas 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 US 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 "e DCAA, "e and other government agencies routinely audit and investigate government contracts |
| These agencies review a contractorapstas performance on its contract, cost structure and compliance with applicable laws, regulations and standards |
| The DCAA also reviews the adequacy of, and a contractorapstas compliance with, its internal control systems and policies, including the contractorapstas 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 US 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 US 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 US federal government: time and materials, cost-plus, and fixed price |
| For the year ended December 31, 2005, approximately 41prca were time and materials, 37prca of our US federal contracts were cost-plus, and 22prca 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 US 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 US 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 US 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 US federal agencies that are designed to safeguard against unauthorized persons &apos , including foreigners &apos , access to classified information |
| If we were to come under foreign ownership, control or influence, our US 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 US federal government |
| Risks Relating to Reductions or Changes in Military and Department of Defense-related Intelligence Agency Expenditures--A decline in the US defense budget may adversely affect our operations |
| Sales under contracts with the US Department of Defense, including sales under subcontracts having the Department of Defense as the ultimate purchaser, represented approximately 88prca and 89prca of our sales for the year ended December 31, 2005 and for the year ended December 31, 2004, respectively |
| The US 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 US 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 managementapstas 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 US federal governmentapstas 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 US 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 US federal governmentapstas discretion |
| In addition, funding for orders from the US 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 subcontractorapstas 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 &apos needs and constrain our future growth |
| In addition, we must often comply with provisions in US 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 |
| 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 &apos operations |
| If our technology solutions or other applications have significant defects or errors or fail to meet our customers &apos 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 |
| 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 US 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, US 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 US 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 |
| 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 US 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 US 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 US 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 US dollar; o imposition or increase of investment and other restrictions or requirements by foreign governments; and o compliance with US 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 US federal government spending, and changes in fiscal policies or available funding; o US 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 "e Credit Facility, "e 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 dlra488dtta1 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 |